<PAGE>
As filed with the Securities and Exchange Commission on February 9, 1998
Registration No. 333-42757
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1/A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
FIRST SOURCE BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF INCORPORATION)
DELAWARE
(state or other jurisdiction of BEING APPLIED FOR
incorporation or organization) (IRS Employer Identification No.)
6035
(Primary Standard
Classification Code Number)
1000 WOODBRIDGE CENTER DRIVE
WOODBRIDGE, NEW JERSEY 07095
(732) 726-9700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JOHN P. MULKERIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRST SAVINGS BANK, SLA
1000 WOODBRIDGE CENTER DRIVE
WOODBRIDGE, NEW JERSEY 07095
(732) 726-9700
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
JOSEPH G. PASSAIC, JR., ESQUIRE
ANN COX CLANCY, ESQUIRE
GEOFFREY W. RYAN, ESQUIRE
PATTON BOGGS, L.L.P.
2550 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 457-6000
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 /
----
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
----
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----
<TABLE>
<CAPTION>
=================================================================================================================
Title of each Class of Amount to Purchase Price Aggregate Offering Registration
Securities to be Registered be Registered Per Share Price(1) Fee
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 31,740,000
$.01 par Value Shares $10.00 $317,400,000 (3)
=================================================================================================================
Participation
Interests (2) _______ $ 9,890,490 (4)
------------
=================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) In addition, this registration statement also covers an indeterminate
amount of interests to be offered or sold pursuant to The Incentive Savings
Plan for Employees of First Savings Bank, SLA.
(3) The registration fee of $93,633 was paid upon the initial filing of the
Form S-1.
(4) The securities of First Source Bancorp, Inc. to be purchased by First
Savings Bank, SLA 401(k) Savings Plan are included in the amount shown for
Common Stock. Accordingly, no separate fee is required for the
participation interests. In accordance with Rule 457(h) of the Securities
Act, as amended, the registration fee has been calculated on the basis of
the number of shares of Common Stock that may be purchased with the current
assets of such Plan.
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>
PROSPECTUS
FIRST SOURCE BANCORP, INC.
(Proposed Holding Company for First Savings Bank, SLA)
14,391,900 Shares of Common Stock
First Source Bancorp, Inc. (the "Company" or "First Savings Bancshares"), a
Delaware corporation, is offering up to 14,391,900 shares of its common stock,
par value $.01 per share (the "Common Stock"), in connection with the
reorganization of First Savings Bank, SLA ("First Savings" or the "Bank") and
First Savings Bancshares, MHC, 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 16,550,374 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, THE NEW JERSEY
DEPARTMENT OF BANKING, 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>
- --------------------------------------------------------------------------------------------------------------------
ESTIMATED UNDERWRITING
SUBSCRIPTION PRICE(1) COMMISSIONS ESTIMATED NET PROCEEDS(3)
AND OTHER FEES AND
EXPENSES(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share................ $ 10.00 $ 0.16 $ 9.84
- --------------------------------------------------------------------------------------------------------------------
Midpoint Per Share............... $ 10.00 $ 0.15 $ 9.85
- --------------------------------------------------------------------------------------------------------------------
Maximum Per Share................ $ 10.00 $ 0.15 $ 9.85
- --------------------------------------------------------------------------------------------------------------------
Total Minimum(1)................. $106,375,420 $1,719,000 $104,656,420
- --------------------------------------------------------------------------------------------------------------------
Total Midpoint(1)................ $125,145,270 $1,917,000 $123,228,570
- --------------------------------------------------------------------------------------------------------------------
Total Maximum(1)................. $143,919,000 $2,116,000 $141,803,000
- --------------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4).... $165,503,740 $2,344,000 $163,159,740
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 December 18, 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
$600,000 and marketing fees to be paid to Sandler O'Neill & Partners, L.P.
("Sandler O'Neill") estimated to be $1.1 million and $1.5 million 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,
SLA Employee Stock Ownership Plan and related trust (the "ESOP") which will
be funded by a loan to the ESOP from the Company or a third party and which
will be deducted from the Company's stockholders' equity. See "Use of
Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the $10 per share price ("Purchase Price"),
without resolicitation of subscribers or any right of cancellation, due to
regulatory considerations or changes in market or general financial and
economic conditions. See "Pro Forma Data" and "The Conversion and
Reorganization - Stock Pricing and Exchange Ratio." For a discussion of
the distribution and allocation of the additional shares, if any, see "The
Conversion and Reorganization - Subscription Offering and Subscription
Rights," "- Community Offering" and "- Limitations on Conversion Stock
Purchases."
_________________________________
SANDLER O'NEILL & PARTNERS, L.P.
_________________________________
THE DATE OF THIS PROSPECTUS IS _______________, 1998.
<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, the
Company will undertake an exchange of shares whereby each share of common stock,
par value $.01 per share, of the Bank ("Bank Common Stock") held by the Mutual
Holding Company will be cancelled and each share of Bank Common Stock held by
the Bank's public stockholders (the "Public Bank Shares") will be converted into
shares of the Company's Common Stock ("Exchange Shares") pursuant to a ratio
(the "Exchange Ratio") that will result in the holders of such shares (the
"Public Stockholders") owning in the aggregate approximately the same percentage
of the Company as they owned of the Bank, subject to certain adjustments
described herein, 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 by the Bank's ESOP in the
Offerings or thereafter (the "Exchange"). As of October 31, 1997, the Mutual
Holding Company held 4,134,812, or 51.6%, of the outstanding shares of Bank
Common Stock and Public Stockholders held 3,881,539, or 48.4%, of outstanding
shares of the Bank's Common Stock. Based upon the number of Public Shares
outstanding as of October 31, 1997, and the final Exchange Ratio, the number of
Exchange Shares to be issued will range from 9,762,458 to 15,189,626 shares of
Common Stock at the minimum and maximum, as adjusted, of the Estimated Price
Range, respectively. The Company will not receive any proceeds from the issuance
of Exchange Shares.
IN ADDITION TO THE EXCHANGE, THE COMPANY WILL ALSO COMMENCE AN OFFERING OF
SHARES WHEREBY NON-TRANSFERABLE SUBSCRIPTION RIGHTS TO SUBSCRIBE FOR UP TO
14,391,900 SHARES (WHICH MAY BE INCREASED TO 16,550,374 SHARES UNDER CERTAIN
CIRCUMSTANCES DESCRIBED BELOW) OF COMMON STOCK (THE "CONVERSION STOCK") HAVE
BEEN GRANTED, IN ORDER OF PRIORITY, TO EACH OF THE BANK'S ELIGIBLE ACCOUNT
HOLDERS, TO THE ESOP, TO EACH OF THE BANK'S SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS, AND TO CERTAIN OTHER MEMBERS (EACH AS DEFINED HEREIN) IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING"). SUBSCRIPTION RIGHTS ARE
NONTRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS"). Concurrently,
and subject to the prior rights of holders of subscription rights, the Company
is offering the shares of Conversion Stock not subscribed for in the
Subscription Offering for sale in a community offering to certain members of the
general public, with a first preference given to holders of the Public Bank
Shares (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 $750,000 of Conversion Stock
offered for sale in the Conversion and Reorganization; 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 more than $750,000 of
Conversion Stock offered for sale in the Conversion and Reorganization; and no
person, together with associates of or 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 2.1% of the total number
of shares of Conversion Stock offered for sale in the Conversion and
Reorganization; provided, however, that such purchase limitations and the amount
that may be subscribed for may be increased or decreased at the discretion
of the Company, the Mutual Holding Company and the Bank ("the Primary Parties"),
subject to such approvals as may be required by the OTS. 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 _________, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY THE
PRIMARY PARTIES, WITH APPROVAL OF THE OTS, IF NECESSARY. Orders submitted are
irrevocable until the completion of the Conversion and Reorganization; provided
that, if the Conversion and Reorganization is not completed within 45 days after
the close of the Subscription and Community Offerings, unless such period has
been extended with the consent of the OTS, if necessary, all subscribers will
have their funds returned promptly with interest, and all withdrawal
authorizations will be cancelled. Such extensions may not go beyond
____________, 2000. 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 "FSLA" upon completion of
the Conversion and Reorganization. The Bank's Common Stock currently trades on
the Nasdaq National Market under the symbol "FSLA." See "Market for the Common
Stock."
This Prospectus contains forward-looking statements which reflect the
Primary Parties' views regarding future events and financial performance. Actual
results could differ materially from those projected in the forward-looking
statements as a result of risks and uncertainties including, but not limited to,
those found in the Risk Factors section. The words "believe," "expect," and
"anticipate" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of their dates. The Primary Parties undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise unless such update is
deemed material to the Public Stockholders. The Risk Factors discussion begins
on page __ of this Prospectus.
2
<PAGE>
[MAP GOES HERE]
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.
FIRST SOURCE BANCORP, INC.
First Source Bancorp, 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, two loans 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 a new loan to the ESOP to enable the ESOP to
purchase up to 8% of the aggregate of the Conversion Stock issued, as well as
the assumption of an existing loan to the ESOP. 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 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095. The
Company's telephone number is (732) 726-9700.
FIRST SAVINGS BANK, SLA
First Savings is a New Jersey-chartered capital stock savings and loan
association headquartered in Woodbridge, New Jersey. First Savings has operated
in its present market area since 1901. Until 1992, the Bank operated in the
mutual form of organization. In July 1992, First Savings reorganized to become
a federally-chartered mutual holding company, First Savings Bancshares, MHC, and
simultaneously formed the Bank as a majority-owned subsidiary of the Company
("1992 MHC Reorganization"). The Mutual Holding Company transferred
substantially all of its assets (except $1.0 million in cash) and all its
liabilities to the newly organized Bank in exchange for 1,660,000 shares of the
Bank's common stock. Concurrently with the 1992 MHC Reorganization, the Bank
sold one million shares of its common stock to the general public at $10 per
share, resulting in net proceeds of $9.2 million. Upon completion of the 1992
MHC Reorganization, 62.4% of the Bank's Common Stock outstanding was held by the
Mutual Holding Company. Subsequently, the Bank completed a Secondary Stock
Offering of 600,000 shares of common stock at $13.00 per share on July 11, 1995
("1995 Secondary Offering"), which resulted in a decrease in the Mutual Holding
Company's ownership interest from 62.4% to 52.5%. By October 31, 1997, the
Mutual Holding Company's ownership interest had decreased to 51.6% due to the
exercise of stock options by Public Stockholders.
First Savings' deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The
Bank has been a member of the Federal Home Loan Bank System ("FHLB") System
since 1945. At September 30, 1997, the Bank had total assets of $1.0 billion,
total deposits of $809.4 million and stockholders' equity of $99.2 million. The
Mutual Holding Company's assets at September 30, 1997 consisted of $491,000 in
cash and certificates of deposit, a loan to the Bank's ESOP of $571,000, and a
51.6% interest in the Bank's outstanding common stock.
The Bank is a community-oriented institution that offers traditional
deposit and loan products. It operates 17 full service offices in its market
area of Middlesex, Monmouth and Union Counties in New Jersey. Based on an
evaluation of its retail operations, the Bank has entered into an agreement to
sell its
4
<PAGE>
Eatontown branch with deposits totalling $28.2 million at September 30, 1997 for
$1.2 million in cash. The Bank's principal business has been, and continues to
be, attracting retail deposits from the general public and investing those
deposits, together with funds generated from operations and borrowings,
primarily in single-family residential mortgage loans, real estate construction
loans, commercial real estate loans, home equity loans and lines of credit. The
Bank also invests in U.S. Government and federal agency securities and other
marketable securities. The Bank's revenues are derived principally from interest
on its mortgage loan and mortgage-backed securities portfolios, and interest and
dividends on its investment securities. The Bank's total loan portfolio amounted
to $573.0 million at September 30, 1997, which represented 54.3% of total
assets. Single-family mortgage loans, consisting primarily of single-family
loans, accounted for 78.1% of total loans, while home equity loans and lines of
credit equalled 7.3% of total loans. In addition, the Bank had investments in
mortgage-backed securities, including those available for sale, totalling $350.5
million, or 33.6% of total assets, at September 30, 1997.
THE CONVERSION AND REORGANIZATION
On October 24, 1997, the Boards of Directors of the Bank and the Mutual
Holding Company adopted the Plan, and in December 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,
through a series of steps, the Mutual Holding Company will cease to exist and
the Bank will become a wholly-owned subsidiary of the Company. In the Exchange,
the outstanding Public Bank Shares will be converted into the Exchange Shares
pursuant to the Exchange Ratio. This will result in the holders of Public Bank
Shares owning in the aggregate approximately the same percentage of the Common
Stock to be outstanding upon completion of the Conversion and Reorganization
(i.e., the Conversion Stock) as the percentage of Bank Common Stock owned by
them in the aggregate immediately prior to consummation of the Conversion and
Reorganization subject to certain adjustments described in "The Conversion and
Reorganization -- Stock Pricing and Exchange Ratio," 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 by the ESOP
in the Offerings or thereafter.
In addition to shares of Common Stock to be issued pursuant to the
Exchange, 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." The following diagrams reflect: (i) the
current organizational structure of the parties' ownership interests; (ii) the
intermediate structure of the parties following commencement of the Conversion
and Reorganization; and (iii) the resulting structure upon consummation of the
transaction:
--------------------------------- ---------------------------------
(i) | FIRST SAVINGS BANCSHARES, MHC | | HOLDERS OF PUBLIC BANK SHARES |
--------------------------------- ---------------------------------
51.6% | | 48.4%
| |
---------------------------
| FIRST SAVINGS BANK, SLA |
---------------------------
5
<PAGE>
--------------------------------- ---------------------------------
(ii) | FIRST SAVINGS BANCSHARES, MHC | | HOLDERS OF PUBLIC BANK SHARES |
--------------------------------- ---------------------------------
51.6% | | 48.4%
| |
-----------------------------------
| FIRST SAVINGS BANK, SLA |
-----------------------------------
| 100%
-----------------------------------
| FIRST SOURCE BANCORP, INC. |
-----------------------------------
| 100%
-----------------------------------
| FIRST INTERIM SAVINGS BANK, FSB |
-----------------------------------
----------------------- ----------------------
(iii) | PURCHASERS | | HOLDERS OF |
| OF CONVERSION STOCK | | PUBLIC BANK SHARES |
----------------------- ----------------------
| 52.1% | 47.9%
| |
-------------------------------------------------
| FIRST SOURCE BANCORP, INC. |
-------------------------------------------------
| 100%
-------------------------------------------------
| FIRST SAVINGS BANK, SLA |
-------------------------------------------------
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 __________, 1998 (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 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 51.6% of the
outstanding shares, in favor of the Plan at the Stockholders' Meeting. Officers
and directors of the Bank, who owned in the aggregate 10.4% of the Bank's Common
Stock as of November 30, 1997, also intend to vote in favor of the Plan.
PURPOSES OF THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Bank and the Mutual Holding Company believe
that the Conversion and Reorganization is in the best interests of their
respective stockholders and members. A principal purpose of the Conversion and
Reorganization is to structure the Mutual Holding Company and the Bank in a form
used by most other holding companies of savings institutions and commercial
banks and most other business
6
<PAGE>
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 "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 EXCHANGE ON PUBLIC STOCKHOLDERS
Stock Pricing and Number of Shares to be Issued in the Exchange. FinPro,
Inc., an independent appraiser, has advised the Primary Parties that in its
opinion, dated December 18, 1997, the estimated aggregate pro forma market value
of the Bank and the Mutual Holding Company was $240.0 million (the "Appraisal").
In accordance with OTS requirements, the Appraisal was multiplied by an Exchange
Ratio which was determined on the basis of the Mutual Holding Company's
ownership interest, as increased to reflect the waiver of $1.1 million of
dividends issued by the Bank, out of the aggregate of $6.7 million in dividends
waived by the Mutual Holding Company. Such adjustment was required by the OTS
despite prior OTS policy which permitted the Mutual Holding Company to waive
dividends paid by the Bank without impacting any future exchange ratio
established in a conversion and reorganization of the Mutual Holding Company.
After giving effect to the adjustment for waived dividends, the payment of cash
in lieu of issuing fractional Exchange Shares, and any shares of Conversion
Stock purchased by Public Stockholders in the Offerings or by the ESOP
thereafter, the Exchange Ratio will result in the Public Stockholders holding
approximately 52.1% of the outstanding shares of the Company's Common Stock, as
compared to the current ownership interest in the Bank's common stock of 51.6%.
The following table sets forth the effects of the Conversion and
Reorganization on Public Stockholders, assuming that at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, as defined
herein, one Public Bank Share will be exchanged for 2.5151, 2.9590, 3.4028 and
3.9133 shares of Company Common Stock. See "Pro Forma Data."
7
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
BASED UPON SALE AT $10.00 PER SHARE
------------------------------------------------------------------
HISTORICAL 10,637,542 12,514,527 14,391,900 16,550,374
AT OR FOR SHARES SHARES SHARES SHARES
THE NINE (MINIMUM OF (MIDPOINT OF (MAXIMUM OF (15% ABOVE
MONTHS ENDED ESTIMATED ESTIMATED ESTIMATED MAXIMUM OF
SEPTEMBER PRICE RANGE) PRICE RANGE) PRICE RANGE) ESTIMATED
30, 1997 PRICE RANGE)
--------------- ---------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Book value per share:
Tangible book value per
share........................... $11.26 $ 8.97 $ 8.30 $ 7.81 $ 7.39
Tangible book value of
Exchange Shares(1)(2)........... N/A 22.56 24.56 26.58 28.92
Total book value per share....... 12.39 9.41 8.68 8.14 7.67
Total book value of
Exchange Shares (1)............. N/A 23.67 25.68 27.70 30.02
Earnings:
Earnings per share............... 0.86 0.44 0.39 0.35 0.31
Earnings on Exchange Shares (1).. N/A 1.11 1.15 1.19 1.21
Dividends:
Dividends per share, as
adjusted (annualized) (3)....... 0.34 0.12 0.12 0.12 0.12
Dividends on Exchange
Shares (1)(4)................... N/A 0.23 0.27 0.31 0.36
</TABLE>
____________________
(1) Based on 2.5151, 2.9590, 3.4028 and 3.9133 shares of Company Common Stock
being exchanged for one Public Bank Share at the minimum, midpoint, maximum
and maximum, as adjusted, of the Estimated Price Range.
(2) Represents a pro forma increase of 151.5%, 195.9%, 240.3% and 291.3% on an
exchange basis at the minimum, midpoint, maximum and maximum, as adjusted,
of the Estimated Price Range.
(3) Dividends have been adjusted to reflect a 10% stock dividend paid on
October 30, 1997. Pro forma dividends reflect the Company's intention to
pay a quarterly dividend of $0.03 per share.
(4) No assurance can be given that the dividend will not be reduced or
eliminated in future periods. See "Dividend Policy."
Effect of the Exchange on Stockholders' Equity Per Shares. The
Conversion and Reorganization is expected to significantly increase the
stockholders' equity of the Public Stockholders. At September 30,
8
<PAGE>
1997, stockholders' equity per share was $12.39 for each share of Bank Common
Stock outstanding. Based on the pro forma information set forth in "Pro Forma
Data" assuming the sale of 12,514,527 shares at the midpoint of the Estimated
Price Range at September 30, 1997, the pro forma stockholders' equity for the
aggregate number of Exchange Shares to be received for each Public Bank Share
was $25.68 per share. This represents a pro forma increase of 107.3% from
stockholders' equity at September 30, 1997.
Effect of the Exchange on Earnings Per Share. The Conversion and
Reorganization will also affect Public Stockholders' pro forma earnings per
share. For the nine months ended September 30, 1997, the Bank's basic earnings
per share was $0.86. Based on the information set forth in "Pro Forma Data"
assuming the sale of 12,514,526 shares of Common Stock at the midpoint of the
Estimated Price Range, the pro forma earnings per share of Common Stock was
$0.39, and the pro forma earnings for the aggregate number of Exchange Shares to
be received for each Public Bank Share was $1.15. On a pro forma basis, this
represents a 33.7% increase from historical earnings per share for the nine
months ended September 30, 1997.
THE MARKET PRICE 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. AT THE MINIMUM, MIDPOINT AND MAXIMUM OF THE ESTIMATED PRICE
RANGE, ONE PUBLIC BANK SHARE WILL BE EXCHANGED FOR 2.5151, 2.9590, 3.4028, AND
3.9133 SHARES OF COMMON STOCK, RESPECTIVELY (WHICH HAVE A CALCULATED EQUIVALENT
VALUE OF $25.15, $29.59, $34.03, AND $39.13 BASED ON THE $10.00 PURCHASE PRICE
OF A SHARE OF COMMON STOCK IN THE OFFERINGS AND THE AFOREMENTIONED EXCHANGE
RATIOS). AS OF ____________, 1998, THE MOST RECENT DAY ON WHICH TRADING OF
THE BANK COMMON STOCK OCCURRED PRECEDING THE DATE OF THIS PROSPECTUS, THE
AVERAGE PRICE PAID FOR BANK COMMON STOCK WAS $_______ PER SHARE. 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. SEE "--STOCK PRICING AND NUMBER OF
SHARES TO BE ISSUED IN THE CONVERSION AND REORGANIZATION" AND "RISK FACTORS--
ESTIMATED PRICE RANGE BELOW MARKET PRICE."
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 "The Conversion and Reorganization -- Effects of the
Conversion and Reorganization -- Effect on Public Bank Shares."
THE OFFERINGS
Pursuant to the Plan and in connection with the Conversion and
Reorganization, the Company is offering up to 14,391,900 shares of Conversion
Stock in the Offerings in addition to the shares being issued in the Exchange.
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, 1995 ("Eligible Account Holders"); (2) the
ESOP; (3) holders of savings accounts in the Bank totalling $50 or more on
December 31, 1997 ("Supplemental Eligible Account Holders"); and (4) other
members of the MHC, consisting of depositors of the Bank as of ______________,
1998, the Voting Record Date for the special meeting of members to vote on the
Conversion, and borrowers with loans outstanding as of July 10, 1992, which
continue to be outstanding as of the Voting Record Date, other than those
members who otherwise qualify as Eligible Account Holders or Supplemental
Eligible Account Holders ("Other Members"). Subject to the prior rights of
holders of subscription rights, Conversion Stock not subscribed for in the
Subscription Offering is being concurrently offered in the Community Offering to
certain members of the general public, with a preference given to the
9
<PAGE>
Public Stockholders. 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 in the Offerings 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 and
Reorganization. See "The Conversion and Reorganization --Procedure for
Purchasing Shares in Subscription and Community Offerings."
Restrictions on Transfer of Subscription Rights and Shares. Prior to the
completion of the Offerings, 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 Offerings, 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
$750,000 of Conversion Stock offered; no person, together with associates of or
persons acting in concert with such person, may purchase in the Community
Offering and the Syndicated Community Offering in the aggregate more than
$750,000 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 2.1% of the total number of shares of Conversion Stock
offered in the Conversion and Reorganization, exclusive of any shares issued
pursuant to an increase in the Estimated Price Range of up to 15%. See "Risk
Factors - Effect of Purchase Limitations on Ability of Public Stockholders to
Purchase Conversion Shares."
At any time during the Offerings, and without further approval by the
Mutual Holding Company's Members or the Bank's Public Stockholders, the Primary
Parties may, subject to any other necessary approvals, decrease the maximum
purchase limitation to 1% of the number of shares of Conversion Stock to be
issued in the Subscription and Community Offerings, when aggregated with any
Exchange Shares, and/or may decrease the amount that may be subscribed for in
the Subscription and Community Offerings.
10
<PAGE>
Additionally, at any time during the Conversion and Reorganization and without
further approval by the Mutual Holding Company's Members or the Bank's Public
Stockholders, the Primary Parties may subject to any other necessary approvals,
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 Offerings. Prior to consummation of
the Conversion and Reorganization, 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 ANY EVENT, PURSUANT TO OTS POLICY, ANY EXCHANGE SHARES RECEIVED BY AN
INDIVIDUAL DESIRING TO PURCHASE COMMON STOCK IN THE OFFERINGS WILL BE AGGREGATED
WITH SHARES SUBSCRIBED FOR BY SUCH PERSON FOR PURPOSES OF APPLYING THE MAXIMUM
PURCHASE LIMITATION. Further, due to OTS policy, the purchase limitations were
set at a level that will preclude certain officers and directors of the Bank
from purchasing any Common Stock in the Offerings. 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." PURSUANT TO OTS POLICY, 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, INCLUDING OFFICERS AND DIRECTORS OF THE BANK, MAY BE LIMITED
IN THEIR ABILITY TO SUBSCRIBE FOR 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 Offerings. Federal
regulations require that the aggregate purchase price of the Conversion Stock to
be offered in the Conversion and Reorganization be consistent with an
independent appraisal of the estimated pro forma market value of the Bank and
the Mutual Holding Company. FinPro, an independent appraiser, has advised the
Primary Parties that in its opinion, dated December 18, 1997, the estimated
aggregate pro forma market value of the Common Stock of the Company was $240.0
million (the "Appraisal"). The Appraisal was multiplied by the Mutual Holding
Company's percentage interest in the Bank, as adjusted pursuant to an OTS
requirement to increase the Mutual Holding Company's interest to reflect the
Mutual Holding Company's waiver of $1.1 million in dividends out of the
aggregate amount of waived dividends of $6.7 million. The resulting ratio
corresponds with the amount of Conversion Stock to be sold in the Offerings
(i.e., 52.1% as of October 31, 1997), to determine the midpoint of the price
range, which was $125.1 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 $106.4 million to $143.9 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 $39.25 and $____ closing prices of the Bank
Common Stock on October 23, 1997, the day preceding the Bank's announcement of
the Conversion and the Reorganization and _________, 1998, the most recent day
on which trading of the Bank Common Stock occurred preceding the date of this
Prospectus, respectively, the estimated market value of all outstanding shares
of Bank Common Stock (including shares held by the Mutual Holding Company) was
$314.6 million and $_____ million, respectively. The disparity between the
estimated pro forma market value of the Company's Common Stock and the recent
estimated market value of the Bank Common Stock is primarily the result of
investor speculation as to the value of the stock, overall market movements,
comparable and other market multiples, the economy, the level of interest rates,
the Bank's earnings growth potential, and numerous other factors that affect the
value of all stocks generally. For further information, see "The Conversion and
Reorganization --Stock Pricing and Exchange Ratio." THE APPRAISAL OF THE COMMON
STOCK IS NOT
11
<PAGE>
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 OFFERINGS WILL BE ABLE TO SELL SUCH SHARES
AFTER THE COMPLETION OF THE CONVERSION AND REORGANIZATION AT OR ABOVE THE
PURCHASE PRICE.
All shares of Conversion Stock issued in the Offerings 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 Common Stock of the Company, giving effect to the Conversion
and Reorganization, at the completion of the Offerings. The maximum of the
Estimated Price Range may be increased by up to 15% and the number of shares of
Conversion Stock to be issued in the Conversion and Reorganization may be
increased to 16,550,374 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 52.1% and 47.9%, respectively, of the Company's total outstanding
shares. See "Risk Factors -- Possible Increase in Estimated Price Range and
Number of Shares Issued," "Pro Forma Data," and "The Conversion and
Reorganization -- Stock Pricing and Exchange Ratio" and "-- Number of Shares to
be Issued."
Based on the 3,881,539 Public Bank Shares outstanding at October 31, 1997,
and assuming a minimum of 10,637,542 and a maximum of 14,391,900 shares of
Conversion Stock are issued in the Offerings, the Exchange Ratio is expected to
range from approximately 2.5151 Exchange Shares to 3.4028 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 October 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 October 31, 1997, there were options exercisable
to purchase 77,201 shares of Bank Common Stock outstanding, which have a
weighted average exercise price of $4.32 per share. Another 65,340 options had
been awarded, but were not exercisable at October 31, 1997. The weighted
average exercise price of these options was $14.35. The Bank has no plans to
grant additional stock options prior to the consummation of the Conversion and
Reorganization.
12
<PAGE>
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price Range: (i) the total number of
shares of Conversion Stock and Exchange Shares to be issued in the Conversion
and Reorganization, (ii) the percentage of the total Common Stock represented by
the Conversion Stock and the Exchange Shares, and (iii) the Exchange Ratio. The
table does not give effect to cash paid in lieu of issuing fractional Exchange
Shares.
<TABLE>
<CAPTION>
TOTAL SHARES
OF COMMON
CONVERSION STOCK EXCHANGE SHARES STOCK TO BE EXCHANGE
TO BE OFFERED(1) TO BE ISSUED(1)(2) OUTSTANDING(1) RATIO(1)
------------------------ ------------------------ -------------- --------
AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C>
Minimum............. 10,637,542 52.1% 9,762,458 47.9% 20,400,000 2.5151
Midpoint............ 12,514,527 52.1 11,485,473 47.9 24,000,000 2.9590
Maximum............. 14,391,900 52.1 13,208,100 47.9 27,600,000 3.4028
15% above maximum... 16,550,374 52.1 15,189,626 47.9 31,740,000 3.9133
</TABLE>
________________________________
(1) Assumes that outstanding options to purchase 142,541 shares of Bank Common
Stock at October 31, 1997 are not exercised prior to consummation of the
Conversion and Reorganization.
(2) Based upon 3,881,539 Public Bank Shares outstanding as of October 31, 1997.
Does not reflect unexercised options.
The final Exchange Ratio will be determined based upon the number of shares
issued in the Offerings in order to obtain a 47.9% ownership interest in the
Bank by Public Stockholders at October 31, 1997, which reflects an adjustment
pursuant to OTS requirements. 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
2.5151, 2.9590, 3.4028, and 3.9133 shares of Common Stock, respectively (which
have a calculated equivalent value of $25.15, $29.59, $34.03, and $39.13 based
on the $10.00 Purchase Price of a share of Common Stock in the Offerings and the
aforementioned Exchange Ratios). THE VALUE OF THE EXCHANGE SHARES TO BE RECEIVED
FOR EACH PUBLIC BANK SHARE MAY BE LESS THAN THE MARKET PRICE OF THE PUBLIC BANK
SHARES AT THE TIME OF THE EXCHANGE, BASED ON THE FINAL EXCHANGE RATIO AND THE
MARKET PRICE AT THE TIME OF THE EXCHANGE. For a discussion of the high and low
trading prices of the Bank's common stock over the last three years, see "Market
for the Common Stock." As of ____________, 1998, the most recent day on which
trading of the Bank Common Stock occurred preceding the date of this Prospectus,
the average price paid for Bank Common Stock was $_______ per share. 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 $104.7 million and $141.8 million (or $163.2 million if the Estimated
Price Range is increased by 15%) depending on the number of shares sold and the
expenses of the Conversion and Reorganization. See "Pro Forma Data." The
Company plans to contribute to the Bank 50% of the net proceeds from the
Offerings, and to retain the remaining net proceeds. Net proceeds to be
retained by the Company after the contribution to the Bank are estimated to be
between $52.4 million and $70.9 million (or $81.6 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 a loan to the ESOP to purchase Conversion Stock in the Offerings (to
the extent such loan is not funded by a third party), the refinancing of an
existing loan to the ESOP 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
13
<PAGE>
aggregate of the number of shares of Conversion Stock to be issued in the
Conversion and Reorganization, the amount of the loan to the ESOP is estimated
to be between $8.5 million and $11.5 million (or $13.2 million if the Estimated
Price Range is increased by 15%) to be repaid over a 15-year period at the
prevailing market rate of interest. See "Management of the Bank --Benefits --
Employee Stock Ownership Plan and Trust." Funds received by the Bank from the
Company's purchase of its capital stock will be used for 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 financial institutions or assets of other financial institutions.
Neither the Bank nor the Company has any pending agreements or understandings
regarding acquisitions of any specific financial institutions, branch offices or
assets of other financial institutions. See "Use of Proceeds" and "Business of
the Bank." To the extent that the stock-based benefit programs which the Company
or Bank intend to adopt subsequent to the Conversion and Reorganization are not
funded with authorized but unissued common stock of the Company, the Company or
Bank may use net proceeds from the Conversion and Reorganization to fund the
purchase of stock in the open market to be awarded under such stock benefit
programs. See "Management of the Bank -- Benefits --Stock-Based Incentive Plan."
DIVIDENDS
The Bank has paid cash dividends on each Minority Share for each quarter
since reorganizing in July 1992. 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
pay cash dividends on the Common Stock at an initial quarterly rate of $0.03 per
share, regardless of the total number of shares of Common Stock outstanding.
Declarations of dividends by the Company's Board of Directors will depend upon a
number of factors, however, 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 one or more stock-based benefit plans to provide stock options,
restricted stock awards and certain related rights to directors, officers and
employees (hereinafter individually or collectively referred to as the "Stock-
Based Incentive Plan"). If such Stock-Based Incentive Plan is adopted within
one year after the Conversion and Reorganization, under current OTS regulations
the plan 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 a plan 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 issued in the
Conversion and Reorganization at no cost to the recipients. The Company also
intends to adopt a plan to provide the Company with the ability to grant options
to officers, directors and employees of the Bank and Company to purchase Common
Stock equal to 10% of the number of shares of Conversion Stock sold in the
Conversion and Reorganization. For a further description of the Stock-Based
14
<PAGE>
Incentive Plan, see "Risk Factors - Stock Based Benefits to Management and
Directors" and "Management of the Bank - Benefits -- Stock-Based Incentive
Plan." See "Beneficial Ownership of Capital Stock - Subscriptions of Executive
Officers and Directors," and "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.
15
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The selected data presented below under the captions "Selected Consolidated
Financial Data" and "Selected Operating Data" for, and as of the end of each of
the years in the five-year period ended December 31, 1996, are derived from the
consolidated financial statements of First Savings Bank, SLA, and subsidiaries,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The selected data presented below for
the nine month periods ended September 30, 1997 and 1996, are derived from the
unaudited consolidated financial statements of First Savings Bank, SLA, and
subsidiaries included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
---------------------- --------------------------------------------------------------
1997(1) 1996(1) 1996 1995 1994 1993 1992
---------- --------- --------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets............................. $1,044,513 $ 974,771 $ 987,115 $945,012 $798,350 $783,846 $759,495
Loan receivable, net..................... 567,197 498,472 509,627 457,756 415,902 415,010 413,748
Loans available for sale................. -- 149 287 424 148 1,595 2,287
Investment securities.................... 40,959 39,968 38,955 39,003 23,997 19,019 43,039
Investment securities available.......... 18,024 21,690 14,831 2,058 13,206 41,064 8,960
for sale
Other interest-earning assets(2)......... 25,970 7,428 9,278 24,151 10,066 9,967 9,475
Mortgage-backed securities, net.......... 228,158 270,855 252,383 288,143 283,263 244,187 255,931
Mortgage-backed securities............... 122,371 93,402 120,797 89,339 24,367 28,314 3,528
available for sale
Deposits................................. 809,449 800,441 794,595 806,338 681,613 678,961 673,031
Borrowed funds........................... 124,465 70,108 88,640 39,496 34,300 26,400 20,600
Stockholders' equity..................... 99,213 90,226 92,863 89,713 74,064 68,809 58,551
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
---------------------- --------------------------------------------------------------
1997(1) 1996(1) 1996 1995 1994 1993 1992
---------- --------- --------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income........................... $ 54,636 $ 50,499 $ 68,039 $ 64,573 $ 52,909 $ 54,665 $ 62,142
Interest expense.......................... 30,591 27,644 37,264 35,691 25,135 26,448 33,810
---------- --------- --------- -------- -------- -------- --------
Net interest income before
provision for loan losses......... 24,045 22,855 30,775 28,882 27,774 28,217 28,332
Provision for loan losses................. 900 375 550 310 300 1,200 2,400
---------- --------- --------- -------- -------- -------- --------
Net interest income after
provision for loan losses.......... 23,145 22,480 30,225 28,572 27,474 27,017 25,932
Other operating income...................... 2,186 1,382 1,995 2,171 1,734 2,791 2,786
Operating expenses.......................... 14,581 20,122(3) 24,701(3) 17,830 16,021 15,551 15,194
---------- --------- --------- -------- -------- -------- --------
Income before income taxes, and
cumulative effect of accounting
changes................................. 10,750 3,740 7,519 12,913 13,187 14,257 13,524
Income taxes.............................. 3,990 1,376 2,809 4,611 4,912 5,352 5,495
---------- --------- --------- -------- -------- -------- --------
Income before cumulative
effect of accounting changes....... 6,760 2,364 4,710 8,302 8,275 8,905 8,029
Cumulative effect of accounting
changes(4)............................... -- -- -- -- -- 398 --
---------- --------- --------- -------- -------- -------- --------
Net income.......................... $ 6,760 $ 2,364 $ 4,710 $ 8,302 $ 8,275 $ 9,303 $ 8,029
========== ========= ========= ======== ======== ======== ========
Basic earnings per share before
cumulative effect of accounting
changes(5)(6).............................. $0.86 $0.31 $0.60 $1.06 $1.06 $1.14 N/A
Cumulative effect of accounting
changes(4)(5).............................. -- -- -- -- -- 0.05 N/A
---------- --------- --------- -------- -------- -------- --------
Basic earnings per share after
cumulative effect of accounting
changes(5)(6).............................. $0.86 $0.31 $0.60 $1.06 $1.06 $1.19 N/A
========== ========= ========= ======== ======== ======== ========
Diluted earnings per share(5)(6)............ $0.83 $0.29 $0.59 $1.04 $1.03 $1.17 N/A
========== ========= ========= ======== ======== ======== ========
Dividends per share, as adjusted(5)(6)...... $0.31 $0.25 $0.33 $0.30 $0.27 $0.27 N/A
========== ========= ========= ======== ======== ======== ========
</TABLE>
(footnotes on following pages)
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------- -------------------------------------------------
1997(1) 1996(1) 1996 1995 1994 1993 1992
-------- -------- -------- --------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(5):
Return on average assets(4)................. 0.87% 0.33% 0.49% 0.91% 1.04% 1.20% 1.04%
Return on average stockholder's
equity(4).............................. 9.37 3.46 5.12 10.14 11.63 14.70 15.84
Average stockholder's equity to
average assets............................ 9.31 9.44 9.52 8.95 8.92 8.19 6.58
Stockholders' equity to total
assets..................................... 9.50 9.26 9.41 9.49 9.28 8.78 7.71
Interest rate spread........................ 2.83 2.86 2.88 2.77 3.26 3.40 3.46
Net interest margin (8)..................... 3.25 3.29 3.30 3.22 3.58 3.74 3.78
Operating expenses to average
assets(9).............................. 1.63 2.62(3) 2.42(3) 1.83 1.98 1.99 1.92
Net interest income before
provision for loan losses
to operating expenses (9).................. 1.90x 1.20x(3) 1.32x(3) 1.72x 1.76x 1.84x 1.91x
Non-performing loans to total
loans receivable, net...................... 0.69 0.93 0.94 1.32 2.17 2.77 3.81
Non-performing assets to total
assets..................................... 0.51 0.67 0.64 0.97 1.34 1.73 2.25
Allowance for loan losses to non-
performing loans....................... 151.83 110.27 110.58 86.90 63.52 51.09 36.32
Allowance for loan losses to non-
performing assets...................... 112.06 77.90 84.08 57.23 53.81 43.42 33.60
Allowance for loan losses to total
loans receivable, net.................. 1.05 1.02 1.04 1.15 1.38 1.42 1.38
Dividend payout ratio(7).................... 17.59 39.26 26.29 12.09 9.51 7.36 --
Average interest-earning assets to
average interest-bearing
liabilities............................ 1.10x 1.11x 1.11x 1.11x 1.10x 1.10x 1.07x
Full service offices........................ 17(10) 16 16 17 15 15 15
</TABLE>
- -------------------------
(1) The data presented at September 30, 1997 and for the nine months ended
September 30, 1997 and 1996 were derived from unaudited financial
statements and reflect, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) which are necessary to
present fairly the results for such interim periods. Interim results for
the nine months ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
All selected financial ratios and other data relating to operating results
for the nine month periods ended September 30, 1997 and September 30, 1996
are presented on an annualized basis.
(2) Includes federal funds sold and investment in the stock of the FHLB-NY.
(3) Includes the Savings Association Insurance Fund ("SAIF") special assessment
of $5.2 million for the nine months ended September 30, 1996 and for the
year ended December 31, 1996.
(4) Reflects the implementation of Statement of Financial Accounting Standards
("SFAS") No. 106 -- Accounting for Postretirement Benefits and SFAS No. 109
-- Accounting for Income Taxes.
(5) Per share data reflects 10% stock dividends paid July 1, 1993, April 1,
1994, December 16, 1996 and October 30, 1997, as well as a 2-for-1 stock
split on December 1, 1994, adjusted retroactively.
(6) Earnings per share amounts have been adjusted to reflect the adoption of
SFAS No. 128, "Earnings Per Share."
(7) Excludes shares owned by the MHC, for which cash dividends were waived
with regulatory approval, after giving effect to prior stock dividends and
the two-for-one stock split.
(8) Calculation is based upon the net interest income before provision for loan
losses divided by interest earning assets.
(9) For purposes of calculating these ratios, operating expenses equal total
operating expenses less amortization of intangibles.
(10) The Bank has signed an agreement to sell the branch deposits of its
Eatontown location, which totaled $28.2 million at September 30, 1997, for
cash of $1.2 million. The closing date is scheduled for February 1998.
17
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The following tables set forth certain consolidated financial and
other data of the Bank at and for the periods indicated. Consolidated financial
and operating data and financial ratios and other data at and for the year ended
December 31, 1997, and at and for the three months ended December 31, 1997 and
1996, were derived from unaudited financial statements.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1997(1) 1996
------------- ---------
(IN THOUSANDS)
<S> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets.................................................. $1,049,316 $ 987,115
Loans receivable, net......................................... 588,500 509,627
Loans available for sale...................................... - 287
Investment securities, net.................................... 31,031 38,955
Investment securities available for sale...................... 17,701 14,831
Mortgage-backed securities, net............................... 207,157 252,383
Mortgage-backed securities available for sale................. 147,137 120,797
Other interest-earning assets (2)............................. 14,095 9,278
Deposits...................................................... 816,283 794,595
Advances from FHLB-NY and other borrowed funds................ 118,990 88,640
Stockholders' equity.......................................... 101,686 92,863
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------- -------------------------
1997 (1) 1996 (1) 1997 (1) 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Interest income............................................. $ 18,586 $ 17,540 $ 73,222 $ 68,039
Interest expense............................................ 10,592 9,620 41,183 37,264
-------- -------- -------- ----------
Net interest income before provision for loan losses..... 7,994 7,920 32,039 30,775
Provision for loan losses................................... 300 175 1,200 550
-------- -------- -------- ----------
Net interest income after provision for loan losses...... 7,694 7,745 30,839 30,225
Other operating income...................................... 615 613 2,801 1,995
Operating expenses.......................................... 4,282 4,579 18,863 24,701(3)
-------- -------- -------- ----------
Income before income taxes.................................. 4,027 3,779 14,777 7,519
Income taxes................................................ 1,492 1,433 5,482 2,809
-------- -------- -------- ----------
Net Income.................................................. $ 2,535 $ 2,346 $ 9,295 $ 4,710
======== ======== ======== ==========
Basic earnings per share.................................... $ 0.32 $ 0.30 $ 1.17 $ 1.06
======== ======== ======== ==========
Diluted earnings per share.................................. $ 0.31 $ 0.29 $ 1.16 $ 0.59
======== ======== ======== ==========
</TABLE>
18
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
<TABLE>
<CAPTION>
AT OR FOR THE
-------------
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ------------------------
1997 (1) 1996 (1) 1997 (1) 1996 (1)
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Return on average assets ............................... 0.97% 0.95% 0.90% 0.49%
Return on average stockholders' equity ................. 10.10 10.22 9.58 5.12
Average stockholders' equity to average assets.......... 9.56 9.34 9.34 9.52
Stockholders' equity to total assets.................... 9.69 9.41 9.69 9.41
Interest rate spread.................................... 2.71 2.92 2.80 2.88
Net interest margin (4)................................. 3.17 3.32 3.23 3.30
Operating expenses to average assets (5)................ 1.55 1.78 1.61 2.42 (3)
Net interest income before provision for loan losses
to operating expenses (5)........................... 1.96x 1.81x 1.92x 1.32x(3)
Non-performing loans to total loans receivable, net..... 0.74% 0.94% 0.74% 0.94%
Non-performing assets to total assets................... 0.54 0.64 0.54 0.64
Allowance for loan losses to non-performing loans....... 140.74 110.58 140.74 110.58
Allowance for loan losses to non-performing assets...... 106.74 84.08 106.74 84.08
Allowance for loan losses to loans, receivable.......... 1.04 1.04 1.04 1.04
Dividend payout ratio(6)................................ 18.38 13.51 17.81 26.29
Average interest earning assets to average
interest-bearing liabilities........................ 1.11 1.10x 1.10x 1.11x
Full service offices.................................... 17(7) 16 17 16
</TABLE>
- ------------------------------
(1) The data presented at December 31, 1997, at and for the three months ended
December 31, 1997 and 1996 and for the year ended December 31, 1997 were
derived from unaudited financial statements and reflect, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such
interim periods. All selected financial ratios and other data relating to
operating results for the three month periods ended December 31, 1997 and
December 31, 1996, respectively, are presented on an annualized basis.
(2) Includes federal funds sold and investment in the stock of the FHLB-NY.
(3) Includes the Savings Association Insurance Fund ("SAIF") special assessment
of $5.2 million for the year ended December 31, 1996.
(4) Calculation is based upon the net interest income before provision for loan
losses divided by interest earning assets.
(5) For purposes of calculating these ratios, operating expenses equal total
operating expenses less amortization of intangibles.
(6) Excludes shares owned by the MHC, for which cash dividends were waived with
regulatory approval, after giving effect to prior stock dividends and the
two-for-one stock splits.
(7) The Bank has signed an agreement to sell the branch deposits of its
Eatontown location, which totaled $27.6 million at December 31, 1997, for
cash of $1.2 million. The closing date is scheduled for February 1998.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
ASSETS. Total assets increased by $62.2 million, or 6.3%, to $1.0 billion at
December 31, 1997, from $987.1 million at December 31, 1996. Cash and cash
equivalents increased $5.4 million, or 59.6%, to $14.4 million as of December
31, 1997, from $9.0 million at December 31, 1996. The increase was due
primarily to a temporary increase in the balance of federal funds sold. These
funds were subsequently invested in longer term, higher yielding assets.
Investment securities, including those available for sale, decreased $5.1
million, or 9.4%, to $48.7 million as of December 31, 1997, from $53.8 million
at December 1996. Mortgage-backed securities, including those available for
sale, decreased $18.9 million, or 5.1%, to $354.3 million at December 31, 1997,
from $373.2 million at December 31, 1996. Net loans receivable, inclusive of
those available for sale, grew by $78.6 million, or 15.4%, to $588.5 million at
December 31, 1997, from $509.9 million at December 31, 1996. The increase in
loans was due to management's strategic decision to maintain a higher percentage
of loans as a balance sheet component.
19
<PAGE>
Management emphasized the origination of residential single-family, five-year,
adjustable-rate mortgages and construction loans. Premises and equipment, net
increased $2.7 million to $13.1 million at December 31, 1997, from $10.4 million
at December 31, 1996. The increase was primarily due to costs capitalized in
connection with the completion of the Bank's new corporate headquarters in
Woodbridge, New Jersey. Excess of costs over fair value of net assets acquired
decreased $2.1 million to $8.8 million at December 31, 1997, from $11.0 million
at December 31, 1996. Normal amortization accounted for $850,000 of this
decrease. In addition, an impairment writedown of the core deposit intangible
totaling $1.3 million was recognized as of September 30, 1997, on deposits
acquired from the RTC in 1995.
LIABILITIES. Deposits increased $21.7 million, or 2.7%, to $816.3 million at
December 31, 1997, from $794.6 million at December 31, 1996. Borrowed funds
increased $30.5 million, or 34.6%, to $118.4 million at December 31, 1997, from
$88.0 million at December 31, 1996. The increased deposits and borrowed funds
were used primarily to fund the asset growth detailed above as well as for
normal operations. Advances by borrowers for taxes and insurance increased
$844,000, or 18.4%, to $5.4 million at December 31, 1997, from $4.6 million at
December 31, 1996, primarily due to the timing of these payments as well as an
increase in the residential loan portfolio.
STOCKHOLDERS' EQUITY. The Bank's stockholders' equity increased $8.8 million for
the year ended December 31, 1997, due primarily to earnings of $9.3 million,
partially offset by dividends of $1.7 million declared and paid during 1997.
The OTS requires that the Bank meet minimum tangible, core, and risk-based
capital requirements. At December 31, 1997, the Bank exceeded all regulatory
capital requirements.
<TABLE>
<CAPTION>
REQUIRED ACTUAL
------------------------- ----------------------- EXCESS OF ACTUAL
% OF % OF OVER REGULATORY
AMOUNT ASSETS AMOUNT ASSETS REQUIREMENTS
------------- ---------- ------------ --------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TANGIBLE CAPITAL $15,625 1.50% $92,344 8.86% $76,719
CORE CAPITAL $31,251 3.00% $92,344 8.86% $61,093
RISK-BASED CAPITAL $34,866 8.00% $97,797 22.44% $62,931
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND YEAR ENDED DECEMBER 31,
1997 AND DECEMBER 31, 1996.
RESULTS OF OPERATIONS. Net income for the three months ended December 31, 1997
was $2.5 million, compared with $2.3 million for the same period in 1996. Basic
and diluted earnings per share were $0.32 and $0.31 for the three months ended
December 31, 1997, compared with to $0.30 and $0.29 for the same respective
periods in 1996. Earnings increased during the quarter 8.1% primarily because of
lower operating expenses. Net income for the year ended December 31, 1997 was
$9.3 million compared with $4.7 million for 1996. Basic earnings per share were
$1.17 for 1997 and $0.60 for 1996, while diluted earnings per share were $1.16
for 1997 and $0.59 for 1996. Earnings for 1997 were affected by an impairment
writedown of the core deposit intangible recognized as of September 30, 1997. An
after-tax charge of $867,000 was incurred due to this writedown. The 1996
earnings were affected by non-recurring charges incurred due to the special
assessment to recapitalize the SAIF and also due to benefits payable as a result
of the passing of the Bank's long-time President.
INTEREST INCOME. Interest income increased $1.0 million, or 6.0%, to $18.6
million for the quarter ended December 31, 1997, and $5.2 million, or 7.6%, to
$73.2 million for the year ended December 31, 1997, compared to $17.5 million
and $68.0 million for the same respective periods in 1996. Interest on loans
increased $1.3 million, or 12.9%, to $11.4 million for the quarter ended
December 31, 1997, and $5.0 million, or 13.0%, to $43.6 million for the year
ended December 31, 1997, compared to $10.1 million and $38.6 million for the
same respective periods in 1996. The increase was due primarily to an increase
in the average size of the loan portfolio to $551.1 million for the year ended
December 31, 1997, from
20
<PAGE>
$487.6 million for the same period in 1996. Interest on mortgage-backed
securities held to maturity decreased $732,000, or 16.4%, to $3.7 million for
the quarter ended December 31, 1997, and $2.8 million, or 14.7%, to $16.3
million for the year ended December 31, 1997, compared to $4.5 million and $19.1
million for the same respective periods in 1996. The decrease was due to the
decreased average balance of the mortgage-backed securities held to maturity
portfolio for 1997 to $236.4 million, from $282.0 million for 1996, partially
offset by an increase in the yield on the portfolio to 6.91% for 1997, from
6.79% for 1996. Interest on investment securities held to maturity decreased to
$238,000, or 20.8%, to $904,000 for the quarter ended December 31, 1997, and
$197,000, or 4.8%, to $3.9 million for the year ended December 31, 1997,
compared to $1.1 million and $4.1 million for the same respective periods in
1996. The decrease was primarily due to a decrease in the average balance of the
portfolio that occurred in the final quarter of 1997. The average balance for
the three months ended December 31, 1997, was $36.5 million, as compared to
$40.5 million for the comparable 1996 period. Interest on investments and
mortgage-backed securities available for sale increased $717,000, or 39.3%, to
$2.5 million for the quarter ended December 31, 1997, and $3.2 million, or
51.1%, to $9.4 million for the year ended December 31, 1997, compared to $1.8
million and $6.2 million for the same respective periods in 1996. The increase
was due to an increase in the average balance of the available for sale
portfolio to $149.5 million for the year ended December 31, 1997, from $101.2
million for the same period of 1996, along with an increase in the yield on the
portfolio from 6.27% for 1997, from 6.13% in 1996.
INTEREST EXPENSE. Interest expense increased $1.0 million, or 10.1%, to $10.6
million for the quarter ended December 31, 1997, and $3.9 million, or 10.5%, to
$41.2 million for the year ended December 31, 1997, compared to $9.6 million and
$37.3 million for the same respective periods in 1996. Interest expense on
deposits increased $316,000, or 3.8%, to $8.7 million for the quarter ended
December 31, 1997, and $269,000, or 0.8%, to $34.2 million for the year ended
December 31, 1997, compared to $8.4 million and $33.9 million for the same
respective periods in 1996. The increase was primarily due to an increase in
the average balance of deposits during the final quarter of 1997. The average
balance for the three months ended December 31, 1997, was $787.3 million, as
compared to $778.2 million for the comparable 1996 period. Interest expense on
borrowed funds increased $656,000, or 52.8%, to $1.9 million for the quarter
ended December 31, 1997, and $3.7 million, or 108.2%, to $7.0 million for the
year ended December 31, 1997, compared to $1.2 million and $3.4 million for the
same respective periods in 1996. The increase was due primarily to the growth
in the average balance of borrowings, which was $114.6 million for the year
ended December 31, 1997, as compared to $55.2 million for the comparable 1996
period. This increase was attributable to management's strategy to fund the
purchase of investment and mortgage-backed securities through the use of
borrowed funds, where accretive to earnings. The interest expense on
borrowings was also affected by a slight increase in the average cost of
borrowings to 6.13% for the year ended December 31, 1997, from 6.10% for the
comparable 1996 period.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $125,000, or
71.4%, to $300,000, for the quarter ended December 31, 1997, and $650,000, or
118.2%, to $1.2 million for the year ended December 31, 1997, compared to
$175,000 and $550,000 for the same respective periods in 1996. The increase in
the provision is primarily due to the increase in the size of the loan
portfolio. Net loans increased $78.6 million between December 31, 1997 and
December 31, 1996. The provision was based upon management's review and
evaluation of the loan portfolio, level of delinquencies, general market and
economic conditions, and asset classification review. In management's opinion,
the allowance for loan losses, totaling $6.1 million, is adequate to cover
losses inherent in the portfolio. Although management considers the allowance
for loan losses to be adequate, there can be no assurances that additional
problems will not arise that would require additional loan loss provisions and
asset write-downs.
21
<PAGE>
OTHER OPERATING INCOME. Other operating income increased $2,000, or 0.3%, to
$615,000 for the quarter ended December 31, 1997, and $806,000, or 40.4%, to
$2.8 million for the year ended December 31, 1997, compared to $613,000 and $2.0
million for the same respective periods in 1996. Fees and service charges
increased $186,000, or 44.6%, to $603,000 for the quarter ended December 31,
1997, and $287,000, or 18.4%, to $1.8 million for the year ended December 31,
1997, compared to $417,000 and $1.6 million for the same respective periods in
1996. The increase was due to a higher number of demand deposit accounts along
with higher service fees. Net gain on loans and securities available for sale
increased $357,000, or 151.3%, to $593,000 for the year ended December 31, 1997
as compared to $236,000 for 1996. The increase was due primarily to net gains
of $545,000 realized in the third quarter of 1997 and such gains were
principally attributable to sales of MBS available for sale. Net gain on loans
and securities available for sale decreased $97,000, or 100.0%, for the quarter
ended December 31, 1997. There were no sales in the fourth quarter of 1997.
The "Other, net" category of Other operating income decreased $87,000, or 87.9%,
to $12,000 for the quarter ended December 31, 1997, and increased $162,000, or
80.2%, to $364,000 for the year ended December 31, 1997, compared to $99,000 and
$202,000 for the same respective periods in 1996. The decrease for the quarter
ended December 31, 1997, was due to increased expenses of $95,000 associated
with REO operations. The increase for the year ended December 31, 1997, was due
to increased income of $123,000 realized by the Bank's wholly owned subsidiary,
FSB Financial Corp., reduced expense of $32,000 associated with REO operations
and increased rental income of $19,000.
OPERATING EXPENSES. Operating expenses decreased $297,000, or 6.5%, to $4.3
million for the quarter ended December 31, 1997, and $5.8 million, or 23.6%, to
$18.9 million for the year ended December 31, 1997, compared to $4.6 million and
$24.7 million for the same respective periods in 1996. The decrease was
primarily due to the one-time special SAIF assessment of $5.2 million charged in
1996. Compensation and employee benefits decreased $139,000, or 6.0%, to $2.2
million for the quarter ended December 31, 1997, and $753,000, or 7.3%, to $9.5
million for the year ended December 31, 1997, compared to $2.3 million and $10.3
million for the same respective periods in 1996. The year ended December 31,
1996 included a non-recurring charge for benefits payable as a result of the
passing of the Bank's long-time Chairman and President. Equipment expense
increased $51,000, or 18.8%, to $322,000 for the quarter ended December 31,
1997, and $392,000, or 37.9%, to $1.4 million for the year ended December 31,
1997, compared to $271,000 and $1.0 million for the same respective periods in
1996. The increase was due to the write-off of certain equipment determined to
be obsolete and increased depreciation expense incurred due to an upgrade of the
Bank's computer equipment and corporate headquarters. The Bank incurred reduced
FDIC insurance premiums in 1997. The Bank's special assessment to recapitalize
the SAIF of $5.2 million was reflected as an expense in 1996. The FDIC
substantially lowered the SAIF insurance assessments on SAIF member
institutions. Amortization of intangibles increased $795,000, or 58.9%, to $2.1
million for the year ended December 31, 1997, from $1.3 million for 1996. An
impairment writedown of the core deposit intangible totaling $1.3 million was
recognized during 1997, regarding deposits acquired from the RTC in 1995.
General and administrative expenses increased $152,000, or 23.7%, to $793,000
for the quarter ended December 31, 1997, and $319,000, or 13.0%, to $2.8 million
for the year ended December 31, 1997, compared to $641,000 and $2.5 million for
the same respective periods in 1996. The increase was due to increased expenses
associated with legal and consulting fees, check processing and postage.
INCOME TAX EXPENSE. Income tax expense increased $59,000, or 4.1%, to $1.5
million for the quarter ended December 31, 1997, and $2.7 million, or 95.2%, to
$5.5 million for the year ended December 31, 1997, compared to $1.4 million and
$2.8 million for the same respective periods in 1996. The increase was due
primarily to an increase in taxable income. Taxable income was affected in the
1996 period by several non-recurring charges.
22
<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.
COMPETITION
The Bank faces significant competition both in originating loans and in
attracting deposits. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank and 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 loans associations and credit unions. The Bank
faces additional competition for deposits from short-term money market funds,
other corporate and government securities funds and from other financial
institutions such as brokerage firms, mutual funds, and insurance companies. See
"Business of the Bank."
Competitive mortgage lending and deposit competition 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 increased competition for
deposits, the Bank may seek 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."
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowed funds. Accordingly, the Bank's results of operations
and financial condition are affected by movements in market interest rates
and its ability to manage its assets and liabilities in response to such
movements. At September 30, 1997, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same time period by $136.9 million based upon national interest
rate sensitivity assumptions and the Bank's historical experience. This
represents a cumulative one year gap as a percentage of total assets of negative
13.09%. As a result of its negative gap position, the yield on interest-earning
assets of the Bank will adjust to changes in interest rates at a slower rate
than the cost of the Bank's interest-bearing liabilities. Consequently, the
Bank's net interest income may be adversely affected during periods of rapidly
rising interest rates.
The Bank's interest rate sensitivity is also monitored by management
through the use of an OTS Net Portfolio Value Model which generates estimates of
the change in the Bank's net portfolio value ("NPV") over a range of interest
rate scenarios. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. As of September 30, 1997, the Bank's NPV
was $127.4 million, or 11.92% of the market value of assets. A 200 basis point
increase in interest rates would result in a decrease in the Bank's NPV to
$104.7 million, representing an 18.0% reduction in the value of the Bank's
discounted cash flows. Conversely, a 200 basis point decrease in interest rates
would result in an increase in the Bank's NPV to $132.7 million, representing
only a 4.0% increase in
23
<PAGE>
the value of the Bank's discounted cash flows. Consequently, an increase in
interest rates will have a significantly greater impact on the Bank's NPV than a
corresponding decrease in interest rates.
Increases in market interest rates also can affect the type (fixed-rate or
adjustable-rate) and amount of loans originated by the Bank and the average life
of loans and securities, which can adversely impact the yields earned on the
Bank's loan and securities portfolio. In addition, increases in interest rates
could result in interest rates on the Bank's adjustable-rate loans increasing,
thereby resulting in increased loan payment amounts by the borrowers which, in
turn, may result in higher delinquencies on such loans. In periods of decreasing
interest rates, the average life of loans held by the Bank may be shortened to
the extent increased prepayment activity occurs during such periods which, in
turn, may result in the Bank investing funds from such prepayments in lower
yielding assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Management of Interest Rate Risk."
DEPENDENCE UPON LOCAL ECONOMY
The Bank's market area is concentrated in north and central New Jersey and
therefore, its results of operations are largely dependent on the economy of the
New Jersey area. 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.
New Jersey's real estate market has stabilized in recent periods. The
population of Middlesex County is growing, but at a declining rate, and new
housing starts in the Bank's primary market area are still lower than those in
the state of New Jersey generally. For the nine months ended September 30, 1997
and the years ended December 31, 1996 and 1995, the Bank originated $76.2
million, $100.0 million and $75.5 million of one- to four-family residential
loans, respectively. Repayments on total mortgage loans were $48.1 million,
$77.1 million and $52.2 million, respectively, for the same periods. While the
Bank's total loan portfolio has grown in the 1990s in dollar amount, from $416.0
million at December 31, 1992, to $567.2 million at September 30, 1997, it has
decreased slightly as a percentage of total assets over the same period. Total
loans as a percentage of assets were 54.8% at December 31, 1992, compared to
54.3% at September 30, 1997. Although the current national and local economic
conditions have significantly improved since the early 1990s, there can be no
assurances that conditions in the local economy, national economy, or real
estate market in general will not deteriorate and adversely affect the financial
condition and results of operations of the Bank.
ESTIMATED PRICE RANGE BELOW MARKET PRICE
The aggregate purchase price of the Conversion Stock to be offered and the
amount of Exchange Shares to be issued in connection with the Conversion and
Reorganization have been determined on the basis of FinPro's independent
appraisal of the estimated pro forma market value of the Bank and the Mutual
Holding Company. The appraised amount was multiplied by the Mutual Holding
Company's percentage interest in the Bank to determine the aggregate amount of
Conversion Stock to be sold in the Offerings, and by the Public Stockholders'
percentage interest to determine the aggregate number of Exchange Shares to be
issued based upon the Purchase Price of $10.00 per share. The final Exchange
Ratio will be based upon the number of shares issued in the Offerings which
results in the Public Stockholders' owning approximately 47.9% in the Company,
as adjusted pursuant to OTS requirements. THE FINAL EXCHANGE RATIO WILL NOT BE
BASED UPON THE TRADING PRICE OF THE PUBLIC BANK SHARES. At the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Price Range, one
Public Bank Share will be exchanged for 2.5151, 2.9590, 3.4028 and 3.9133 shares
of Common Stock, respectively. Based upon the $10.00 Purchase Price of a share
of Common Stock
24
<PAGE>
in the Offerings and the Exchange Ratio, the Exchange Shares to be received for
one share of Bank Common Stock have a calculated equivalent value of $25.15,
$29.59, $34.03 and $39.13 at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, which may be less than the market value
of one share of Bank Common Stock at the time of the Exchange. The closing price
per share of the Bank Common Stock as of ___________, 1998, was $_____. There
can be no assurance as to the actual market price of a share of Bank Common
Stock at the time of the Exchange. Further, there can be no assurance as to the
actual market value of a share of Common Stock of the Company after the
Conversion and Reorganization, or that such shares could be sold at or above the
$10.00 Purchase Price. See "Summary - Effects of the Reorganization on Public
Stockholders," and "The Conversion and Reorganization - Stock Pricing and Number
of Shares to be Issued in the Conversion and Reorganization."
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, a Public Stockholder who
receives Exchange Shares in an amount equal to or exceeding 4.0% of the
Conversion Stock offered will not be able to subscribe for shares of Conversion
Stock in the Offerings. Specifically, a Public Stockholder who qualifies as an
Eligible Account Holder and receives 302,229 Exchange Shares at the maximum of
the Estimated Price Range, will not be able to participate in the Subscription
Offering. See "The Conversion and Reorganization-- Limitations on Conversion
Stock Purchases." Further, due to OTS policy, the OTS required the establishment
of the purchase limitations at a level that will preclude certain officers and
directors of the Bank from purchasing any Common Stock in the Offering.
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS
The Company intends to seek stockholder approval of a Stock-Based Incentive
Plan which it intends to adopt for the benefit of non-employee directors,
officers and employees of the Company and the Bank at a meeting of stockholders
following the Conversion and Reorganization, which under current OTS regulations
may be held no earlier than six months after completion of the Conversion and
Reorganization. Assuming the receipt of stockholder approval, the Company
expects to acquire or issue an amount equal to 4% of the Conversion Stock sold
in the Conversion, or 425,502 shares and 575,676 shares at the minimum and
maximum of the Estimated Price Range, respectively. Based on the Purchase Price
of $10 per share, such awards will have a value ranging from $4.3 million to
$5.8 million 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 Company also intends to
acquire or issue an amount equal to 10% of the Conversion Stock issued, or
1,063,754 shares and 1,439,190 shares at the minimum and maximum of the
Estimated Price Range, respectively, for stock options. The exercise price will
be equal to the fair market value of the underlying Common Stock on the date of
grant. The value of such options cannot be predicted since any value is
dependent on an increase in the price of the Common Stock from the date of
grant. Although no specific award determinations have been made, the Company
anticipates that it will provide awards and options to its directors and
employees to the extent permitted by applicable regulations. Current OTS
regulations provide that no individual may receive more than 25% of the shares
of any plan and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate, of the shares or options awarded under
any plan. Stock awards will be granted at no cost to the recipients. Officers
and directors receiving 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."
The foregoing plans are in addition to the First Savings Bank, SLA 1992
Incentive Stock Option Plan and the 1992 Stock Option Plan for Outside
Directors, (collectively, the "1992 Stock Option Plans") which were adopted by
the Bank in connection with the 1992 MHC Reorganization, and to the First
Savings Bank, SLA 1996 Omnibus Incentive Plan ("1996 Incentive Plan") which was
implemented following the Bank's 1995 Secondary Offering, each of which were
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 - Benefits" and "The Conversion and Reorganization -
Effect on Existing
25
<PAGE>
Compensation Plans." In addition, the Bank's existing ESOP, which was adopted in
connection with the 1992 MHC Reorganization, intends to purchase 8.0% of the
Conversion Stock to be issued in the Offerings (1,151,352 shares or $11.5
million of Conversion Stock at the maximum of the Estimated 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 - Benefits - Employee Stock Ownership
Plan."
Expenses Associated With Stock Benefit Plans. The purchase by the Bank's
ESOP of 8.0% of the Conversion Stock issued and the purchase by the Stock-Based
Incentive Plan of 4.0% of the Conversion Stock issued, assuming receipt of
stockholder approval, will cause the Bank to recognize additional significant
compensation and employee benefits expense. The Bank cannot predict the actual
amount of these new expenses because applicable accounting practices require
that the compensation expense be based on the fair market value of the shares of
Common Stock when the expenses are recognized. Expenses for the ESOP would be
recognized when shares are committed to be released to participants' accounts,
and expenses for the Stock-Based Incentive Plan would be recognized over the
vesting period of awards made to recipients. These expenses have been reflected
in the pro forma financial information under "Pro Forma Data" assuming the
$10.00 per share Purchase Price as the fair market value. Actual expenses,
however, will be based on the fair market value of the Common Stock at the time
of recognition, which may be higher or lower than $10.00. For further discussion
of these plans, see "Management of the Bank - Benefits -Employee Stock Ownership
Plan" and "- Stock-Based Incentive Plan."
Possible Dilutive Effect of Stock-Based Incentive Plan. Following the
Conversion and Reorganization, the Stock-Based Incentive Plan, if approved by
the stockholders of the Company, will acquire an amount of shares equal to 4% of
the shares of Conversion Stock issued in the Conversion and Reorganization,
either through open market purchases or the issuance of authorized but unissued
shares of Common Stock from the Company. If the Stock-Based Incentive Plan is
funded by the issuance of authorized but unissued shares, the voting interests
of then-existing shareholders will be diluted by 2.2%. In addition, directors,
officers and employees will be granted options to purchase authorized but
unissued shares in an amount equal to 10% of the Conversion Stock issued in the
Conversion and Reorganization, if the Stock-Based Incentive Plan is approved by
the stockholders of the Company. If all of the options were to be exercised
using authorized but unissued Common Stock and the stock awards were funded with
authorized but unissued shares, the voting interests of then-existing
stockholders would be diluted by 5.5%.
The Bank also has adopted and maintains the 1992 Stock Option Plans, which
reserved for issuance 292,820 shares of Bank Common Stock, after giving effect
to four 10% stock dividends and a two-for-one stock split. As of September 30,
1997, 79,584 options remained available for exercise. In addition, the Bank
maintains the 1996 Incentive Plan, which has reserved for issuance 72,600 shares
of Bank Common Stock, after giving effect to two 10% stock dividends. At
September 30, 1997, all of the option shares awarded under this plan remained
available for exercise. Upon consummation of the Conversion and Reorganization,
the 1992 Stock Option Plans and the 1996 Incentive Plan 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."
Voting Control of Officers and Directors. Directors and executive officers
of the Bank and the Company expect to hold approximately 12.6% or 9.3% of the
shares of Common Stock to be outstanding upon completion of the Conversion and
Reorganization, based upon the minimum and the maximum of the Estimated Price
Range, respectively. When combined with shares that may be attributable to
directors and officers through the existing and future stock benefit 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
26
<PAGE>
"Restrictions on Acquisition of the Company and the Bank - Restrictions in the
Company's Certificate of Incorporation and Bylaws."
EMPLOYMENT CONTRACTS, CHANGE IN CONTROL PROVISIONS AND EMPLOYEE SEVERANCE
COMPENSATION
The Bank and the Mutual Holding Company currently maintain employment
agreements with Messrs. Mulkerin and Martin. In connection with the Conversion
and Reorganization, the Bank and the Company intend to enter into new 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. These provisions may have the
effect of increasing the cost of acquiring the Company, thereby discouraging
future attempts to take over the Company or the Bank. 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."
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."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion and Reorganization may be
increased as a result of an increase in the Estimated Price Range of up to 15%
to reflect changes in market and financial conditions following the commencement
of the Subscription and Community Offerings. In the event that the Estimated
Price Range is so increased, it is expected that the Company will issue up to
16,550,374 shares of Conversion Stock at the Purchase Price for an aggregate
purchase price of up to $165.5 million. An increase in the number of shares
issued will decrease pro forma net earnings per share and stockholders' equity
per share for those subscribers who are not already Public Stockholders of the
Bank 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
27
<PAGE>
is not binding on the Internal Revenue Service ("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 gains 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."
FIRST SOURCE BANCORP, INC.
The Company was organized in December 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 and exchanged 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 to refinance the MHC's
existing loan to the ESOP. Initially, the Company expects to deposit the
remaining proceeds with the Bank. See "Use of Proceeds." The Company and Bank
may, however, alternatively choose to fund the ESOP through a loan to the ESOP
trust by a third party financial institution.
Initially, the Company will neither own nor lease any property, but will
instead use the premises, equipment and furniture of the Bank. At the present
time, the Company does not intend to employ any persons other than the officers
set forth under "Management of the Company," but will utilize the support staff
of the Bank from time to time. Additional employees will be hired as appropriate
to the extent the Company expands its business in the future. The initial
business activities of the Company will consist of investment in the Bank. The
Company may in the future expand its business activities or services which it
provides through existing or newly-formed subsidiaries or through acquisitions
of other financial services providers. The initial activities of the Company are
anticipated to be funded by the net proceeds retained by the Company and
earnings thereon or, alternatively, through dividends from the Bank.
The Company's executive offices are currently located at 1000 Woodbridge
Center Drive, Woodbridge, New Jersey 07095. Its telephone number is (732) 726-
9700.
FIRST SAVINGS BANCSHARES, MHC
The Mutual Holding Company was formed as a result of the 1992 MHC
Reorganization of the Bank, in a series of steps, from a New Jersey-chartered
savings association into a federally-chartered mutual holding company. The Bank
is a majority-owned subsidiary of the Mutual Holding Company. Pursuant to OTS
regulations governing mutual holding companies, the Mutual Holding Company must
at all times own more than 50% of the outstanding voting stock of the Bank. As
the majority owner of the Bank, the Mutual Holding Company elects directors who
oversee the affairs and operations of the Bank. Depositors and those current
borrowers of the Bank who had loans outstanding as of the consummation of the
Reorganization, vote and elect directors of the Mutual Holding Company. The
Mutual Holding Company currently does not engage in any business activity other
than to hold the majority of the Bank's common stock, to invest the
28
<PAGE>
funds retained at the Mutual Holding Company, and to finance a loan to the
Bank's ESOP. At September 30, 1997, the Mutual Holding Company's assets
consisted of a 51.6% ownership interest in the Bank, $491,000 in cash and
certificates of deposit (which will become assets of the Bank upon consummation
of the Conversion and Reorganization), and a loan to the Bank's ESOP totalling
$571,000. The Mutual Holding Company had liabilities of $29,000 at September 30,
1997, and had net income for the nine months ended September 30, 1997 of
$10,000. 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, SLA
First Savings is a New Jersey-chartered capital stock savings and loan
association headquartered in Woodbridge, New Jersey. First Savings has operated
in its present market area since 1901. Until 1992, the Bank operated in the
mutual form of organization. On July 10, 1992, the Bank, acting on a Plan of
Reorganization approved by its members, reorganized to become a federally-
chartered mutual holding company. In connection with the 1992 MHC
Reorganization, all of the assets and substantially all of the liabilities of
the mutual savings association were transferred to a newly formed state-
chartered stock savings association that assumed the name of First Savings Bank,
SLA. Concurrently, the newly formed stock savings association sold approximately
37.6% of its common stock at $10.00 per share in an initial minority stock
offering. The remaining 62.4% of the Bank common stock was issued to the Mutual
Holding Company in exchange for all assets, except $1.0 million in cash, and all
of the liabilities of the former state-chartered mutual association. On July 11,
1995, the Bank consummated its 1995 Secondary Offering, whereby the Bank sold
additional shares of common stock, which resulted in the Minority Ownership
Interest in the Bank increasing to 47.5% at that time. By October 31, 1997, the
Minority Ownership Interest had increased to 48.4% due to the exercise of
options by Public Stockholders.
The Bank's executive offices are currently located at 1000 Woodbridge
Center Drive, Woodbridge, New Jersey 07095. Its telephone number is (732) 726-
9700.
29
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At September 30, 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 September 30, 1997, on a historical and
pro forma basis assuming that the indicated number of shares were sold as of
such date and receipt by the Bank of 50% of the net proceeds. For purposes of
the table below, the amount expected to be borrowed by the ESOP and the cost of
the shares expected to be acquired by the Stock-Based Incentive Plan are
deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
FIRST SAVINGS BANK, SLA
PRO FORMA AT SEPTEMBER 30, 1997 BASED UPON SALE AT $10.00 PER SHARE
----------------------------------------------------------------------------------
10,637,542 SHARES 12,514,527 SHARES 14,391,900 SHARES
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED
SEPTEMBER 30, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE)
-------------------- ---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2)
------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............. $99,213 9.50% $145,712 13.36% $153,871 14.00% $162,032 14.63%
======= ===== ======== ===== ======== ===== ======== =====
Tangible Capital:
Capital Level......... $89,992 8.68% $136,381 12.59% $144,540 13.26% $152,701 13.90%
Requirement........... 15,552 1.50 16,250 1.50 16,372 1.50 16,494 1.50
------- ----- -------- ----- -------- ----- -------- -----
Excess................ $74,440 7.18% $120,131 11.09% $128,168 11.76% $136,207 12.40%
======= ===== ======== ===== ======== ===== ======== =====
Core Capital:
Capital Level......... $89,992 8.68% $136,381 12.59% $144,540 13.24% $152,701 13.89%
Requirement (3)....... 31,104 3.00 32,499 3.00 32,744 3.00 32,989 3.00
------- ----- -------- ----- -------- ----- -------- -----
Excess................ $58,888 5.68% $103,882 9.59% $111,796 10.24% $119,712 10.89%
======= ===== ======== ===== ======== ===== ======== =====
Risk-Based Capital (4):
Capital Level (4)..... $95,319 22.38% $141,818 31.58% $149,977 31.21% $158,138 32.37%
Requirement........... 34,070 8.00 35,930 8.00 38,443 8.00 39,095 8.00
------- ----- -------- ----- -------- ----- -------- -----
Excess................ $61,249 14.38% $105,888 23.58% $111,534 23.21% $119,043 24.36%
======= ===== ======== ===== ======== ===== ======== =====
<CAPTION>
---------------------
16,550,374 SHARES
(15% ABOVE
MAXIMUM
OF ESTIMATED
PRICE RANGE) (1)
---------------------
PERCENT
OF
AMOUNT ASSETS (2)
------- ------------
GAAP Capital............. $171,416 15.35%
======== =====
Tangible Capital:
Capital Level......... $162,085 14.63%
Requirement........... 16,635 1.50
-------- -----
Excess................ $145,450 13.13%
======== =====
Core Capital:
Capital Level......... $162,085 14.62%
Requirement (3)....... 33,270 3.00
-------- -----
Excess................ $128,815 11.62%
======== =====
Risk-Based Capital (4):
Capital Level (4)..... $167,522 33.63%
Requirement........... 39,846 8.00
-------- -----
Excess................ $127,676 25.63%
======== =====
</TABLE>
______________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of total 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) 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."
(4) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
30
<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 $104.7 million and $141.8 million (or $163.2 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 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 single-family residential mortgage loans,
commercial real estate loans and other loans, investment in federal funds,
investment grade marketable securities and mortgage-backed securities, to repay
borrowings and to fund the Stock-Based Incentive Plan. 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-Based Incentive Plan. See "Risk Factors - Stock-Based
Benefits to Management and Directors" and "Management of the Bank - Benefits -
Stock-Based Incentive Plan."
The Company intends to use a portion of the net proceeds to loan
additional funds to the ESOP to enable the ESOP to purchase 8% of the Conversion
Stock issued in the Conversion and to refinance the MHC's existing loan to the
ESOP. Based upon the issuance of 10,637,542 shares or 14,391,900 shares at the
minimum and maximum, respectively, of the Estimated Price Range, the amount of
the loan to the ESOP would be $8.5 million or $11.5 million, respectively (or
$13.2 million if the Estimated Price Range is increased by 15%) to be repaid
over a 15 year period at a market rate of interest. See "Management of the
Bank -Benefit Plans -Employee Stock Ownership Plan and Trust."
The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of smaller savings
associations and commercial banks or their assets, including those located
within the Bank's market area or diversification into other banking related
businesses. The Company has no current arrangements, understandings or
agreements regarding any such transactions. Upon completion of the Conversion
and Reorganization, the Company will be a unitary savings and loan holding
company, which under existing laws would generally not be restricted as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL"). See "Regulation - Holding
Company Regulation" for a description of certain regulations currently
applicable to the Company.
Upon completion of the Conversion and Reorganization, the Board of
Directors of the Company will have the authority to adopt stock repurchase
plans, subject to statutory and regulatory requirements. Unless approved by the
OTS, the Company, pursuant to OTS regulations, will be prohibited from
repurchasing any shares of the Common Stock for three years except (i) for an
offer to all stockholders on a pro rata basis, or (ii) for the repurchase of
qualifying shares of a director. Notwithstanding the foregoing and except as
provided below, beginning one year following completion of the Conversion and
Reorganization, the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a
31
<PAGE>
twelve-month period; (ii) the repurchases do not cause the Bank to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and (iii) the Company provides to the Regional Director of the OTS
no later than ten days prior to the commencement of a repurchase program written
notice containing a full description of the program to be undertaken and such
program is not disapproved by the Regional Director. See "Regulation - Prompt
Corrective Regulatory Action."
Based upon facts and circumstances following the Conversion and
Reorganization and subject to applicable regulatory requirements, the Board of
Directors may determine to repurchase stock in the future. Such facts and
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 Offerings. 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 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 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."
32
<PAGE>
DIVIDEND POLICY
Since the 1992 MHC Reorganization, the Bank has paid, in the
aggregate, annual cash dividends on the Bank Common Stock ranging from $0.27 per
share for 1993 to $0.43 per share for 1997, as adjusted for stock dividends and
a 2-for-1 stock split. The current quarterly cash dividend is $0.12 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. The table below sets forth the cash and
stock dividends paid by the Bank since January 1, 1995.
<TABLE>
<CAPTION>
ACTUAL
CASH STOCK
DIVIDEND DIVIDEND PAID, DIVIDEND
PAYABLE DATE PAID(1) AS ADJUSTED(2) PAID
------------ ----------- -------------- ------------
<S> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31, 1997:
Fourth Quarter......................... November 28 $0.12 $0.12 --%
October 30 -- -- 10
Third Quarter.......................... August 29 0.12 0.11 --
Second Quarter......................... May 30 0.12 0.11 --
First Quarter.......................... February 28 0.10 0.09 --
YEAR ENDING DECEMBER 31, 1996:
Fourth Quarter......................... December 16 $ -- $ -- 10%
November 29 0.10 0.08 --
Third Quarter.......................... August 31 0.10 0.08 --
Second Quarter......................... May 31 0.10 0.08 --
First Quarter.......................... February 29 0.10 0.08 --
YEAR ENDING DECEMBER 31, 1995:
Fourth Quarter......................... November 30 $0.09 0.07 10%
Third Quarter.......................... August 31 0.09 0.07 --
Second Quarter......................... May 31 0.09 0.07 --
First Quarter.......................... February 28 0.09 0.07 --
</TABLE>
________________________
(1) The Mutual Holding Company has waived receipt of all cash dividends paid
by the Bank. The aggregate amount of all cash dividends waived by the
Mutual Holding Company as of September 30, 1997 is $6.7 million.
(2) As adjusted for 10% stock dividends paid on July 1, 1993, April 1, 1994,
December 16, 1996 and October 30, 1997, respectively, and a two-for-one
stock split effected on December 1, 1994.
Upon consummation of the Conversion and Reorganization, the Company
expects to pay an initial quarterly dividend of $0.03 per share. Declarations of
dividends by the Company's Board of Directors, however, will depend upon a
number of factors, including the amount of the net proceeds from the Offerings
retained by the Company, investment opportunities available to the Company or
the Bank, capital requirements, regulatory limitations, the Company's and the
Bank's financial condition and results of operations, tax considerations and
general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods. See "Market for
the Common Stock."
33
<PAGE>
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 take any action to declare an extraordinary dividend to stockholders
which would be treated by recipient stockholders as a tax-free return of capital
for federal income tax purposes without prior approval of the OTS.
MARKET FOR THE COMMON STOCK
Although the Bank Common Stock is traded on the Nasdaq National
Market, there is no established market for the Common Stock of the Company at
this time. The Company has received conditional approval to have its Common
Stock quoted on the Nasdaq National Market under the symbol "FSLA." One of the
requirements for quotation of the Common Stock on the Nasdaq National Market is
that there be at least three market makers for the Common Stock. The Company
will seek to encourage and assist at least three market makers to make a market
in its Common Stock. Currently, there are three market makers for the Bank's
Common Stock. Making a market involves maintaining bid and ask quotations and
being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. Although under no obligation to do so, Sandler O'Neill has
informed the Company that it intends, upon the completion of the Conversion and
Reorganization, to make a market in the Common Stock by maintaining bid and ask
quotations and trading in the Common Stock so long as the volume of trading
activity and certain other market making considerations justify it doing so. As
of the date hereof, no other broker-dealers have agreed to act as market makers.
While the Company anticipates that prior to the completion of the Conversion
there will be at least two other broker-dealers to act as market maker for the
Common Stock, there can be no assurance there will be three 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.
34
<PAGE>
The following table sets forth the high and low trading prices of the
Bank's Common Stock during the periods indicated as adjusted for stock dividends
paid to shareholders.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1997:
------------------------------
Fourth Quarter................ $54.50 $32.27
Third Quarter................. 32.50 26.88
Second Quarter................ 29.25 21.00
First Quarter................. 23.50 18.25
YEAR ENDED DECEMBER 31, 1996:
-----------------------------
Fourth Quarter................ $19.50 $16.50
Third Quarter................. 17.00 15.50
Second Quarter................ 16.25 14.50
First Quarter................. 16.50 15.00
YEAR ENDED DECEMBER 31, 1995:
-----------------------------
Fourth Quarter................ $17.50 $13.25
Third Quarter................. 14.25 13.25
Second Quarter................ 15.25 12.50
First Quarter................. 14.50 12.50
</TABLE>
35
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at September 30, 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
----------------------------------------------------------------------
16,550,374
SHARES
BANK 10,637,542 12,514,527 14,391,900 (15% ABOVE
HISTORICAL SHARES SHARES SHARES MAXIMUM
AT (MINIMUM (MIDPOINT (MAXIMUM OF OF ESTIMATED
SEPTEMBER 30, OF ESTIMATED OF ESTIMATED ESTIMATED PRICE
1997 PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE) (1)
-------------- -------------- -------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposit accounts (2)..................... $809,449 $809,449 $809,449 $809,449 $809,449
Borrowed funds........................... 123,894 123,894 123,894 123,894 123,894
Debt in connection with acquisition
of shares of Common Stock by
ESOP (3)............................... 571 571 571 571 571
-------- -------- -------- -------- --------
Total deposit accounts and
borrowed funds......................... $933,914 $933,914 $933,914 $933,914 $933,914
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01 par value,
10,000,000 shares authorized;
none to be issued.................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 85,000,000 shares
authorized; shares to be
issued as reflected (4).............. 73 204 240 276 317
Additional paid-in capital (5)(6)...... 27,856 133,487 152,023 170,562 191,878
Retained earnings...................... 71,870 71,870 71,870 71,870 71,870
Net unrealized gain on securities
available for sale..................... 193 193 193 193 193
Less:
Unearned Common Stock previously
acquired by the ESOP (3)............. (571) (571) (571) (571) (571)
Unearned Common Stock held
by the 1996 Incentive Plan........... (208) (208) (208) (208) (208)
Common Stock to be acquired
by the ESOP (7)...................... -- (8,510) (10,012) (11,514) (13,240)
Common Stock to be acquired by
the Stock-Based Incentive Plan (8)... -- (4,255) (5,006) (5,757) (6,620)
-------- -------- -------- -------- --------
Total stockholders' equity............... $ 99,213 $192,210 $208,529 $224,851 $243,619
======== ======== ======== ======== ========
</TABLE>
(footnotes on next page)
36
<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 3,881,539 Public Bank Shares outstanding at October
31, 1997 are converted into 9,762,458, 11,485,473, 13,208,100 and
15,189,626 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 -- Benefits."
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Company's Stock-Based Incentive Plan intended to be
adopted by the Company and presented for approval of stockholders at a
meeting of stockholders following the Conversion and Reorganization. If
approved by the stockholders of the Company, an amount equal to 10% of the
shares of Conversion Stock issued in the Conversion and Reorganization will
be reserved for issuance upon the exercise of options to be granted under
the Stock-Based Incentive Plan. See "Risk Factors -Possible Dilutive Effect
of Stock-Based Incentive Plan," Footnote 3 to the tables under "Pro Forma
Data" at or for the nine months ended September 30, 1997 and at or for the
year ended December 31, 1996, respectively, and "Management of the Bank --
Benefits -- Stock-Based Incentive Plan."
(6) The additional paid-capital includes $1.1 million 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 1992 MHC Reorganization. The retained earnings of the
Bank will be substantially restricted after the Conversion and
Reorganization by virtue of the liquidation account to be established in
connection with the Conversion and Reorganization. See "The Conversion and
Reorganization -- Liquidation Rights" and "Regulation - Federal Regulation
of Savings Institutions -- Limitations on Capital Distributions."
(7) Assumes that 8% of the aggregate of the Conversion Stock issued in the
Conversion and Reorganization will be purchased by the ESOP and that the
funds used to acquire such shares will be borrowed from the Company. The
Common Stock acquired by the ESOP is reflected as a reduction of
stockholders' equity. See "Management of the Bank - Benefits - Employee
Stock Ownership Plan and Trust."
(8) Assumes that, subsequent to the Conversion and Reorganization, an amount
equal to 4% of the shares of Conversion Stock issued in the Conversion and
Reorganization is purchased by the Stock-Based Incentive Plan through open
market purchases. The Common Stock purchased by the Stock-Based Incentive
Plan is reflected as a reduction of stockholder's equity. Implementation of
the Stock-Based Incentive Plan 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-Based Incentive Plan,"
Footnote 2 to the tables under "Pro Forma Data" at or for the nine months
ended September 30, 1997 and at or for the year ended December 31, 1996,
respectively, and "Management of the Bank - Benefits -- Stock-Based
Incentive Plan."
37
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization is completed. However, net
proceeds are currently estimated to be between $104.7 million and $141.8 million
(or $163.2 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 $600,000 of
Common Stock; (iii) Sandler O'Neill will receive a fee equal to 1.15% of the
aggregate Purchase Price of shares sold in the Subscription Offering and in the
Community Offering, excluding shares purchased by Insiders and the ESOP; and
(iv) Conversion and Reorganization expenses, excluding the marketing fees paid
to Sandler O'Neill, will be approximately $600,000. Actual Conversion and
Reorganization expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the nine months ended
September 30, 1997, and for the year ended December 31, 1996 have 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 an average yield of 5.42%, the one-year Treasury note rate at
September 30, 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.
The tables below do not reflect the effect of withdrawals from deposit accounts
for the purchase of Conversion Stock or the effect of any possible use of the
net proceeds. The pro forma after-tax yield for the Company and the Bank is
assumed to be 3.41% for both the nine months ended September 30, 1997 and the
year ended December 31, 1996 based on an effective tax rate of 37%.
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 tables summarize historical data of the Bank and pro forma
data of the Company at or for the nine months ended September 30, 1997 and the
year ended December 31, 1996 based on the assumptions set forth above and in the
tables 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-Based Incentive Plan, which is expected to be adopted by the
Company following the Conversion and Reorganization and presented to
stockholders for approval at a meeting of stockholders. See Footnotes 2 and 3 to
the tables and "Management of the Bank - Benefits - Stock-Based Incentive Plan."
No effect has been given in the tables to the possible issuance of additional
shares reserved for future issuance pursuant to the options 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 tables below, "The Conversion and Reorganization
- -- Liquidation Rights" and "Management of the Bank -Benefits - Stock-Based
Incentive Plan."
38
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------------
10,637,542 12,514,527 14,391,900 16,550,374
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)(7)
-------------- -------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross Proceeds....................................... $106,375 $125,145 $143,919 $165,504
Less: Offering expenses and commission.............. (1,719) (1,917) (2,116) (2,344)
-------- -------- -------- --------
Estimated net proceeds............................... 104,656 123,228 141,803 163,160
Less: Common Stock purchased by the ESOP............ 8,510 10,012 11,514 13,240
Common Stock purchased by Stock-Based
Incentive Plan 4,255 5,006 5,757 6,620
-------- -------- -------- --------
Estimated net proceeds, as adjusted................ $ 91,891 $108,210 $124,532 $143,300
======== ======== ======== ========
Consolidated net earnings:
Historical......................................... $ 6,760 $ 6,760 $ 6,760 $ 6,760
Pro forma earnings on net proceeds................. 2,350 2,767 3,185 3,665
Less: Pro forma ESOP adjustment(1)............... (268) (315) (363) (417)
Pro forma Stock-Based Incentive
Plan(2)................................. (402) (473) (544) (626)
-------- -------- -------- --------
Pro forma net earnings........................ $ 8,440 $ 8,739 $ 9,038 $ 9,382
======== ======== ======== ========
Per share net earnings (3):
Historical......................................... $ 0.35 $ 0.30 $ 0.26 $ 0.22
Pro forma earnings on net proceeds................. 0.12 0.12 0.12 0.12
Less: Pro forma ESOP adjustment(1)............... (0.01) (0.01) (0.01) (0.01)
Pro forma Stock-Based Incentive
Plan(2)................................. (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Pro forma net earnings per share.............. $ 0.44 $ 0.39 $ 0.35 $ 0.31
======== ======== ======== ========
Stockholders' equity:
Historical......................................... $ 99,213 $ 99,213 $ 99,213 $ 99,213
Estimated net proceeds............................. 104,656 123,228 141,803 163,160
Plus: Assets consolidated from MHC................. 1,106 1,106 1,106 1,106
Less: Common stock acquired by ESOP(1)........... (8,510) (10,012) (11,514) (13,240)
Common Stock acquired by Stock-
Based Incentive Plan(2)................. (4,255) (5,006) (5,757) (6,620)
-------- -------- -------- --------
Pro forma stockholders' equity(2)(4)(5)....... $192,210 $208,529 $224,851 $243,619
======== ======== ======== ========
Stockholders' equity per share (6):
Historical......................................... $ 4.86 $ 4.13 $ 3.59 $ 3.13
Estimated net proceeds............................. 5.13 5.13 5.14 5.14
Plus: Assets consolidated from MHC................. 0.05 0.05 0.04 0.03
Less: Common stock acquired by ESOP(1)........... (0.42) (0.42) (0.42) (0.42)
Common Stock acquired by Stock-
Based Incentive Plan(2)................. (0.21) (0.21) (0.21) (0.21)
-------- -------- -------- --------
Pro forma stockholders' equity per
share(2)(4)(5)............................. $ 9.41 $ 8.68 $ 8.14 $ 7.67
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share..................... 106.2% 115.2% 122.9% 130.4%
Offering price to pro forma net earnings per share... 17.0x 19.2x 21.4x 24.2x
</TABLE>
(footnotes on following page)
39
<PAGE>
__________________
(1) It is assumed that 8% of the shares of Common Stock issued in the
Conversion and Reorganization will be purchased by the ESOP. For purposes
of this table, the funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Bank intends to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total annual
payment of the ESOP debt is based upon 15 equal annual installments of
principal, with an assumed interest rate at 7.00%. The pro forma net
earnings assume: (i) that the Bank's contribution to the ESOP is equivalent
to the debt service requirement for the nine months ended September 30,
1997, and was made at the end of the period; (ii) that 42,550, 50,058,
57,658 and 66,201 shares at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, were committed to be released
during the nine months ended September 30, 1997 at an average fair value of
$10.00 per share in accordance with Statement of Position ("SOP") 93-6; and
(iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net earnings per share calculations. See
"Management of the Bank -- Benefits -- Employee Stock Ownership Plan and
Trust."
(2) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion and presented for approval at a
meeting of stockholders. The Stock-Based Incentive Plan intend to acquire
an amount of Common Stock equal to 4% of the shares of Common Stock sold in
the Conversion or 425,501, 500,581, 575,675 and 662,014 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-Based
Incentive Plan to purchase the shares will be contributed to the Stock-
Based Incentive Plan by the Bank. In calculating the pro forma effect of
the Stock-Based Incentive Plan, it is assumed that the shares were acquired
by the Stock-Based Incentive Plan at the beginning of the period presented
in open market purchases at the Purchase Price and that 15% 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-
Based Incentive Plan instead of open market purchases would dilute the
voting interests of existing stockholders by approximately 2.2% and pro
forma net earnings per share would be $0.43, $0.38, $0.34, and $0.31,
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma shareholders' equity per share would be $9.23,
$8.51, $7.98 and $7.52 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-Based Incentive Plan will be obtained, or
that the actual purchase price of the shares will be equal to the Purchase
Price. See "Management of the Bank -- Benefits -- Stock-Based Incentive
Plan."
(3) Historical and pro forma net earnings per share have been divided by the
total number of shares to be outstanding upon consummation of the
Conversion and Reorganization, as adjusted to give effect to the purchase
of shares by the ESOP during the period, or 19,386,918, 22,808,152,
26,229,364 and 30,163,786 shares at the minimum, midpoint, maximum, and
maximum, as adjusted, of the Estimated Price Range, respectively.
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the options provided for in the Stock-Based Incentive
Plan expected to be adopted by the Company following the Conversion and
Reorganization or to the exercise of existing stock options. The Company
expects to present the Stock-Based Incentive Plan for approval at a meeting
of stockholders. An amount equal to 10% of the Common Stock issued in the
Conversion or 1,063,754, 1,251,452, 1,439,190 and 1,655,037 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-Based Incentive Plan. The issuance
of Common Stock pursuant to the exercise of options under the Stock-Based
Incentive Plan will result in the dilution of existing stockholders'
interests by approximately 5.5%. Assuming 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 $0.41, $0.36, $0.33, and $0.29,
respectively, and the pro forma stockholders' equity per share would be
$9.45, $8.75, $8.24, and $7.79, respectively. See "Management of the
Bank -- Benefits -- Stock-Based Incentive Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion and Reorganization. See "Dividend Policy,"
"The Conversion -- Liquidation Rights" and "Regulation --Federal Savings
Institution Regulation -- Limitation on Capital Distributions."
(6) Historical and pro forma shareholders' equity per share have been divided
by the total number of shares to be outstanding upon consummation of the
Conversion and Reorganization, or 20,400,000, 24,000,000, 27,600,000 and
30,174,000 shares at the minimum, midpoint, maximum, and maximum, as
adjusted, of the Estimated Price Range, respectively.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
40
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,1996
----------------------------------------------------------------------
10,637,542 12,514,527 14,391,900 16,550,374
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....................................... $106,375 $125,145 $143,919 $165,504
Less: Offering expenses and commissions............. (1,719) (1,917) (2,116) (2,344)
-------- -------- -------- --------
Estimated net proceeds............................... 104,656 123,228 141,803 163,160
Less: Common Stock purchased by the ESOP............ 8,510 10,012 11,514 13,240
Common Stock purchased by Stock-Based
Incentive Plan........................... 4,255 5,006 5,757 6,620
-------- -------- -------- --------
Estimated net proceeds, as adjusted................ $ 91,891 $108,210 $124,532 $143,300
======== ======== ======== ========
Consolidated net earnings:
Historical......................................... $ 4,710 $ 4,710 $ 4,710 $ 4,710
Pro forma earnings on net proceeds, as adjusted.... 3,133 3,690 4,247 4,887
Less: Pro forma ESOP adjustment(1)............. (357) (421) (484) (556)
Pro forma Stock-Based Incentive Plan
adjustment(2)........................ (536) (631) (725) (834)
-------- -------- -------- --------
Pro forma net earnings........................ $ 6,950 $ 7,348 $ 7,748 $ 8,207
======== ======== ======== ========
Per share net earnings (3)
Historical......................................... $ 0.24 $ 0.21 $ 0.18 $ 0.16
Pro forma earnings on net proceeds, as adjusted.... 0.16 0.16 0.16 0.16
Less: Pro forma ESOP adjustment(1)............. (0.02) (0.02) (0.02) (0.02)
Pro forma Stock-Based Incentive Plan
adjustment(2)........................ (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- --------
Pro forma net earnings per share.............. $ 0.35 $ 0.32 $ 0.29 $ 0.27
======== ======== ======== ========
Stockholders' equity:
Historical......................................... $ 92,863 $ 92,863 $ 92,863 $ 92,863
Estimated net proceeds............................. 104,656 123,228 141,803 163,160
Plus: Assets consolidated from MHC................. 1,106 1,106 1,106 1,106
Less: Common Stock acquired by ESOP(1)......... (8,510) (10,012) (11,514) (13,240)
Common Stock acquired by
Stock-Based Incentive Plan(2)........ (4,255) (5,006) (5,757) (6,620)
-------- -------- -------- --------
Pro forma stockholders' equity(2)(4)(5)....... $185,860 $202,179 $218,501 $237,269
======== ======== ======== ========
Stockholders' equity per share (6):
Historical......................................... $ 4.55 $ 3.87 $ 3.36 $ 2.93
Estimated net proceeds............................. 5.13 5.13 5.14 5.14
Plus: Assets consolidated from MHC................. 0.05 0.05 0.04 0.03
Less: Common Stock acquired by ESOP(1)......... (0.42) (0.42) (0.42) (0.42)
Common Stock acquired by
Stock-Based Incentive Plan(2)........ (0.21) (0.21) (0.21) (0.21)
-------- -------- -------- --------
Pro forma stockholders' equity
per share(2)(4)(5)....................... $ 9.10 $ 8.42 $ 7.91 $ 7.47
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share..................... 109.9% 118.8% 126.4% 133.9%
Offering price to pro forma net earnings
per share.......................................... 28.6x 31.3x 34.5x 37.0x
</TABLE>
(footnotes on following page)
41
<PAGE>
__________________
(1) It is assumed that 8% of the shares of Conversion Stock issued in the
Conversion and Reorganization, will be purchased by the ESOP. For purposes
of this table, the funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Bank intends to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total annual
payment of the ESOP debt is based upon 15 equal annual installments of
principal, with an assumed interest rate at 7.00%. The pro forma net
earnings assumes: (i) that the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the year ended December 31,
1996, and was made at the end of the period; (ii) that 56,734, 66,744,
76,757 and 88,269 shares at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, were committed to be released
during the year ended December 31, 1996, at an average fair value of $10.00
per share in accordance with the 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-Based Incentive Plan expected to be adopted by
the Company following the Conversion and Reorganization and presented for
approval at a meeting of stockholders. If the Stock-Based Incentive Plan is
approved by stockholders, the Stock-Based Incentive Plan intends to acquire
an amount of Conversion Stock equal to 4% of the shares of Common Stock
issued in the Conversion and Reorganization, or 425,501, 500,581, 575,675
and 662,014 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-Based Incentive Plan to purchase the shares will be
contributed to the Stock-Based Incentive Plan by the Bank. In calculating
the pro forma effect of the Stock-Based Incentive Plan, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the Stock-Based Incentive Plan 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-Based Incentive Plan instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 2.2%
and pro forma net earnings per share would be $0.36, $0.32, $0.30 and $0.27
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be $8.92,
$8.25, $7.75 and $7.32 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-Based Incentive Plan will be obtained, or
that the actual purchase price of the shares will be equal to the Purchase
Price. See "Management of the Bank -Benefits - Stock-Based Incentive Plan."
(3) Historical and pro forma net earnings per share have been divided by the
total number of shares to be outstanding upon consummation of the
Conversion and Reorganization, as adjusted to give effect to the purchase
of shares by the ESOP during the period, or 19,386,918, 22,808,152,
26,229,364 and 30,163,786 shares of Common Stock at the minimum, midpoint,
maximum, and maximum, as adjusted, of the Estimated Price Range,
respectively.
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the options provided for under the Stock-Based Incentive
Plan expected to be adopted by the Company following the Conversion and
Reorganization or to the exercise of existing stock options. The Company
expects to present the Stock-Based Incentive Plan for approval at a meeting
of stockholders. If the Stock-Based Incentive Plan are approved by
stockholders, an amount equal to 10% of the Conversion Stock issued in the
Conversion, or 1,063,754, 1,251,452, 1,439,190 and 1,655,037 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-Based Incentive Plan. The issuance
of Common Stock pursuant to the exercise of options under the Stock-Based
Incentive Plan will result in the dilution of existing stockholders'
interests by approximately 5.5%. Assuming stockholder approval of the
Stock-Based Incentive Plan 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 $0.34, $0.31, $0.28 and $0.26, respectively, and the pro
forma stockholders' equity per share would be $9.15, $8.50, $8.02 and
$7.60, respectively. See "Management of the Bank - Benefits -- Stock-Based
Incentive Plan."
(5) 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."
(6) Historical and pro forma stockholders' equity per share have been divided
by the total number of shares to be outstanding upon consummation of the
Conversion and Reorganization, or 20,400,000, 24,000,000, 27,600,000 and
30,174,000 shares at the minimum, midpoint, maximum, and maximum, as
adjusted, of the Estimated Price Range, respectively.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
42
<PAGE>
FIRST SAVINGS BANK, SLA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank and
Subsidiaries for each of the years in the three-year period ended December 31,
1996 have been audited by KPMG Peat Marwick LLP independent certified public
accountants, whose report thereon is included elsewhere in this Prospectus. With
respect to the information for the nine months ended September 30, 1997 and
1996, which is unaudited, in the opinion of management, all adjustments
necessary for a fair presentation of such interim periods have been included and
are of a normal recurring nature. Results for the nine months ended September
30, 1997 are not necessarily indicative of the results that may be expected for
the fiscal year ended December 31, 1997. These Consolidated Statements of Income
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>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ------------ ---------- ----------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income:
<S> <C> <C> <C> <C> <C>
Loans.......................................... $ 32,216 $ 28,489 $ 38,596 $ 35,245 $ 32,095
Mortgage-backed securities..................... 12,598 14,680 19,147 22,140 15,115
Investment securities and other................ 2,993 2,952 4,094 4,671 2,179
Investment and mortgage-backed securities
and loans available for sale................ 6,829 4,378 6,202 2,517 3,520
--------- --------- --------- --------- ---------
Total interest income.................. 54,636 50,499 68,039 64,573 52,909
--------- --------- --------- --------- ---------
Interest expense:
Deposits:
NOW and money market demand............ 4,142 3,809 5,122 5,090 4,348
Savings................................ 2,462 2,665 3,514 3,568 3,609
Certificates of deposit................ 18,863 19,040 25,256 24,997 15,738
--------- --------- --------- --------- ---------
25,467 25,514 33,892 33,655 23,695
Borrowed funds................................. 5,124 2,130 3,372 2,036 1,440
--------- --------- --------- --------- ---------
Total interest expense................. 30,591 27,644 37,264 35,691 25,135
--------- --------- --------- --------- ---------
Net interest income before provision for
loan losses................................. 24,045 22,855 30,775 28,882 27,774
Provision for loan losses...................... 900 375 550 310 300
--------- --------- --------- --------- ---------
Net interest income after provision for 23,145 22,480 30,225 28,572 27,474
loan losses................................. --------- --------- --------- --------- ---------
Other operating income:
Fees and service charges....................... 1,241 1,140 1,557 1,604 1,587
Net gain on sales of loans and securities...... 593 139 236 751 40
Other, net..................................... 352 103 202 (184) 107
--------- --------- --------- --------- ---------
Total other operating income........... 2,186 1,382 1,995 2,171 1,734
--------- --------- --------- --------- ---------
Operating expenses:
Compensation and employee benefits............. 7,342 7,956 10,283 8,531 8,189
Occupancy...................................... 1,491 1,517 2,048 2,056 1,875
Equipment...................................... 1,103 762 1,033 1,186 1,288
Advertising.................................... 439 313 445 563 426
Federal deposit insurance premium.............. 285 1,394 1,860 1,701 1,569
Special SAIF assessment........................ -- 5,220 5,220 -- --
- - Amortization of intangibles.................... 1,932 1,138 1,349 1,066 223
General and administrative..................... 1,989 1,822 2,463 2,727 2,451
--------- --------- --------- --------- ---------
Total operating expenses............... 14,581 20,122 24,701 17,830 16,021
--------- --------- --------- --------- ---------
Income before income tax expense................. 10,750 3,740 7,519 12,913 13,187
Income tax expense............................... 3,990 1,376 2,809 4,611 4,912
--------- --------- --------- --------- ---------
Net income....................................... $ 6,760 $ 2,364 $ 4,710 $ 8,302 $ 8,275
========= ========= ========= ========= =========
Basic earnings per share......................... $ 0.86 $ 0.31 $ 0.60 $ 1.06 $ 1.06
========= ========= ========= ========= =========
Diluted earnings per share....................... $ 0.83 $ 0.29 $ 0.59 $ 1.04 $ 1.03
========= ========= ========= ========= =========
Weighted average shares outstanding including
common stock equivalents....................... 8,025,954 8,023,369 7,986,590 7,974,548 7,997,935
--------- --------- --------- --------- ---------
</TABLE>
43
<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, U.S. Government and agency obligations, and the
interest paid on interest-bearing liabilities, which consist of savings deposits
and borrowings from the FHLB and primary brokers/dealers. 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.
The Offering will have a pronounced effect on the Company's and Bank's
financial condition in several ways. Liquidity will be greatly enhanced by the
net proceeds provided, accompanied by the leverage that will be available
through the investment of the funds obtained in the Offering. The Company and
the Bank will benefit from the returns provided by the capital raised in the
Offering with investments in loans, mortgage-backed securities, and possible
branch and business acquisitions in the Bank's surrounding markets. The Bank
will also invest a portion of the net proceeds in improving the Bank's delivery
systems through its branch network and lending areas in an effort to expand its
market share and enhance its product line diversification. Although the capital
raised from the stock offering will initially provide the Bank with higher
capital levels, the Bank will continue to exercise prudent underwriting and
credit policies which do not, in the opinion of management, expose the
Bank, its capital or its earnings to undue risk.
BUSINESS STRATEGY
The Bank's business strategy is to preserve asset quality, to maintain a
strong capital position by continuing to emphasize single-family lending
and to seek controlled growth. The Bank's strategy emphasizes customer service
and convenience, and the Bank attributes the loyalty of its customer base to its
commitment to maintaining customer satisfaction. The Bank attempts to set itself
apart from its competitors by providing the type of personalized service not
generally available from larger banks while offering a greater variety of
products and services than is typically available from smaller, local depository
institutions.
The Bank's principal business has historically been, and, to a large
degree, continues to be, attracting retail deposits from the general public and
investing those deposits, together with funds generated from operations and
borrowings, primarily in single-family residential mortgage loans, real
estate construction loans, commercial real estate loans, home equity loans and
lines of credit and multi-family residential mortgage loans. The Bank maintains
a significant portfolio of mortgage-backed securities and also invests in U. S.
Government, federal agency and corporate debt securities and other marketable
securities. The Bank's revenues are derived principally from interest on its
mortgage loan and mortgage-backed securities portfolios and interest and
dividends on its investment securities. The Bank's primary sources of funds are
deposits, proceeds from principal and interest payments on loans and mortgage-
backed securities; sales of loans, mortgage-backed securities and investments
available for sale; maturities of investment securities and short-term
investments; and, to an increasing extent, advances from the Federal Home Loan
Bank of New York ("FHLB-NY"), reverse repurchase agreements and other borrowed
funds.
In an effort to enhance its long-term profitability and increase its market
share, however, the Bank began, in 1997, to expand its traditional thrift
lending and securities investment strategy. In this regard, the Bank has begun
to diversify and expand upon the products and services it offers by focusing on
small and medium-sized retail businesses as both lending and deposit customers
by increasing its emphasis on the origination of commercial real estate,
construction and commercial loans, as well as increasing the marketing of its
business checking accounts and other business-related services. To develop full-
service relationships with commercial customers, the Bank has introduced
merchant services, such as merchant credit card
44
<PAGE>
processing, overdraft sweep accounts and express teller services. The Bank
intends to hire additional lending personnel with expertise in commercial real
estate lending to facilitate growth in this area. It is also the Bank's
intention to increase lending volumes through the use of third-party
correspondent lending, without compromising credit quality, as the
correspondents selected will be using the Bank's underwriting guidelines and
approved appraisers.
As part of the Bank's asset/liability management strategy, and as a means
of enhancing profitability, the Bank also invests in securities. More recently,
the Bank has begun to increase its borrowings as a means of funding asset
growth. The average balance of borrowings outstanding for the year ended
December 31, 1996 was $55.2 million, compared to $111.0 million for the nine
months ended September 30, 1997. To the extent the Bank continues to increase
its utilization of borrowings, it may incur an increase in the average cost of
funds, and a corresponding decrease in its net interest margin.
The Bank is in the process of redesigning its retail delivery system to
facilitate the transition from deposit gathering to active sales promotion and
tracking. The Bank has also invested in a Marketing Customer Information File
marketing system to provide better target marketing and develop product and
customer profitability levels. This strategy is intended to enable the Bank to
reach new and existing customers with products and services which match their
profile, and result in more effective use of the Bank's marketing initiatives.
The desired results of the revamping of the retail branch network is to attract
low-cost deposit accounts, primarily non-interest bearing checking, and also
maintain its current core customer by enhancing existing services to become more
efficient.
The Bank has, and will continue to, actively pursue growth in contiguous
markets, as evidenced in its retail expansion via branch purchase transactions
with the Resolution Trust Corporation ("RTC"). The Bank has opened a new branch
in its corporate headquarters, and will actively seek opportunities as they
present themselves. The Bank and the Company may use a portion of the net
Conversion and Reorganization proceeds to open additional branch offices or
acquire other financial institutions. However, neither the Company nor the Bank
have any pending agreements or understandings regarding acquisitions of any
specific financial institutions or branch offices.
The Bank emphasizes its attention to quality service, but also monitors its
operating expenses to maintain its profitability. As business lines and products
are added, the Bank develops break-even levels and budgetary constraints to make
sure the service or product offered is enhancing returns and meeting growth
targets. The Bank regularly reviews its retail operations to verify that they
maintain lending and retail deposit growth initiatives and retention targets. As
a result of this review, the Bank entered into an agreement with a commercial
bank to sell its Eatontown branch, which at September 30, 1997, had total
deposits of $28.2 million. The Bank determined that this branch, acquired from
the RTC in 1991 in a cluster of three branches of another financial institution,
had not performed to the Bank's targeted retail lending and cost of funds
levels. This transaction is scheduled to close in February 1998.
YEAR 2000 COMPUTER ISSUES
First Savings Bank has adopted a Year 2000 Compliance Plan. This lan was
approved by the Board of Directors and has been submitted to the OTS. First
Savings has also established a Year 2000 Compliance Committee, which includes
members of senior management from all operating areas. The objectives of the
plan and the committee are to ensure that the Bank will be prepared for the new
millennium. As recommended by the Federal Financial Institutions Examination
Council, the Year 2000 Compliance Plan encompasses the following phases:
Awareness, Assessment, Renovation, Validation and Implementation. These phases
will enable the Bank to identify risks, develop an action plan, perform adequate
testing and
45
<PAGE>
complete certification that its processing systems will be Year 2000 compliant.
Execution of the plan is currently on target and no material expenses have been
identified to date. The Bank is currently in Phase 2 -- Assessment, which will
identify and inventory all hardware, software, networks and forms affected by
the year 2000 change. Prioritization of the most critical applications has been
addressed, along with contract and service agreements. The Bank is identifying
if there are any areas where technical expertise would be necessary. The
Renovation Phase will perform code enhancements, program changes, hardware and
software upgrades, and system replacements, if necessary. The Validation Phase
involves testing of changes to hardware and software, accompanied by monitoring
and testing with vendors. The Implementation Phase is to certify that systems
are year 2000 compliant, along with assurances that any new systems are
compliant on a going-forward basis. While the Bank has not determined the final
cost of compliance, it currently anticipates such costs to be immaterial. No
assurances can be given, however, that execution of the plan will be completed
successfully by the year 2000, in which event the Bank could incur significant
costs.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises primarily from interest rate risk inherent
in its lending, investment and deposit taking activities. The Bank's
profitability is affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Bank's earnings
to the extent that the interest rates borne by assets and liabilities do not
change at the same speed, to the same extent or on the same basis. To that end,
management actively monitors and manages its interest rate risk exposure.
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to minimize the
vulnerability of its operations to changes in interest rates. The Bank's Board
of Directors reviews the Bank's interest rate risk position quarterly. The
Bank's Asset/Liability Committee is comprised of the Bank's senior management
under the direction of the Board of Directors, with senior management
responsible for reviewing with the Board of Directors its activities and
strategies, the effect of those strategies on the Bank's net interest margin,
the market value of the portfolio and the effect that changes in interest rates
will have on the Bank's portfolio and the Bank's exposure limits. In addition,
the Bank has established an Asset/Liability Strategy Committee ("ALSCO"), a
subcommittee of the Asset/Liability Committee, which is charged with
establishing and maintaining a monitoring system for all marketing initiatives
providing management reports, and formulating and recommending strategies to the
Asset/Liability Committee. The ALSCO meets at least twice monthly. See "Risk
Factors--Potential Impact of Changes in Interest Rates."
The Bank utilizes the following strategies to manage interest rate risk:
(1) emphasizing the origination and retention of fixed-rate mortgage loans
having terms to maturity of not more than 20 years, adjustable-rate loans and
consumer loans consisting primarily of home equity loans and lines of credit;
(2) selling substantially all fixed-rate conforming mortgage loans with terms of
thirty years without recourse and on a servicing-retained basis; and (3)
investing primarily in adjustable-rate mortgage-backed securities, which may
generally bear lower yields as compared to longer term investments, but which
better position the Bank for increases in market interest rates, and holding the
majority of these securities as available for sale. The Bank currently does not
participate in hedging programs, interest rate swaps or other activities
involving the use of off-balance sheet derivative financial instruments, but may
do so in the future to mitigate interest rate risk.
Net Portfolio Value. The Bank's interest rate sensitivity is monitored by
management through the use of the OTS model which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios, and
the Federal Home Loan Bank of Atlanta Asset/Liability Model. The NPV is defined
as the current market value of assets, minus the current market value of
liabilities, plus or minus the current value of off-balance sheet items. The
market values are estimated through two cash flow-based valuation methodologies
and an option-based valuation model: (1) static discounted cash flow analysis,
(2) an option-based pricing analysis (modified discounted cash flow analysis to
value embedded options), and (3) the Black-Scholes model to value off-balance
sheet items. The change in NPV measures an institution's vulnerability to
changes in interest rates by estimating the change in the market value of an
institution's assets, liabilities, and off-balance sheet contracts in response
to an instantaneous change in the general level of interest rates.
The OTS uses, as a critical point, a change of plus or minus 200 basis
points in order to set its "normal" institutional results and peer comparisons.
The greater the change, positive or negative, in NPV, the more interest rate
risk is assumed to exist within the institution. The following table lists the
Bank's percentage change in NPV assuming an immediate change of plus or minus of
up to 400 basis points from the level of interest rates at September 30, 1997,
as calculated by the OTS. As the table shows, increases in
46
<PAGE>
interest rates would result in decreases in the Bank's NPV, while decreases in
interest rates would result in increases in the Bank's NPV. All market risk
instruments presented in this table are held to maturity or available for sale.
The Bank has no trading securities.
<TABLE>
<CAPTION>
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES NET PORTFOLIO VALUE VALUE OF ASSETS
--------------------------------- ----------------------------
IN BASIS POINTS NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE(1)
- --------------- -------- ----------- -------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $ 72,140 $(55,218) (43.0)% 7.30% (461)
300 89,115 (38,243) (30.0) 8.81 (310)
200 104,705 (22,653) (18.0) 10.14 (178)
100 117,921 (9,437) (7.0) 11.20 (71)
Static 127,358 -- -- 11.92 --
(100) 131,681 4,323 3.0 12.19 27
(200) 132,680 5,322 4.0 12.19 27
(300) 135,050 7,692 6.0 12.28 37
(400) 140,536 13,178 10.0 12.63 71
</TABLE>
_____________
(1) Expressed in basis points.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of the Bank's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Bank's net interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
also depends on the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rate earned or paid on them.
47
<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
annualized 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 SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1997 1997 1996
---------------------- ---------------------------------------------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- --------- ---------- ---------- -------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1)........... $ 567,197 7.84% $ 540,782 $32,216 7.94% $480,638 $28,489 7.90%
Mortgage-backed securities......... 228,158 7.33 243,273 12,598 6.90 289,080 14,680 6.77
Investment securities.............. 40,959 7.23 41,236 2,258 7.30 35,665 2,002 7.48
Investment and mortgage-backed
securities and loans available
for sale........................ 140,395 6.77 144,510 6,829 6.30 95,717 4,378 6.10
Other interest-earning
investments(2)................... 25,970 6.09 17,163 735 5.71 24,642 950 5.14
---------- ---------- ------- -------- -------
Total interest-earning assets.... 1,002,679 7.50 986,964 54,636 7.38 925,742 50,499 7.27
------- -------
Non-interest earning assets....... 41,834 46,474 39,524
---------- ---------- --------
Total assets...................... $1,044,513 $1,033,438 $965,266
========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW and money market accounts..... $ 195,003 2.93 $ 191,758 4,142 2.88 $177,228 3,809 2.87
Passbook and statement savings.... 123,384 2.54 129,334 2,462 2.54 141,031 2,665 2.52
Certificate accounts.............. 464,652 5.54 463,939 18,863 5.42 470,523 19,040 5.40
Borrowed funds.................... 124,465 5.98 110,954 5,124 6.16 46,978 2,130 6.05
---------- ---------- ------- -------- -------
Total interest-bearing liabilities. 907,504 4.63 895,985 30,591 4.55 835,760 27,644 4.41
------- -------
Non-interest-bearing deposits...... 26,410 21,109 19,667
Other liabilities.................. 11,386 20,147 18,677
---------- ---------- --------
Total liabilities................. 945,300 937,241 874,104
Stockholders' equity............... 99,213 96,197 91,162
---------- ---------- --------
Total liabilities and stockholders
equity........................... $1,044,513 $1,033,438 $965,266
========== ========== ========
Net interest income/interest
rate spread(3)................... 2.87% $24,045 2.83% $22,855 2.86%
==== ======= ==== ======= ====
Net interest-earning assets/
net interest
rate margin(4).................. $ 90,979 3.25% $ 89,982 3.29%
========== ==== ======== ====
Ratio of interest-earning assets to
interest-bearing liabilities..... 1.10x 1.11x
===== =====
</TABLE>
___________________
(1) Loans receivable, net includes non-accrual loans.
(2) Includes federal funds sold and FHLB-NY stock.
(3) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
48
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1995
----------------------------------- ----------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable, net(1)........... $487,619 $38,596 7.92% $457,802 $35,245 7.70%
Mortgage-backed securities......... 282,021 19,147 6.79 332,167 22,140 6.67
Investment securities.............. 36,810 2,741 7.45 44,334 3,171 7.15
Investment and mortgage-backed
securities and loans available
for sale......................... 101,244 6,202 6.13 42,425 2,517 5.93
Other interest-earning
investments(2)................... 23,525 1,353 5.75 21,069 1,500 7.12
-------- ------- -------- -------
Total interest-earning assets... 931,219 68,039 7.31 897,797 64,573 7.19
------- -------
Non-interest earning assets........ 34,360 16,030
-------- --------
Total assets....................... $965,579 $913,827
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW and money market accounts...... $178,176 5,122 2.87 $179,978 5,090 2.83
Passbook and statement savings..... 139,045 3,514 2.53 140,122 3,568 2.55
Certificate accounts............... 468,894 25,256 5.39 453,655 24,997 5.51
Borrowed funds..................... 55,241 3,372 6.10 33,575 2,036 6.06
-------- ------- -------- -------
Total interest-bearing.liabilities... 841,356 37,264 4.43 807,330 35,691 4.42
------- -------
Non-interest-bearing deposits........ 19,491 16,610
Other liabilities.................... 12,799 8,029
-------- --------
Total liabilities.................. 873,646 831,969
Stockholders' equity................. 91,933 81,858
-------- --------
Total liabilities and
stockholders' equity.............. $965,579 $913,827
======== ========
Net interest income/interest
rate spread(3)..................... $30,775 2.88% $28,882 2.77%
======= ==== ======= ====
Net interest-earning assets/net
interest margin(4).................. $ 89,863 3.30% $ 90,517 3.22%
======== ==== ======== ====
Ratio of interest-earning
assets to interest-bearing
liabilities........................ 1.11x 1.11x
======== ========
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1994
-----------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
----------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable, net(1)........... $413,314 $32,095 7.77%
Mortgage-backed securities......... 267,274 15,115 5.66
Investment securities.............. 24,954 1,410 5.65
Investment and mortgage-backed
securities and loans
available for sale.............. 56,270 3,520 6.26
Other interest-earning
investments(2)................... 12,948 769 5.94
-------- -------
Total interest-earning assets... 774,760 52,909 6.83
-------
Non-interest earning assets........ 22,407
--------
Total assets....................... $797,167
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW and money market accounts...... 168,168 4,348 2.59
Passbook and statement savings..... 143,738 3,609 2.51
Certificate accounts............... 361,589 15,738 4.35
Borrowed funds..................... 29,896 1,440 4.82
-------- -------
Total interest-bearing
liabilities......................... 703,391 25,135 3.57
-------
Non-interest-bearing deposits 14,002
Other liabilities.................... 8,638
--------
Total liabilities.................. 726,031
Stockholders' equity................. 71,136
--------
Total liabilities and
stockholders' equity.............. $797,167
========
Net interest income/interest
rate spread(3)..................... $27,774 3.26%
======= ====
Net interest-earning assets/net $ 71,369
interest margin(4).................. ======== 3.58%
====
Ratio of interest-earning
assets to interest-bearing 1.10x
liabilities........................ ========
</TABLE>
____________________________
(1) Loans receivable, net includes non-accrual loans.
(2) Includes federal funds sold and FHLB-NY stock.
(3) Interest rate spread represents the difference between the average
rate on interest-earning assets and the average cost of interest-
bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
49
<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 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 (change 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
---------------------------- -----------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
-------------------- ----------------------
VOLUME RATE NET VOLUME RATE NET
-------- --------- ------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net............... $ 3,582 $145 $ 3,727 $ 2,329 $1,022 $ 3,351
Mortgage-backed securities........... (2,527) 445 (2,082) (3,387) 394 (2,993)
Investment securities................ 333 (77) 256 (558) 128 (430)
Investment and mortgage-backed
securities and loans available
for sale........................... 2,303 148 2,451 3,597 88 3,685
Other interest earning
investments........................ (363) 148 (215) 162 (309) (147)
------- ---- ------- ------- ------ -------
Total......................... 3,328 809 4,137 2,143 1,323 3,466
------- ---- ------- ------- ------ -------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and money market accounts........ 319 14 333 (46) 78 32
Passbook and statement savings....... (237) 34 (203) (27) (27) (54)
Certificates of deposit.............. (289) 112 (177) 819 (560) 259
Borrowed funds....................... 2,955 39 2,994 1,322 14 1,336
------- ---- ------- ------- ------ -------
Total......................... 2,748 199 2,947 2,068 (495) 1,573
------- ---- ------- ------- ------ -------
Net change in net interest income.... $ 580 $610 $ 1,190 $ 75 $1,818 $ 1,893
======= ==== ======= ======= ====== =======
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
COMPARED TO
YEAR ENDED
DECEMBER 31, 1994
-----------------------------------
INCREASE
(DECREASE)
DUE TO
----------------------
VOLUME RATE NET
--------- -------- ----------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net................ $3,441 $ (291) $ 3,150
Mortgage-backed securities............ 4,049 2,976 7,025
Investment securities................. 1,312 449 1,761
Investment and mortgage-backed
securities and loans available
for sale............................ (826) (177) (1,003)
Other interest earning
investments......................... 555 176 731
------ ------- -------
Total.......................... 8,531 3,133 11,664
------ ------- -------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and money market accounts......... 320 442 742
Passbook and statement savings........ (95) 54 (41)
Certificates of deposit............... 4,521 4,738 9,259
Borrowed funds........................ 193 403 596
------ -------
Total.......................... 4,939 5,617 10,556
------ ------- -------
Net change in net interest income..... $3,592 $(2,484) $ 1,108
====== ======= =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
ASSETS. Total assets increased by $57.4 million, or 5.8%, to $1.0 billion
at September 30, 1997, from $987.1 million at December 31, 1996. Cash and cash
equivalents increased $14.8 million, or 163.2%, to $23.8 million as of September
30, 1997, from $9.0 million at December 31, 1996. The increase was due primarily
to a temporary increase in the balance of federal funds sold. These funds were
subsequently invested in longer term, higher yielding assets. Investment
securities, including those available for sale, increased $5.2 million, or 9.7%,
to $59.0 million as of September 30, 1997, from $53.8 million at December 31,
1996. Mortgage-backed securities, including those available for sale, decreased
$22.7 million, or 6.1%, to $350.5 million at September 30, 1997, from $373.2
million at December 31, 1996. The primary source of the asset growth was
increased lending. Net loans receivable, inclusive of those available for sale,
grew by $57.3 million, or 11.2 %, to $567.2 million at September 30, 1997, from
$509.9 million at December 31, 1996. The increase in loans was due to
management's strategic decision to maintain a higher percentage of
50
<PAGE>
loans as a balance sheet component. Management emphasized the origination of
residential one- to four-family five-year adjustable rate mortgages and
construction loans. Loan originations totaled $105.2 million for the nine months
ended September 30, 1997 as compared to $97.3 million for the same period in
1996. Repayment of principal on loans totaled $51.0 million for the nine months
ended September 30, 1997 as compared to $59.7 million for the same period in
1996. Over the 1997 period, principal repayments and sales of mortgage backed
securities were primarily used to fund loan growth. Premises and equipment, net
increased $2.9 million to $13.3 million at September 30, 1997, from $10.4
million at December 31, 1996. The increase was primarily due to costs
capitalized in conjunction with the completion of the Bank's new corporate
headquarters in Woodbridge, New Jersey. Excess of costs over fair value of net
assets acquired decreased $1.9 million to $9.0 million at September 30, 1997,
from $11.0 million at December 31, 1996. Normal amortization accounted for
$635,000 of this decrease. In addition, an impairment writedown of the core
deposit intangible totaling $1.3 million was recognized as of September 30,
1997, on deposits acquired from the RTC in 1995.
LIABILITIES. Deposits increased $14.9 million, or 1.9%, to $809.4 million
at September 30, 1997, from $794.6 million at December 31, 1996. Borrowed funds
increased $35.9 million, or 40.8%, to $123.9 million at September 30, 1997, from
$88.0 million at December 31, 1996. The increased deposits and borrowed funds
were used primarily to fund the asset growth detailed above as well as for
normal operations. Advances by borrowers for taxes and insurance increased
$782,000, or 17.0%, to $5.4 million at September 30, 1997, from $4.6 million at
December 31, 1996, primarily due to the timing of these payments as well as an
increase in the residential loan portfolio.
STOCKHOLDERS' EQUITY. The Bank's stockholders' equity increased $6.4
million for the nine months ended September 30, 1997, due primarily to earnings
of $6.8 million, partially offset by dividends of $1.2 million declared and paid
during the first nine months of 1997. Stockholder's equity was also positively
affected by an increase in the market value of securities available for sale
which resulted in an increase in the value of such investments of $196,000, net
of applicable income tax effect. Stock options exercised during the first nine
months of 1997 totaled $430,000.
The OTS requires that the Bank meet minimum tangible, core, and risk-based
capital requirements. At September 30, 1997, the Bank exceeded all regulatory
capital requirements.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
ASSETS. The Bank's assets at December 31, 1996, totaled $987.1 million, an
increase of $42.1 million, or 4.5% from December 31, 1995. Cash and cash
equivalents decreased $17.5 million, or 65.9%, to $9.0 million at December 31,
1996 from $26.5 million at December 31, 1995. The decrease was due primarily to
federal funds being utilized to fund loan production. Investment securities,
including those available for sale, increased $12.7 million, or 31.0%, to $53.8
million at December 31, 1996, from $41.1 million at December 31, 1995. The
increase was due primarily to purchases of investment securities of $52.7
million, partially offset by sales, calls, and maturities of investment
securities of $39.8 million. FHLB-NY stock increased $1.2 million, or 18.4%, to
$7.4 million at December 31, 1996, due to an additional purchase of stock as
required by FHLB-NY. Loans receivable, net increased $51.9 million, or 11.3%, to
$509.6 million at December 31, 1996 from $457.8 million at December 31, 1995.
The Bank originated $124.1 million in loans during 1996, compared to $95.7
million for 1995. The Bank also purchased $10.1 million of first mortgage loans
secured by one-to four-family properties in New Jersey from third-party
correspondents during 1996, compared with $5.2 million during 1995. The Bank
will continue to originate residential and commercial mortgage loans through its
retail outlets, in-house originators, brokers and third-party correspondents.
The Bank will also continue to warehouse and sell its 30-year fixed-rate
conforming
51
<PAGE>
mortgage loans. The Bank provided $550,000 for loan losses during 1996, compared
to $310,000 for 1995. Although non-performing loans decreased to $4.8 million at
December 31, 1996, from $6.0 million at December 31, 1995, the Bank's loan
portfolio growth warranted an increase in the provision. Real estate owned
("REO") decreased $1.6 million to $1.5 million at December 31, 1996, from $3.1
million at December 31, 1995. The Bank acquired $2.5 million in properties,
provided $105,000 for losses on REO, while selling $4.2 million during 1996. The
Bank continues to liquidate REO properties as expeditiously as possible.
Mortgage-backed securities, including those available for sale, totaled $373.2
million at December 31, 1996, compared to $377.5 million at December 31, 1995.
The available for sale portfolio increased $31.5 million, while the held to
maturity portfolio decreased $35.8 million, as the Bank continued to more
actively manage its MBS portfolio. Premises and equipment, net increased $1.0
million, or 10.8%, to $10.4 million at December 31, 1996, as the Bank was
renovating its new corporate headquarters. Excess of cost over fair value of net
assets acquired decreased $1.3 million, or 11.0%, to $11.0 million at December
31, 1996, from $12.3 million at December 31, 1995, as the Bank recognized an
impairment writedown totaling $334,000 on deposits acquired from the RTC in
1991, along with normal amortization of core deposit premiums.
LIABILITIES. Deposits decreased $11.7 million, or 1.5%, to $794.6 million
at December 31, 1996, from $806.3 million at December 31, 1995. The decrease was
primarily due to a reduction in the dependence on higher rate certificates of
deposits, accompanied by the outflow of funds into other investment vehicles,
specifically mutual funds and the equity markets. Borrowed funds, which consist
of FHLB-NY advances and repurchase agreements, increased $49.2 million, or
127.1%, to $88.0 million at December 31, 1996, from $39.0 million at December
31, 1995. The Bank repaid $37.2 million in borrowings, while proceeds on new
borrowings totaled $86.4 million during 1996. Due to the decline in deposits,
funding for continued loan production was attained through borrowings. ESOP debt
decreased $100,000 to $646,000 at December 31, 1996, as a result of principal
payments during 1996. Advances by borrowers for taxes and insurance increased
$787,000, or 20.6%, to $4.6 million at December 31, 1996, as a direct
correlation with the growth of the loan portfolio. Other liabilities increased
$765,000, or 13.5%, to $6.4 million at December 31, 1996, from $5.7 million at
December 31, 1995, primarily as a result of an increase in accrued liabilities.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $3.2 million, or 3.5%,
to $92.9 million at December 31, 1996, from $89.7 million at December 31, 1995.
The increase was primarily attributable to earnings for the year ended December
31, 1996, of $4.7 million, offset by cash dividends of $1.2 million, the
acquisition of shares for the Recognition and Retention Plan ("RRP") totaling
$310,000, and a net change in unrealized loss on securities available for sale
of $168,000. Proceeds from stock options exercised during 1996 totaled $32,000.
The OTS requires that the Bank meet minimum tangible, core, and risk-based
capital requirements. At December 31, 1996, the Bank exceeded all regulatory
capital requirements.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996
RESULTS OF OPERATIONS. Net income for the nine months ended September 30,
1997 was $6.8 million, or basic earnings per share of $0.86, compared with $2.4
million, or basic earnings per share of $0.31, for the corresponding 1996
period. The earnings for 1997 were affected by an impairment writedown of the
core deposit intangible recognized as of September 30, 1997. An after tax charge
of $867,000 was incurred due to this writedown. Net income for the nine months
ended September 30, 1997, excluding this charge, was $7.6 million, or basic
earnings per share of $0.95. The 1996 period was affected by non-recurring
charges incurred due to the special assessment to recapitalize the SAIF and also
due to benefits payable as a result of the passing of the Bank's long-time
President.
52
<PAGE>
Earnings for the 1996 period would have been $6.6 million, or basic earnings
per share of $0.84, without these non-recurring charges. These non-recurring
charges in 1996 and 1997 resulted in a declining return on average assets and
equity in both years.
INTEREST INCOME. Interest income increased by $4.1 million, or 8.2%, to
$54.6 million for the nine months ended September 30, 1997, compared to $50.5
million for the same period in 1996. Interest on loans increased $3.7 million,
or 13.1%, to $32.2 million for the nine months ended September 30, 1997, from
$28.5 million for the same period in 1996. The increase was due primarily to an
increase in the average size of the loan portfolio to $540.8 million for the
nine month period ended September 30, 1997, from $480.6 million for the same
period in 1996. Interest on mortgage-backed securities held to maturity
decreased $2.1 million, or 14.2%, to $12.6 million for the nine months ended
September 30, 1997, compared to $14.7 million for the same period in 1996. The
decrease was due to the decreased average balance of the mortgage-backed
securities held to maturity portfolio for the nine months of 1997 to $243.3
million, from $289.1 million for the same period in 1996, partially offset by an
increase in the yield on the portfolio to 6.90% for 1997 from 6.77% for 1996.
The decrease in mortgage-backed securities held to maturity balances was due
primarily to principal repayments on existing mortgage-backed securities held to
maturity being utilized to fund loan production. The majority of mortgage-backed
securities purchased over the period were classified as available for sale.
Interest and dividends on investment securities increased $41,000, or 1.4% for
the nine months ended September 30, 1997. Interest on investments and mortgage-
backed securities available for sale increased $2.5 million, or 56.0%, to $6.8
million for the nine months ended September 30, 1997, as compared to $4.4
million for the same period in 1996. The increase was due to an increase in the
average balance of the available for sale portfolio to $144.5 million for the
nine months ended September 30, 1997, from $95.7 million for the same period of
1996 along with an increase in the yield on the portfolio to 6.30% for 1997 from
6.10% in 1996.
INTEREST EXPENSE. Interest expense increased $2.9 million, or 10.7%, to
$30.6 million for the nine months ended September 30, 1997, compared to $27.6
million for the same period in 1996. Interest expense on deposits decreased
$47,000, or 0.2%, to $25.5 million for the nine month period ended September 30,
1997. Interest expense on borrowed funds increased $3.0 million, or 140.6%, to
$5.1 million for the nine months ended September 30, 1997, compared to $2.1
million for the same period in 1996. The increase was due primarily to the
growth in the average balance of borrowings, which was $111.0 million for the
nine months ended September 30, 1997, as compared to $47.0 million for the
comparable 1996 period. This increase was attributable to management's strategy
to fund the purchase of investment and mortgage-backed securities through the
use of borrowed funds, where accretive to earnings. The interest expense on
borrowings was also affected by an increase in the average cost of borrowings to
6.16% for the nine months ended September 30, 1997, from 6.05% for the
comparable 1996 period.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased $1.2 million, or 5.2%, to $24.0
million for the nine months ended September 30, 1997, compared to $22.9 million
for the same period in 1996. The increase was due to the changes in interest
income and interest expense described above.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased
$525,000, or 140.0%, to $900,000 for the nine months ended September 30, 1997,
compared to $375,000 for the same period in 1996. The increase in the provision
is primarily due to the increase in the single-family residential loan portfolio
and, to a lesser degree, commercial real estate and construction lending. Net
loans increased $68.6 million between September 30, 1997 and September 30, 1996.
The provision was based upon management's review and evaluation of the loan
portfolio, level of delinquencies, general market and economic conditions, and
asset classification review. In management's opinion, the allowance for loan
losses, totaling $6.0 million, is adequate to cover losses inherent in the
portfolio. Although management considers the allowance for loan
53
<PAGE>
losses to be adequate, additional problems could develop and lead to
additional loan loss provisions and asset write-downs.
OTHER OPERATING INCOME. Other operating income increased $804,000, or
58.2%, to $2.2 million for the nine months ended September 30, 1997, compared to
$1.4 million for the same period in 1996. Fees and service charges increased
$101,000, or 8.9%, to $1.2 million for the nine months ended September 30, 1997,
from $1.1 million for the same period in 1996. This increase was due to a higher
number of demand deposit accounts along with higher service fees. The overall
increase in other operating income was due primarily to an increase of $454,000
in gains on sales of loans and securities available for sale, to $593,000 for
the nine months ended September 30, 1997, from $139,000 for the comparable 1996
period. The increase was due primarily to net gains of $545,000 recognized in
the third quarter of 1997 and such gains were principally attributable to sales
of mortgage-backed securities available for sale. The "Other, net" category of
Other operating income increased $249,000, or 241.7%, to $352,000 for the nine
months ended September 30, 1997, from $103,000 for the same period in 1996. The
changes in that category are primarily due to reduced expense of $131,000
associated with REO operations and increased income of $121,000 realized by the
Bank's wholly owned subsidiary, FSB Financial Corp. FSB Financial Corp. markets
annuities and other financial products to customers of the Bank and receives
commissions on sales.
OPERATING EXPENSES. Operating expenses decreased $5.5 million, or 27.5%, to
$14.6 million for the nine months ended September 30, 1997, from $20.1 million
for the same period in 1996. The decrease was primarily due to the SAIF
assessment and employee benefit costs. Compensation and employee benefits
decreased $614,000, or 7.7%, to $7.3 million for the nine months ended September
30, 1997, compared to $8.0 million for the same period in 1996. The 1996 period
included a non-recurring charge for benefits payable as a result of the passing
of the Bank's long-time Chairman and President. Equipment expense increased
$341,000, or 44.8%, to $1.1 million for the nine months ended September 30,
1997, from $762,000 million for the same period in 1996. The increase was due to
the write off of certain equipment determined to be obsolete and increased
depreciation expense incurred due to an upgrade of the Bank's computer
equipment. The Bank incurred reduced FDIC insurance premiums in 1997. On
September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the "Funds Act") which, among other things, imposed a one-time
special assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. The Bank's special assessment of $5.2 million was
reflected as an expense in the 1996 period. As a result of the Funds Act, the
FDIC substantially lowered the SAIF insurance assessments on SAIF member
institutions. The Bank's assessment rate has now been reduced to 6.4 basis
points from 23 basis points and the corresponding FDIC expense decreased $1.1
million, or 80%, to $285,000 for the nine months ended September 30, 1997, from
$1.4 million for the comparable 1996 period. Amortization of intangibles
increased $794,000, or 69.8%, to $1.9 million for the nine months ended
September 30, 1997, from $1.1 million for the same period in 1996. An impairment
writedown of the core deposit intangible totaling $1.3 million was recognized as
of September 30, 1997, regarding deposits acquired from the RTC in 1995.
INCOME TAX EXPENSE. Income tax expense totaled $4.0 million for the nine
months ended September 30, 1997, compared to $1.4 million for the comparable
1996 period, which represented an increase of $2.6 million, or 190.0%. The
increase was due primarily to an increase in taxable income. Taxable income was
affected in the 1996 period by several non-recurring charges.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
RESULTS OF OPERATIONS. Net income for the year ended December 31, 1996,
totaled $4.7 million, a 43.4% decrease from the $8.3 million earned in 1995. The
decrease was primarily attributable to non-
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recurring charges for the special assessment to recapitalize the SAIF and the
expenses resulting from the passing of the Bank's long-time President. Return on
average stockholders' equity was adversely affected in 1995 by the Bank's
secondary stock offering completed in July 1995, which raised $7.2 million in
capital.
INTEREST INCOME. Interest income for the year ended December 31, 1996,
totaled $68.0 million, an increase of $3.5 million, or 5.4%, from $64.6 million
for the year ended December 31, 1995. The increase was due primarily to an
increase in the average balance of interest-earning assets to $931.2 million for
1996, from $897.8 million for 1995. Interest income on loans increased $3.4
million, or 9.5%, to $38.6 million for the year ended December 31, 1996,
compared to $35.2 million for 1995. The increase was due primarily to the
increase in the average balance of the loan portfolio to $487.6 million for the
year ended December 31, 1996, from $457.8 million for 1995. Interest on
mortgage-backed securities held to maturity decreased $3.0 million, or 13.5%, to
$19.1 million for the year ended December 31, 1996, from $22.1 million for 1995.
The decrease is primarily due to a reduction in the average size of the
mortgage-backed securities held to maturity portfolio to $282.0 million for the
year ended December 31, 1996, from $332.2 million for 1995, as the cash flows
from mortgage-backed securities held to maturity were used to provide funding
for loan production and the purchase of investment securities and mortgage-
backed securities available for sale. Interest on investment securities
decreased $577,000, or 12.4%, to $4.1 million for the year ended December 31,
1996, from $4.7 million for 1995. The decrease was primarily due to a reduction
in the average size of the investment securities portfolio to $36.8 million for
the year ended December 31, 1996, from $44.3 million in 1995, offset slightly by
an increase in the average yield on the investment portfolio to 7.45% for 1996,
from 7.15% for 1995. Interest on investment securities and mortgage-backed
securities available for sale increased $3.7 million, or 146.4%, to $6.2 million
for the year ended December 31, 1996, from $2.5 million for 1995. The increase
was primarily due to the increased average size of the available for sale
portfolio to $101.2 million for 1996, from $42.4 million for 1995, accompanied
by an increase in the average yield to 6.13% for 1996, from 5.93% for 1995. The
increased average size was due to the reclassification from held to maturity to
available for sale of $77.5 million in investment and mortgage-backed securities
in December 1995, (see Note 1, "Summary of Significant Accounting Policies" in
the consolidated financial statements) accompanied by the Bank's positioning
more securities in the available for sale category to manage the portfolio more
effectively.
INTEREST EXPENSE. Total interest expense increased $1.6 million, or 4.4%,
to $37.3 million for the year ended December 31, 1996, compared to $35.7 million
for 1995. Interest expense on deposits increased $237,000, or 0.7%, to $33.9
million for the year ended December 31, 1996. Interest expense on borrowed funds
increased $1.3 million, or 65.6%, to $3.4 million for the year ended December
31, 1996, from $2.0 million for 1995. The increase was due primarily to an
increase in the average balance of FHLB-NY advances and other borrowings to
$55.2 million for 1996, from $33.6 million for 1995, accompanied by a slight
increase in the average rate paid on borrowings to 6.10% for 1996, from 6.06%
for 1995. The Bank continued to utilize borrowings for funding of loan
production and investment securities purchases.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
increased $1.9 million, or 6.6%, totaling $30.8 million for the year ended
December 31, 1996, compared to $28.9 million for 1995. The average interest rate
spread for the year ended December 31, 1996, was 2.88%, compared to 2.77% for
1995. The average yield on interest-earning assets increased 12 basis points,
while average interest expense increased only 1 basis point from 1995 to 1996.
PROVISION FOR LOAN LOSSES. The Bank provided $550,000 for loan losses in
1996, as compared to $310,000 in 1995. The provision was based upon management's
review and evaluation of the loan portfolio, level of delinquencies, general
market and economic conditions, and asset classification review. The related
allowance for loan losses totaled $5.3 million, and was 112.8% of nonaccrual
loans at December 31, 1996. This compares to a $5.2 million allowance for loan
losses at December 31, 1995, which
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was 89.9% of nonaccrual loans. Substantially all of the nonaccrual loans are
secured by first mortgage liens on single-family residential properties. Non-
performing loans decreased $1.2 million, or 20.3%, to $4.8 million at December
31, 1996, compared to $6.0 million at December 31, 1995.
OTHER OPERATING INCOME. Other operating income, consisting primarily of
deposit product fees, loan servicing fees, gains and losses on loans and
securities sold, and real estate owned operating income and expenses, totaled
$2.0 million for the year ended December 31, 1996, compared to $2.2 million for
1995, which represented a decrease of $176,000, or 8.1%. Net gains on sales of
loans and securities available for sale totaled $236,000 for the year ended
December 31, 1996, from $751,000 for 1995. Although volume of sales increased
during 1996, the Bank continued to minimize its exposure to rising rates by
limiting the duration of the available for sale portfolio, in order to provide a
consistent funding source for continued loan production. Other income,
consisting primarily of income from the Bank's operating subsidiaries, FSB
Financial Corp. and 1000 Woodbridge Center Drive, Inc., gains and losses on
sales of REO, rental income, and REO expenses, totaled $202,000 for the year
ended December 31, 1996, compared to a net expense of $184,000 for the year
ended December 31, 1995, representing an increase of $386,000, or 209.8%. The
increase was due to decreased REO expenses and provisions for possible losses on
REO, increased income from operating subsidiaries, and increased profits on the
sale of REO.
OPERATING EXPENSE. Operating expenses increased $6.9 million, or 38.5%, to
$24.7 million for the year ended December 31, 1996, from $17.8 million in 1995.
There were several non-recurring expenses during 1996. Compensation and employee
benefit expense increased $1.8 million, or 20.5%, to $10.3 million for the year
ended December 31, 1996, from $8.5 million for 1995. The increase was primarily
due to a non-recurring charge for benefits payable as a result of the passing of
the Bank's President, accompanied by increased salary and benefit costs.
Occupancy expense decreased $8,000 to $2.0 million for the year ended December
31, 1996. The decrease was due primarily to the closing of a branch of the Bank
in November 1996. Equipment expense decreased $153,000, or 12.9%, to $1.0
million for the year ended December 31, 1996. Advertising expense decreased
$118,000, or 21.0%, to $445,000 for the year ended December 31, 1996, from
$563,000 for 1995. The decrease was due primarily to reduced generic marketing
as loan production was attained without additional marketing efforts. Federal
deposit insurance premiums increased $159,000, or 9.3%, to $1.9 million for the
year ended December 31, 1996, from $1.7 million for 1995. The increase was due
primarily to an increase in the average level of insurance-assessable deposits
to $813.3 million for 1996, from $796.1 million for 1995. The Funds Act, which
was signed into law on September 30, 1996, imposed a one-time special assessment
of $5.2 million on the Bank to recapitalize the SAIF (see Note 15, "Special SAIF
Assessment" in the consolidated financial statements). Amortization of
intangibles increased $283,000, or 26.5%, to $1.3 million for the year ended
December 31, 1996, from $1.1 million for 1995. The increase was due primarily to
an impairment writedown of the core deposit intangible totaling $334,000
regarding deposits acquired from the RTC in 1991. General and administrative
expenses decreased $264,000, or 9.7%, to $2.5 million for the year ended
December 31, 1996, from $2.7 million for 1995. The decrease was due primarily to
lower outside service bureau expenses.
INCOME TAX EXPENSE. Income tax expense totaled $2.8 million for the year
ended December 31, 1996, compared to $4.6 million for 1995, which represented a
decrease of $1.8 million, or 39.1%. The decrease was due primarily to a
reduction in taxable income due to the special SAIF assessment and one-time
charges resulting from the passing of the Bank's President in 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
RESULTS OF OPERATIONS. Net income for the year ended December 31, 1995,
totaled $8.3 million, unchanged from the $8.3 million earned in 1994. The Bank's
earnings were primarily achieved by an
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increase in net interest income and other operating income, offset by higher
operating expenses due primarily to the expenses relating to the acquisition of
branches from the RTC, partially reduced by lower income tax expense.
INTEREST INCOME. Interest income for the year ended December 31, 1995,
totaled $64.6 million, an increase of $11.7 million, or 22.1%, from $52.9
million for 1994. The increase was primarily due to an increase in the average
balance of interest-earning assets to $897.8 million for 1995, from $774.8
million for 1994, combined with an increase in the average yield on interest-
earning assets to 7.19% for the year ended December 31, 1995, from 6.83% for
1994. Interest income on loans increased $3.1 million, or 9.7%, to $35.2 million
for the year ended December 31, 1995, compared to $32.1 million for 1994. The
increase was due primarily to an increase in the average balance of the loan
portfolio to $457.8 million in 1995, from $413.3 million in 1994. Interest on
mortgage-backed securities held to maturity increased $7.0 million, or 46.4%, to
$22.1 million for the year ended December 31, 1995, compared to $15.1 million
for 1994. The increase is due primarily to an increase in the average size of
the mortgage-backed securities held to maturity portfolio to $332.2 million in
1995, from $267.3 million for 1994, as the proceeds of the branch acquisitions
were used to purchase mortgage-backed securities held to maturity, accompanied
by the increase in the average yield earned on mortgage-backed securities held
to maturity to 6.67% during 1995 from 5.66% during 1994 as a result of upward
adjustments on adjustable-rate mortgage-backed securities. Interest on
investment securities increased $2.5 million, or 113.6%, to $4.7 million for the
year ended December 31, 1995, as compared to $2.2 million for 1994. The increase
was due primarily to the increase in the average balance of the investment
securities portfolio with cash flow provided from the branch acquisition during
1995, accompanied by an increase in the average yield to 7.15% for 1995 from
5.65% for 1994, as a result of purchases of investment securities in the first
half of 1995 when rates were higher. Interest on investments, mortgage-backed
securities and loans available for sale totaled $2.5 million for the year ended
December 31, 1995, as compared to $3.5 million for 1994, which represents a
decrease of $1.0 million, or 28.6%. The decrease was due primarily to the
average yield on the available for sale portfolio decreasing to 5.93% for the
year ended December 31, 1995, from 6.26% for 1994, and a corresponding decrease
in the average balance of the available for sale portfolio during 1995. On
December 15, 1995, the Bank reassessed its classifications of all of its
securities in accordance with the SFAS 115 (see Note 1, "Summary of Significant
Accounting Policies" in the consolidated financial statements). The Bank
classified an additional $77.5 million in investment and mortgage-backed
securities from held to maturity to available for sale.
INTEREST EXPENSE. Total interest expense increased $10.6 million, or 42.2%,
to $35.7 million for the year ended December 31, 1995, as compared to $25.1
million for 1994. The increase in interest expense on deposits to $33.7 million
for the year ended December 31, 1995, from $23.7 million for 1994, was mainly
attributable to an increase in the average deposit balance outstanding to $773.8
million for 1995, from $673.5 million for 1994, accompanied by higher interest
rates paid on deposits, causing average interest cost to increase to 4.35% for
1995, from 3.52% for 1994. General market interest rates began a trend upward in
1994 and continued increasing through June, 1995. Interest rates trended
downward, which enabled the Bank to reprice certificates of deposits
accordingly. Interest expense on borrowed funds increased $596,000, or 41.4%,
during 1995, and was due to increased borrowings accompanied by higher interest
rates paid on borrowings. The average cost of borrowed funds increased to 6.06%
for 1995, from 4.82% for 1994.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
increased slightly during 1995, totaling $28.9 million for the year ended
December 31, 1995, as compared to $27.8 for 1994, a $1.1 million, or 4.0%
increase. The average interest rate spread for the year ended December 31, 1995,
was 2.77%, compared to 3.26% for 1994. The spread compression was due to the
upward repricing of certificates of deposit during 1995 outpacing the repricing
of adjustable rate assets, which are subject to
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interest rate caps and margins. The average yield on interest-earning assets
increased 36 basis points, but the average interest expense increased 85 basis
points from 1994 to 1995.
PROVISION FOR LOAN LOSSES. The Bank provided $310,000 for loan losses in
1995, as compared to $300,000 in 1994. The provision was based upon management's
review and evaluation of the loan portfolio, level of delinquencies, general
market and economic conditions, and asset classification review. The related
allowance for loan losses totaled $5.2 million, and was 89.9% of nonaccrual
loans at December 31, 1995. This compares to a $5.7 million allowance for loan
losses at December 31, 1994, which was 65.3% of nonaccrual loans. Substantially
all of the nonaccrual loans are secured by first mortgage liens on single-family
residential properties. Non-performing loans decreased $3.0 million, or 50.0%,
to $6.0 million at December 31, 1995, compared to $9.0 million at December 31,
1994.
OTHER OPERATING INCOME. Other operating income, totaled $2.2 million for
the year ended December 31, 1995, as compared to $1.7 million for 1994, which
represented an increase of $500,000, or 29.4%. The increase was due primarily to
net gains on sales of loans and securities sold to $751,000 for the year ended
December 31, 1995, increased from $40,000 for 1994, as some of the securities
purchased with the proceeds from both the branch acquisitions and the Secondary
Offering were placed in the available for sale portfolio and subsequently sold.
Also included in the net gains on sales of securities available for sale was the
sale of securities which were transferred in accordance with the reassessment of
the securities portfolio as allowed by the SFAS 115 (see Note 1, "Summary of
Significant Accounting Policies" in the consolidated financial statements).
Other income totaled a net expense of $184,000 for the year ended December 31,
1995, as compared to income of $107,000 for 1994. This decrease was due
primarily to increased REO expenses and provisions for possible losses on REO.
OPERATING EXPENSES. Operating expenses increased $1.8 million, or 11.3%, to
$17.8 million for the year ended December 31, 1995, as compared to $16.0 million
for 1994. The increase was due primarily to increased costs due to the branch
acquisitions during 1995. Compensation and employee benefits increased $342,000,
or 4.2%, to $8.5 million for the year ended December 31, 1995, as compared to
$8.2 million for 1994. Occupancy expenses increased $181,000, or 9.5%, to $2.1
million for the year ended December 31, 1995, compared to $1.9 million for 1994,
due to new branch location costs. Advertising expense increased $137,000, or
32.2% to $563,000 for 1995, compared to $426,000 for 1994, due to increased
advertising to maintain loan volume. Federal deposit insurance premiums
increased $132,000, or 8.3%, to $1.7 million for 1995, compared to $1.6 million
for 1994, due primarily to the increase in the deposit base as a result of the
acquisition from the RTC. Amortization of intangibles totaled $1.1 million for
the year ended December 31, 1995, as compared to $223,000 for 1994, as a result
of the $12.6 million premium paid on the deposits acquired from the RTC during
1995. General and administrative expenses increased $276,000, or 11.0%, to $2.7
million for the year ended December 31, 1995. The increase was due primarily to
certain one-time costs related to the conversion of the deposit data from the
acquired branches to the Bank's data processing system, and increased expenses
in operating subsidiaries.
INCOME TAX EXPENSE. Income tax expense totaled $4.6 million for the year
ended December 31, 1995, compared to $4.9 million for 1994, which represented a
decrease of $300,000, or 6.1%. The decrease was due primarily to a reduction in
taxable income because of allowable deductions for increases in specific loan
and REO reserves and charge-offs.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity is a measure of its ability to generate sufficient
cash flows to meet all of its current and future financial obligations and
commitments. The Bank's primary sources of funds are deposits,
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proceeds from principal and interest payments on loans and mortgage-backed
securities; sales of loans, mortgage-backed securities and investments available
for sale; maturities of investment securities and short-term investments; and,
to an increasing extent, advances from the FHLB-NY, reverse repurchase
agreements and other borrowed funds. While maturities and scheduled amortization
of loans and mortgage-backed securities are a predictable source of funds,
deposit cash flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The primary investing activity of the Bank is the origination of one- to
four-family mortgage loans. During the nine months ended September 30, 1997 and
1996, and years ended December 31, 1996, 1995, and 1994, the originated mortgage
loans in the amounts of $104.6 million, $100.9 million, $127.1 million, $98.5
million and $81.8 million, respectively. The Bank originated other loans
totaling $3.4 million, $2.3 million, $3.8 million, $3.8 million and $2.3 million
for the nine months ended September 30, 1997 and 1996, and years ended December
31, 1996, 1995, and 1994, respectively. The Bank also purchased loans and
mortgage-backed and investment securities to reduce excess liquidity not
otherwise used for lending activities. Purchases of mortgage loans totaled $4.7
million and $4.6 million for the nine months ended September 30, 1997 and 1996,
respectively, and $10.1 million and $5.2 million for the years ended December
31, 1996 and 1995, respectively. There were no mortgage loans purchased in 1994.
Purchases of mortgage-backed securities, including those available for sale,
totaled $160.7 million, $141.4 million, $191.3 million, $215.3 million and
$146.6 million for the nine months ended September 30, 1997 and 1996, and years
ended December 31, 1996, 1995, and 1994, respectively. Purchases of investment
securities, including those available for sale, totaled $27.0 million, $44.8
million, $52.7 million, $48.0 million and $37.7 million for the nine months
ended September 30, 1997 and 1996, and years ended December 31, 1996, 1995, and
1994, respectively. Other investing activities include investment in FHLB-NY
stock and federal funds. The investing activities were funded primarily from
principal repayments on loans and mortgage-backed securities of $117.3 million,
$139.2 million, $178.6 million, $119.8 million and $149.4 million for the nine
months ended September 30, 1997 and 1996, and years ended December 31, 1996,
1995, and 1994, respectively. Additionally, proceeds from sales of loans,
mortgage-backed securities and investment securities totaling $128.0 million,
$90.2 million, $124.2 million, $114.8 million and $89.1 million for the nine
months ended September 30, 1997 and 1996, and years ended December 31, 1996,
1995, and 1994, and, to a lesser extent, called or maturing investment
securities totaling $14.0 million, $13.0 million, $19.0 million, $19.0 million
and $11.0 million for the nine months ended September 30, 1997 and 1996, and
years ended December 31, 1996, 1995, and 1994, respectively, provided additional
liquidity.
The Bank has several other sources of liquidity, including FHLB-NY
advances, which, at September 30, 1997, totaled $33.0 million, of which $15.0
million were due within the following twelve months. If necessary, the Bank has
additional borrowing capacity with the FHLB-NY, including an available overnight
line of credit of up to $48.9 million. The Bank also has other borrowings that
provided additional liquidity, totaling $90.9 million at September 30, 1997,
$25.9 million of which is due in 1998. Other sources of liquidity are investment
and mortgage-backed securities available for sale, totaling $140.4 million at
September 30, 1997.
The Bank, in the normal course of conducting business, extends credit to
meet the financing needs of its customers through commitments and letters of
credit. At September 30, 1997, the Bank had commitments to originate and
purchase mortgage loans of $25.8 million and to purchase mortgage-backed and
investment securities of $16.9 million. At that date, there were also
commitments under unfunded credit lines totaling $43.0 million and standby
letters of credit totaling $2.1 million. Certificates of deposit that are
scheduled to mature in one year or less totaled $348.3 million at September 30,
1997. Based on historical experience, management estimates that a significant
portion of such deposits will remain with the Bank. The Bank anticipates that it
will have sufficient funds available to meet its current commitments.
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The Bank is required to maintain an average daily balance of liquid assets
as defined by OTS regulations. This ratio is based upon a percentage of deposits
and short-term borrowings. The required minimum ratio has been reduced to 4.00%,
from 5.00% at September 30, 1997. The Bank's liquidity ratio at September 30,
1997, was 8.17%. The Bank's most liquid assets are cash and cash equivalents,
which include investments in highly liquid, short-term investments. The level of
these assets is dependent upon the Bank's operating, financing, and investing
activities during any given period. As of September 30, 1997, cash and
investments qualifying for liquidity purposes totaled $80.0 million.
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
performance than 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 June 1996, the FASB issued SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. These standards are based on a consistent application of a
financial components approach that 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 is effective for transfers that occur after December
31, 1996 and will be applied prospectively except for certain provisions that
were deferred until January 1, 1998, by Statement 127 "Deferral of the Effective
Date of Certain Provisions of FASB No. 125" issued in December 1996. The
adoption of SFAS 125 did not have a material effect on the Bank's financial
position or results of operations.
Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127"), an amendment
of SFAS 125. SFAS 127 defers for one year the effective date of portions of SFAS
125 that address secured borrowings and collateral for all transactions.
Additionally, SFAS 127 defers for one year the effective date of transfers of
financial assets that are part of repurchase agreements, securities lending and
similar transactions. The adoption is not expected to have a material effect on
the Bank's financial position or results of operations.
Earnings Per Share. In February 1997, the FASB issued Statement 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 supersedes APB Opinion No. 15,
"Earnings Per Share" and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. SFAS 128 replaces Primary EPS and Fully
Diluted EPS with Basic EPS and Diluted EPS, respectively. SFAS 128 requires dual
presentation of Basic and Diluted EPS on the face of the income statement for
entities with complex capital structures and a reconciliation of information
utilized to calculate Basic EPS to that used to calculate Fully Diluted EPS.
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SFAS 128 is effective for financial statement periods ending after December 15,
1997. Earlier application is not permitted. After adoption, all prior EPS are
required to be restated to conform with SFAS 128. The Bank adopted SFAS
128 on December 31, 1997 and all earnings per share data have been restated to
conform to the provisions of SFAS 128.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Under SFAS 130, comprehensive
income is divided into net income and other comprehensive income. Other
comprehensive income includes items previously recorded directly in equity, such
as unrealized gains or losses on securities available for sale. SFAS 130 is
effective for interim periods and annual periods beginning after December 15,
1997. Comparative financial statements for earlier periods are required to be
reclassified to reflect application of the provisions of SFAS 130. The Bank has
not determined the impact, if any, SFAS 130 will have on the Bank's financial
statement presentation.
Disclosures About Segments of an Enterprise and Related Information. In
June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected financial information about operating segments in interim
financial reports to shareholders. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Bank has not yet
determined the impact, if any, SFAS 131 will have on the Bank's financial
statement presentation.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business has been, and continues to be, attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations and borrowings, primarily in single-
family residential mortgage loans, real estate construction loans, commercial
real estate loans, home equity loans and lines of credit and multi-family
residential mortgage loans. The Bank maintains a significant portfolio of
mortgage-backed securities and also invests in U.S. Government, federal agency
and corporate debt securities and other marketable securities. The Bank's
revenues are derived principally from interest on its mortgage loan and
mortgage-backed securities portfolios, and interest and dividends on its
investment securities. The Bank's total loan portfolio amounted to $573.0
million at September 30, 1997. One- to four-family residential loans, consisting
of primarily single-family loans, accounted for 81.8% of total loans, while home
equity loans and lines of credit were 7.3% of total loans. Real estate
construction, commercial real estate and multi-family residential mortgage loans
represented in the aggregate 9.8% of total loans. The Bank also offers a variety
of consumer loans. In addition, the Bank had investments in mortgage-backed
securities totalling $350.5 million, or 33.6% of total assets at September 30,
1997.
MARKET AREA AND COMPETITION
The Bank has 17 branch offices in central New Jersey, 13 of which are
located in Middlesex County, three in Monmouth county and one in Union County.
The Bank's deposit gathering base is concentrated in the communities surrounding
its offices. The majority of the Bank's loan originations are derived from north
and central New Jersey, which is a part of the New York City metropolitan area
and which has historically benefitted from having a large number of corporate
headquarters and a concentration of financial services-
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related industries. The area also has a well-educated employment base and a
large number of industrial, service and high-technology businesses. In the late
1980's and early 1990's, however, 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, the New York/New Jersey metropolitan area
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. Whether such stabilization will continue is dependent, in large
part, upon the general economic health of the United States and other factors
beyond the Bank's control and, therefore, cannot be estimated.
The Bank faces significant competition both in making loans and in
attracting deposits. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank, all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, credit unions, mortgage banking companies and insurance companies.
Its most direct competition for deposits has historically come from commercial
banks, savings banks savings and loan associations and credit unions. The Bank
faces additional competition for deposits from short-term money market funds,
other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies.
LENDING ACTIVITIES
Loan and Mortgage-Backed Securities Portfolio Compositions. The Bank's loan
portfolio consists primarily of conventional first mortgage loans secured by
one-to four-family residences and, to a lesser extent, multi-family residences
and commercial real estate. At September 30, 1997, the Bank's loan portfolio
totalled $573.0 million, of which $468.8 million, or 81.8% were one- to four-
family residential mortgage loans. At that date, the Bank's loan portfolio also
included $41.9 million of home equity loans and lines of credit generally
secured by second liens on one- to four-family residential property, $18.3
million of construction loans, $31.6 million of commercial real estate loans,
and $6.2 million of multi-family residential mortgage loans, which represented
7.3%, 3.2%, 5.5% and 1.1%, respectively, of total loans receivable. Of the
mortgage loan portfolio outstanding at that date, 36.0% were fixed-rate loans
and 64.0% were ARM loans. Other loans held by the Bank, which consist of loans
on deposit accounts, commercial business, personal, automobile and credit card
loans, totalled $6.2 million, or 1.1% of total loans outstanding at September
30, 1997. The Bank does not anticipate maintaining a credit card portfolio in
the foreseeable future.
The majority of the loans originated by the Bank are held for investment.
However, the Bank sells 30 year, fixed-rate, conforming loans to the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and institutional investors from
time to time, and retains servicing rights. All loans are sold without recourse.
At September 30, 1997, the Bank's servicing portfolio was $94.5 million.
The Bank also invests in mortgage-backed securities and other mortgage-
backed products such as collateralized mortgage obligations ("CMOs"). At
September 30, 1997, mortgage-backed securities aggregated $350.5 million, or
33.6% of total assets, of which 59.4% were secured by ARM loans. The majority of
the Bank's mortgage-backed securities are insured or guaranteed by Freddie Mac,
the Government National Mortgage Association ("GNMA"), or Fannie Mae ("FNMA").
CMOs totalled $61.7 million, or 17.7% of the Bank's total mortgage-backed
securities portfolio at September 30, 1997, the majority of which were backed or
guaranteed by federal agencies. At September 30, 1997, the Bank had $228.2
million in mortgage-backed securities held for investment, $4.1 million of which
had contractual
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<PAGE>
maturities of less than one year. The actual maturity of a mortgage-backed
security varies, depending on when the underlying mortgages are repaid or
prepaid. Prepayments of the underlying mortgages may shorten the life of the
investment, thereby affecting its yield to maturity and the related market value
of the mortgage-backed security. The actual prepayments of the underlying
mortgages depend on many factors, including the type of mortgages, the coupon
rates, the age of the mortgages, the geographical location of the underlying
real estate collateralizing the mortgages, levels of market interest rates, and
general economic conditions. As part of the Bank's asset/liability management
strategy and for increased liquidity, the Bank holds a portion of its mortgage-
backed securities portfolio available for sale. At September 30, 1997, mortgage-
backed securities available for sale had an amortized cost of $122.0 million and
a market value of approximately $122.4 million.
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<PAGE>
The following table sets forth the composition of the Bank's loan and
mortgage-backed securities portfolio in dollar amounts and as a percentage of
the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
AT SEPTEMBER 30,
1997 1996 1995 1994
----------------------- --------------------- -------------------- --------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
----------- ------------ ---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1):
One-to-four family..................... $468,829 81.82% $428,463 83.14% $390,641 84.20% $363,449
Home equity loans...................... 41,895 7.31 39,140 7.60 33,456 7.21 30,768
Construction(2)........................ 18,255 3.19 12,871 2.50 7,612 1.64 3,177
Commercial real estate................. 31,569 5.51 21,209 4.11 17,322 3.73 13,370
Multi-family........................... 6,225 1.09 7,876 1.53 9,675 2.09 7,779
A.I.D.(3).............................. -- -- -- -- 165 0.04 178
-------- ------ -------- ------ -------- ------ --------
Total mortgage loans............. 566,773 98.92 509,559 98.88 458,871 98.91 418,721
Other loans............................. 6,208 1.08 5,772 1.12 5,055 1.09 4,027
-------- ------ -------- ------ -------- ------ --------
Total loans receivable........... 572,981 100.00% 515,331 100.00% 463,926 100.00% 422,748
====== ====== ======
Less:
Net deferred loan fees.................. (198) 95 499 953
and premiums and discounts
Allowance for loan losses............... 5,982 5,322 5,247 5,745
-------- -------- -------- --------
Total loans receivable, net........... $567,197 $509,914 $458,180 $416,050
======== ======== ======== ========
Mortgage loans:
ARM................................... $362,631 63.98% $309,600 60.76% $275,109 59.95% $242,499
Fixed-rate............................ 204,142 36.02 199,959 39.24 183,762 40.05 176,222
-------- ------ -------- ------ -------- ------ --------
Total mortgage loans............. $566,773 100.00% $509,559 100.00% $458,871 100.00% $418,721
======== ====== ======== ====== ======== ====== ========
Mortgage-backed securities(4):
CMOs................................... $ 61,670 17.73% $ 40,095 10.81% $ 65,399 17.41% $ 81,009
FHLMC.................................. 199,984 57.50 248,525 67.00 259,994 69.22 198,377
GNMA................................... 18,509 5.32 27,999 7.54 31,570 8.41 10,029
FNMA................................... 67,623 19.45 54,339 14.65 18,644 4.96 18,573
-------- ------ -------- ------ -------- ------ --------
Total mortgage-backed securities........ 347,786 100.00% 370,958 100.00% 375,607 100.00% 307,988
======= ======= ======= =======
Net premiums and discounts.............. 2,414 2,094 1,634 1,153
Net unrealized gain (loss) on mortgage-
backed securities available for sale.... 329 128 241 (1,511)
-------- -------- -------- --------
Net mortgage-backed securities.......... $350,529 $373,180 $377,482 $307,630
======== ======== ======== ========
<CAPTION>
------------------------------------------------------------------------------
1993 1992
-------------------------- ------------------------
PERCENT PERCENT PERCENTAGE
OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Mortgage loans(1):
One-to-four family..................... 85.98% $366,914 86.56% $370,280 87.30%
Home equity loans...................... 7.28 27,676 6.53 25,734 6.07
Construction(2)........................ 0.75 3,920 0.92 5,514 1.30
Commercial real estate................. 3.16 12,559 2.96 8,585 2.02
Multi-family........................... 1.84 7,335 1.73 7,436 1.75
A.I.D.(3).............................. 0.04 191 0.05 202 0.05
------ -------- ------ -------- ------
Total mortgage loans............. 99.05 418,595 98.75 417,751 98.49
Other loans............................. 0.95 5,306 1.25 6,410 1.51
------ -------- ------ -------- ------
Total loans receivable........... 100.00% 423,901 100.00% 424,161 100.00%
====== ====== ======
Less:
Net deferred loan fees
and premiums and discounts............ 1,397 2,375
Allowance for loan losses............... 5,899 5,751
-------- --------
Total loans receivable, net........... $416,605 $416,035
======== ========
Mortgage loans:
ARM................................... 57.91% $240,424 57.44% $256,248 61.34%
Fixed-rate............................ 42.09 178,171 42.56 161,503 38.66
------ -------- ------ -------- ------
Total mortgage loans............. 100.00% $418,595 100.00% $417,751 100.00%
====== ======== ====== ======== ======
Mortgage-backed securities(4):
CMOs................................... 26.30% $ 74,523 27.64% $ 51,397 19.89%
FHLMC.................................. 64.41 166,245 61.66 182,278 70.54
GNMA................................... 3.26 13,578 5.04 18,664 7.22
FNMA................................... 6.03 15,280 5.66 6,065 2.35
------ -------- ------ -------- ------
Total mortgage-backed securities........ 100.00% 269,626 100.00% 258,404 100.00%
====== ====== ======
Net premiums and discounts.............. 2,238 1,055
Net unrealized gain (loss) on mortgage-. 637 --
backed securities available for sale.... -------- --------
Net mortgage-backed securities.......... $272,501 $259,459
======== ========
</TABLE>
_________________________________________
(1) Includes $287,000, $424,000, $150,000, $1.6 million and $2.3 million in
mortgage loans available for sale for 1996, 1995, 1994, 1993 and 1992,
respectively.
(2) Net of loans in process of $26.2 million, $12.3 million, $3.8 million, $3.9
million, $6.3 million and $4.6 million at September 30, 1997, December 31,
1996, 1995, 1994, 1993 and 1992, respectively.
(3) Agency for International Development. Represented a participation interest
in a $15.0 million aggregate loan to the Korea National Housing
Corporation, a government-sponsored housing development project.
(4) Includes $122.4 million, $120.8 million, $89.3 million, $24.4 million,
$28.3 million and $3.5 million in mortgage-backed securities available for
sale at September 30, 1997 and December 31, 1996, 1995, 1994, 1993 and
1992, respectively.
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<PAGE>
The following table sets forth the Bank's loan originations and principal
repayments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans(1):
At beginning of period...................................... $ 504,142 $453,125 $453,125 $412,023 $411,299
--------- -------- -------- -------- --------
Mortgage loans originated:
One- to four-family..................................... 76,212 78,523 99,956 75,505 64,976
Home equity loans....................................... 11,253 12,649 15,290 10,679 9,549
Construction............................................ 5,383 4,938 5,258 5,262 5,355
Commercial real estate.................................. 11,550 1,066 4,943 5,043 1,334
Multi-family............................................ 167 3,743 1,650 1,976 547
-------- -------- -------- -------- --------
Total mortgage loans originated and purchased......... 104,565 100,919 127,097 98,465 81,761
Mortgage loans purchased.................................... 4,665 4,631 10,118 5,181 --
--------- -------- -------- -------- --------
Total mortgage loans originated......................... 109,230 105,550 137,215 103,646 81,761
Mortgage loans sold......................................... (3,036) (6,198) (6,932) (6,343) (5,387)
Principal repayments........................................ (48,095) (57,321) (77,060) (52,193) (73,883)
(Increase) decrease in premiums/discounts................... 293 247 404 454 444
and deferred loan fees
Net (increase) decrease in allowance for loan losses........ (660) 156 (75) 498 154
Mortgage loans transferred to real estate owned............. (885) (2,105) (2,535) (4,960) (2,365)
--------- -------- -------- -------- --------
At end of period............................................ $ 560,989 $493,454 $504,142 $453,125 $412,023
========= ======== ======== ======== ========
Other loans:
At beginning of period...................................... $ 5,772 $ 5,055 $ 5,055 $ 4,027 $ 5,306
Other loans originated...................................... 3,364 2,343 3,835 3,828 2,278
Other loans sold............................................ -- -- -- -- (238)
Principal repayments........................................ (2,928) (2,380) (3,118) (2,800) (3,319)
--------- -------- -------- -------- --------
At end of period............................................ $ 6,208 $ 5,018 $ 5,772 $ 5,055 $ 4,027
========= ======== ======== ======== ========
Mortgage-backed securities(2):
At beginning of period...................................... $ 373,180 $377,482 $377,482 $307,630 $272,501
Mortgage-backed securities purchased........................ 160,663 141,397 191,327 215,292 146,629
Mortgage-backed securities sold............................. (116,430) (73,011) (96,147) (81,792) (35,905)
Amortization of premium..................................... (794) (756) (977) (615) (1,227)
Net change in unrealized gain (loss) on..................... 202 (1,362) (113) 1,752 (2,148)
mortgage-backed securities available for sale
Principal repayments........................................ (66,292) (79,493) (98,392) (64,785) (72,220)
--------- -------- -------- -------- --------
At end of period............................................ $ 350,529 $364,257 $373,180 $377,482 $307,630
========= ======== ======== ======== ========
</TABLE>
__________________________________________
(1) Includes $149,000, $287,000, $424,000 and $150,000 in mortgage loans
available for sale for the nine months ended September 30, 1996, and the
years ended December 31, 1996, 1995 and 1994, respectively.
(2) Includes $122.4 million, $93.4 million, $120.7 million, $89.1 million and
$25.9 million in mortgage-backed securities available for sale for the nine
months ended September 30, 1997 and 1996, and for the years ended December
31, 1996, 1995 and 1994, respectively.
65
<PAGE>
Loan Maturity. The following table sets forth the maturity or period of
repricing of the Bank's loan portfolio at September 30, 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 $51.0
million, $80.2 million and $55.0 million for the nine months ended September 30,
1997 and the years ended December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------------------------------------------------------------------
ONE YEAR THREE FIVE YEARS TEN YEARS TWENTY
ONE YEAR TO THREE YEARS TO TO TEN TO TWENTY YEARS
OR LESS YEARS FIVE YEARS YEARS YEARS OR MORE TOTAL
----------- ------------- ----------------- -------------- ------------ -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family............ $101,491 $89,064 $ 97,755 $ 98,545 $67,589 $14,385 $468,829
Home equity loans............. 13,786 1,057 4,957 9,544 12,551 -- 41,895
Construction(1)............... 18,255 -- -- -- -- -- 18,255
Commercial real estate........ 3,259 5,427 2,518 3,765 15,342 1,258 31,569
Multi-family.................. -- 352 4,689 536 648 -- 6,225
-------- ------- -------- -------- ------- ------- --------
Total mortgage loans........ 136,791 95,900 109,919 112,390 96,130 15,643 566,773
Other loans..................... 2,983 1,876 978 -- 371 -- 6,208
------- -------- -------- -------- ------- -------- --------
Total loans................. $139,774 $97,776 $110,897 $112,390 $96,501 $15,643 $572,981
======== ======= ======== ======== ======= =======
Net deferred loan fees and unearned discounts........................................................................ 198
Allowance for loan losses............................................................................................ (5,982)
--------
Loans receivable, net.................................................................................................. $567,197
========
</TABLE>
____________________________________________
(1) Net of loans in process of $26.2 million.
The following table sets forth at September 30, 1997 the dollar amount of
loans contractually due or repricing after September 30, 1998, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE OR REPRICING AFTER SEPTEMBER 30, 1998
----------------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family........................ $148,842 $218,496 $367,338
Multi-family............................... 162 6,063 6,225
Home equity loans.......................... 28,109 -- 28,109
Commercial real estate..................... 24,400 3,910 28,310
Other loans................................ 3,225 -- 3,225
-------- -------- --------
Total loans receivable....................... 204,738 228,469 433,207
Mortgage-backed securities(1)................ 125,405 221,709 347,114
-------- -------- --------
Total loans receivable and
mortgage-backed securities.................. $330,143 $450,178 $780,321
======== ======== ========
</TABLE>
___________________________________________
(1) Includes $122.0 million in mortgage-backed securities available for sale, at
amortized cost.
One- to Four-Family Mortgage Loans. The Bank offers fixed- and adjustable-
rate first mortgage loans secured by one- to four-family residences in New
Jersey. Typically, such residences are single family homes that serve as the
primary residence of the owner. Loan originations are generally obtained from
existing or past customers, members of the local community, and referrals from
attorneys, established builders, and realtors within the Bank's market area. In
addition, one- to four-family residential mortgage loans are also originated in
the Bank's market area through loan originators who are employees of the Bank
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<PAGE>
and are compensated on a commission basis. Originated mortgage loans in the
Bank's portfolio include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event that
the borrower transfers ownership of the property without the Bank's consent.
At September 30, 1997, 81.8% of total loans receivable consisted of one-to
four-family residential loans. The Bank currently offers ARM loans, with an
initial fixed rate for one, three, five, seven or ten year periods, which it
then converts into a one-year ARM. The Bank's ARM loans may carry an initial
interest rate which is less than the fully-indexed rate for the loan. The
initial discounted rate is determined by the Bank in accordance with market and
competitive factors. The majority of the Bank's ARM loans adjust by a maximum of
2.00% per year, with a lifetime cap on increases of up to 6.00%. ARM loans are
originated for a term of up to 30 years. In the past, the Bank offered three
year ARM loans that reset every three years at a margin over the three year U.S.
Treasury Index. Interest rates charged on fixed-rate loans are competitively
priced based on market conditions and the Bank's cost of funds. The Bank's
fixed-rate mortgage loans currently are made for terms of 10 through 30 years.
In previous years, the Bank offered balloon mortgages of five and seven years.
Generally, ARM loans pose credit risks different than risks inherent in
fixed-rate loans, primarily because as interest rates rise, the payments of the
borrower rise, thereby increasing the potential for delinquency and default. At
the same time, the marketability of the underlying property may be adversely
affected by higher interest rates. In order to minimize risks, borrowers of one-
year ARM loans are qualified at the starting interest rate plus 2.00% or the
fully-indexed rate, whichever is lower. The Bank does not originate ARM loans
which provide for negative amortization. At present, the Bank offers Limited
Documentation loans that do not require income verification but do require full
asset verification.
The Bank generally originates one- to four-family residential mortgage
loans in amounts up to 95% of the appraised value or selling price of the
mortgaged property, whichever is lower. The Bank requires private mortgage
insurance for all loans originated with loan-to-value ratios exceeding 80%.
Generally, the minimum one- to four-family loan amount is $25,000, and the
maximum loan amount is $500,000. The Bank typically charges an origination fee
of up to 3.00% on one- to four-family residential loans.
Home Equity Loans and Lines of Credit. The Bank originates home equity
loans secured by one- to four-family residences. These loans generally are
originated as fixed-rate loans with terms from five to 15 years. Home equity
loans are primarily made on owner-occupied, one- to four-family residences and
primarily to the Bank's first mortgage customers. These loans are generally
subject to a 80% loan-to-value limitation, including any other outstanding
mortgages or liens where the first mortgage lien is held by the Bank, and 75% on
all other loans. The Bank currently offers home equity loans for qualified
borrowers with a loan-to-value ratio of up to 90%. The Bank obtains private
mortgage insurance for some of these types of loans, depending on the
underwriting and first lien position. The Bank is currently offering "Helping
Hand" home equity loans for low income borrowers, with maximum terms of five
years, with loan-to-value ratios of up to 90% and a maximum loan amount of
$10,000. Generally, the Bank's minimum equity loan is $5,000 and the maximum
equity loan is $200,000. As of September 30, 1997, the Bank had $28.2 million in
fixed-rate home equity loans outstanding.
The Bank also offers a variable rate home equity line of credit which
extends a credit line based on the applicant's income and equity in the home.
Generally, the credit line, when combined with the balance of the first mortgage
lien, may not exceed 80% of the appraised value of the property at the time of
the loan commitment where the first mortgage lien is held by the Bank, and 75%
on all other loans. Home equity lines of credit are secured by a mortgage on the
underlying real estate. The Bank presently charges no origination fees for these
loans. A borrower is required to make monthly payments of principal and
interest,
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<PAGE>
at a minimum of $100.00 plus interest, based upon a 15 or 20 year amortization
period. Generally, the interest rate charged is the prime rate of interest (as
published in The Wall Street Journal) plus up to 2.0%. The loans have a 6.0%
lifetime cap on the amount the interest rate may increase. During 1996, the Bank
introduced a credit line product which is based on a 10 year amortization and
the interest rate charged is the prime rate of interest. These loans also have a
6.0% lifetime cap. The Bank offers a teaser-rate on both home equity line of
credit products. The Bank's home equity lines of credit outstanding at September
30, 1997 totalled $13.7 million against total available credit lines of $14.3
million.
Construction Lending. At September 30, 1997, construction loans totalled
$18.3 million, or 3.2%, of the Bank's total loans outstanding. Construction
loans, in the form of lines of credit, are primarily made to developers known by
the Bank. Available credit lines totalled $26.2 million at September 30, 1997.
The current policy of the Bank is to charge interest rates on its construction
loans which float at margins of up to 2.0% above the prime rate (as published in
The Wall Street Journal). The Bank's construction loans improve the interest
rate sensitivity of its earning assets. The Bank's construction loans typically
have original principal balances that are larger than its one- to four-family
mortgage loans, with the majority of the loans ranging from available lines of
credit of $125,000 to $6.2 million. At September 30, 1997, the Bank had 21
construction loans, six of which had a principal balance outstanding of $1.0
million or more, with the largest loan balance being $4.5 million. At September
30, 1997, all of the Bank's construction lending portfolio consisted of loans
secured by property located in the State of New Jersey, for the purpose of
constructing one- to four-family homes.
The Bank will originate construction loans on unimproved land in amounts up
to 60% of the lower of the appraised value or the cost of the land. The Bank
also originates loans for site improvements and construction costs in amounts up
to 75% of actual costs or sales price where contracts for sale have been
executed. Generally, construction loans are offered for one year terms with up
to four six-month options to extend the original term. Typically, additional
loan origination fees are charged for each extension granted, although in some
cases these fees have been waived. The Bank requires an appraisal of the
property, credit reports, and financial statements on all principals and
guarantors, among other items, on all construction loans.
Construction lending, by its nature, entails additional risks as compared
with one- to four-family mortgage lending, attributable primarily to the fact
that funds are advanced upon the security of the project under construction
prior to its completion. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent on the success of the
ultimate project and the ability of the borrower or guarantor to repay the loan.
Because of these factors, the analysis of prospective construction loan projects
requires an expertise that is different in significant respects from that which
is required for residential mortgage lending. The Bank addresses these risks
through its underwriting procedures. At September 30, 1997, none of the Bank's
construction loans were classified as substandard. See "-- Delinquencies and
Classified Assets - Non-performing Assets" for further discussion.
Commercial Real Estate. At September 30, 1997, the Bank had 53 loans
secured by commercial real estate, totalling $31.6 million, or 5.5%, of the
Bank's total loan portfolio. Commercial real estate loans are generally
originated in amounts up to 70% of the appraised value of the mortgaged
property. The Bank's commercial real estate loans are permanent loans secured by
improved property such as office buildings, retail stores, including small
shopping centers, medical offices, small industrial facilities, warehouses and
other non-residential buildings. The largest commercial real estate loan at
September 30, 1997 was a participation loan originated in 1995 on a medical arts
building with a balance of $3.8 million at that date. All commercial real estate
loans in portfolio are secured by properties located within New Jersey.
68
<PAGE>
The Bank's commercial real estate loans are generally made for terms of up
to 15 years. These loans typically are based upon a payout over a period of 10
to 25 years. To originate commercial real estate loans, the Bank requires a
security interest in personal property, standby assignment of rents and leases
and some level of personal guarantees, if possible. The Bank has established its
loan-to-one borrower limitation, which was $13.5 million as of September 30,
1997, as its maximum commercial real estate loan amount.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject, to a greater extent, to adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks by
limiting the number of such loans, lending only to established customers and
borrowers otherwise known or recommended to the Bank, generally restricting such
loans to New Jersey, and obtaining personal guarantees, if possible.
Multi-Family Mortgage Loans. The Bank originates multi-family mortgage
loans in its primary lending area. As of September 30, 1997, $6.2 million, or
1.1%, of the Bank's total loan portfolio consisted of multi-family residential
loans. Substantially all of the Bank's multi-family loan portfolio is comprised
of loans on garden apartments and participations in senior citizen homes with
the Thrift Institutions Community Investment Corp ("TICIC"). The largest multi-
family loan at September 30, 1997 had an outstanding balance of $1.9 million.
The second largest multi-family loan at that date had an outstanding balance of
$1.4 million. Large multi-family loans, such as these two loans, are originated
on the basis of the Bank's underwriting standards for commercial real estate
loans. The Bank also participates with other savings institutions to provide
financing for projects within the state of New Jersey via the TICIC. The Bank
has four participation loans outstanding with the TICIC at September 30, 1997,
totaling $2.2 million, which are secured by four senior citizen complexes and
one garden apartment complex.
Other Lending. The Bank also offers other loans, primarily loans secured by
savings accounts and commercial, business, personal and automobile loans. At
September 30, 1997, $6.2 million or 1.1% of the loan portfolio consisted of such
other loans.
Loan Approval Authority and Underwriting. All loans secured by real estate
must have the approval or ratification of the members of the Loan Committee,
which consists of two directors and at least two senior officers engaged in the
lending area. The Loan Committee meets at least monthly to review and ratify
management's approval of loans made within the scope of its authority since the
last committee meeting, and to approve mortgage loans made in the excess of
$750,000, but not greater than $1.0 million. Real estate loans in excess of $1.0
million require prior Board approval. Prior Board approval is also required for
the origination of consumer and business loans in excess of $100,000 for
unsecured loans, and $500,000 for secured loans.
One- to four-family residential mortgage loans are generally underwritten
according to Freddie Mac guidelines, except as to loan amount and certain
documentation. For all loans originated by the Bank, upon receipt of a completed
loan application from a prospective borrower, a credit report is then requested,
income, assets and certain other information are verified and, if necessary,
additional financial information is requested. An appraisal of the real estate
intended to secure the proposed loan is required, which is currently performed
by appraisers designated and approved by the Board of Directors. It is the
Bank's policy to obtain appropriate insurance protections, including title and
flood insurance, on all real estate first mortgage loans. Borrowers must also
obtain hazard insurance prior to closing. Borrowers generally are required to
advance funds for certain items such as real estate taxes, flood insurance and
private mortgage insurance, when applicable.
69
<PAGE>
Loan Servicing. The Bank generally retains the servicing rights on loans it
has sold. The Bank receives fees for these servicing activities, which include
collecting and remitting loan payments, inspecting the properties and making
certain insurance and tax payments on behalf of the borrowers. The Bank was
servicing $94.5 million and $101.2 million of mortgage loans for others at
September 30, 1997 and December 31, 1996, respectively. The Bank received
$218,000 and $325,000 in servicing fees for the nine months ended September 30,
1997 and the year ended December 31, 1996, respectively.
Loan Purchases and Sales. The Bank is a Freddie Mac qualified servicer in
good standing, and may sell any of its conforming loans originated, subject to
Freddie Mac requirements, and retain the servicing rights. As a part its
asset/liability management, the Bank will sell loans, on occasion, in order to
reduce or minimize potential interest rate and credit risk. To account for such
sales, the Bank has established an available for sale category and carries loans
available for sale at the lower of cost or market. As of September 30, 1997, the
Bank did not have any mortgage loans classified as available for sale. Mortgage
loans sold totalled $3.0 million and $6.2 million for the nine months ended
September 30, 1997 and the year ended December 31, 1996, respectively. From time
to time, the Bank may also purchase mortgage loans in order to maintain stable
interest income, if and when management believes it is prudent to do so. The
Bank purchased $4.7 million and $10.1 million in mortgage loans from third-party
corespondents for the nine months ended September 30, 1997 and the year ended
December 31, 1996, respectively. The Bank underwrote the loans and verified
documentation prior to purchase and has representations and warranties on same
for a one year period, including repayment of remaining premiums if a loan
prepays within the first 12 months.
DELINQUENCIES AND CLASSIFIED ASSETS
Delinquent Loans. In the late 1980s and early 1990s, the Bank experienced
an increase in loans delinquent 90 days or more. The increase occurred primarily
with single family residential loans, which the Bank attributes, in large part,
to the decline in economic conditions in the Northeast, the weakness of the New
Jersey real estate market and the national recession. Since 1992, delinquent
loans have decreased, due to an improving economy and continued stabilization of
the New Jersey real estate market. The aggregate principal balances of one- to
four-family loans delinquent 90 days or more had declined to $3.9 million, at
September 30, 1997, from $4.6 million at September 30, 1996. At September 30,
1997, one-to four- family loans delinquent 90 days or more consisted of 42
loans. There can be no assurances, however, that such declines will continue, or
that increases will not occur.
70
<PAGE>
The following table sets forth information regarding loans and loans
delinquent 90 days or more, and REO. At September 30, 1997, REO totaled $1.4
million and consisted of 14 properties. It is the policy of the Bank to cease
accruing interest on loans 90 days or more past due with loan-to-value ratios in
excess of 55% and to charge off all accrued interest. For the nine months ended
September 30, 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 $198,000.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------ -----------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ------------ ----------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual mortgage loans.......... $3,547 $4,538 $4,716 $5,838 $ 8,636 $10,631 $14,564
Non-accrual other loans............. 14 6 4 -- 160 453 150
------ ------ ------ ------ ------- ------- -------
Total non-accrual loans........ 3,561 4,544 4,720 5,838 8,796 11,084 14,714
------ ------ ------ ------ ------- ------- -------
Loans 90 days or more delinquent.... 379 72 93 200 248 463 1,120
and still accruing............. ------ ------ ------ ------ ------- ------- -------
Total non-performing loans........ 3,940 4,616 4,813 6,038 9,044 11,547 15,834
------ ------ ------ ------ ------- ------- -------
Total real estate owned, net of... 1,398 1,918 1,517 3,131 1,633 2,039 1,282
related allowance for loss.... ------ ------ ------ ------ ------- ------- -------
Total non-performing assets......... $5,338 $6,534 $6,330 $9,169 $10,677 $13,586 $17,116
====== ====== ====== ====== ======= ======= =======
Non-performing loans to
total loans receivable, net.... 0.69% 0.93% 0.94% 1.32% 2.17% 2.77% 3.81%
Total non-performing assets to
total assets....................... 0.51% 0.67% 0.64% 0.97% 1.34% 1.73% 2.25%
</TABLE>
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 Bank 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 days past due are classified
substandard, doubtful, or loss.
71
<PAGE>
The following table sets forth the aggregate amount of the Bank's special
mention and classified assets at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
---------------------- ------------------------------
1997 1996 1996 1995 1994
----------- ---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Special mention............. $ 811 $ 242 $ 290 $1,348 $ 747
Substandard assets.......... 5,720 6,983 6,037 6,287 10,117
Doubtful assets............. 121 181 167 253 78
------ ------ ------ ------ -------
Total special mention and
classified assets.....
$6,652 $7,406 $6,494 $7,888 $10,942
====== ====== ====== ====== =======
</TABLE>
As of September 30, 1997, the Bank had no single special mention or
classified asset with a balance of greater than $240,000.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in its loan portfolio, review of individual loans for adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and consideration of current economic conditions. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers the fair value of the underlying
collateral, economic conditions, historical loan loss experience, and other
factors that warrant recognition in providing for an adequate loan loss
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses and valuation of real estate owned. 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.
The Bank provided $900,000 and $375,000 in provision for loan losses for
the nine months ended September 30, 1997 and 1996, respectively. The Bank
provided $550,000 to the allowance for loan losses for 1996, compared with
$310,000 in 1995. The Bank determined, after performing its asset classification
review, that the allowance was adequate and within industry standards. At
September 30, 1997, the total allowance was $6.0 million, which amounted to 1.1%
of total loans receivable, net and 112.1% of nonperforming assets. Management
will continue to maintain an allowance for loan losses consistent with
regulatory expectations for non-performing assets, and will also adhere to the
Bank's policy of evaluating the risks inherent in its loan portfolio and the New
Jersey economy. The Bank will continue to monitor the level of its allowance for
loan losses in order to maintain it at a level which management considers
adequate to provide for potential loan losses.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- ------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- ---------- --------------- -------------- ------------ ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period............ $5,322 $5,247 $5,247 $ 5,745 $5,899 $ 5,751 $3,865
Provision for loan losses................. 900 375 550 310 300 1,200 2,400
Charge-offs............................... (240) (534) (585) (1,044) (490) (1,087) (520)
Recoveries................................ -- 3 110 236 36 35 6
------ ------ ------ ------- ------ ------- ------
Balance at end of period.................. $5,982 $5,091 $5,322 $ 5,247 $5,745 $ 5,899 $5,751
====== ====== ====== ======= ====== ======= ======
</TABLE>
72
<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 SEPTEMBER 30,
---------------------------------------------------------------------------------
1997 1996
--------------------------------------- -------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ----------- ---------- -------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One-to four-family.............................. $3,592 60.05% 81.82% $3,465 68.06% 83.35%
Home equity loans............................... 442 7.39 7.31 310 6.09 7.73
Construction.................................... 791 13.22 3.19 597 11.73 2.49
Commercial real estate.......................... 540 9.03 5.51 322 6.32 4.25
Multi-family.................................... 64 1.07 1.09 89 1.75 1.18
Total mortgage loans........................ 5,429 90.76 98.92 4,783 93.95 99.00
Consumer loans.................................. 192 3.21 1.08 157 3.09 1.00
Other........................................... 64 1.07 -- 16 0.31 --
Unallocated..................................... 297 4.96 -- 135 2.65 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses.......... $5,982 100.00% 100.00% $5,091 100.00% 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
DECEMBER 31,
----------------------------------------
1996
---------------------------------------
PERCENT
OF LOANS
PERCENT OF IN EACH
ALLOWANCE CATEGORY
TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS
-------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
One-to four-family.............................. $3,641 68.42% 83.14%
Home equity loans............................... 437 8.21 7.60
Construction.................................... 577 10.84 2.50
Commercial real estate.......................... 347 6.52 4.11
Multi-family.................................... 89 1.67 1.53
Total mortgage loans........................ 5,091 95.66 98.88
Consumer loans.................................. 174 3.27 1.12
Other........................................... 13 0.24 --
Unallocated..................................... 44 0.83 --
------ ------ ------
Total allowance for loan losses.......... $5,322 100.00% 100.00%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- -------------------------------- ----------------------------------
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
-------- ----------- ---------- -------- ----------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........ $3,842 73.22% 84.20% $4,408 76.73% 85.98% $4,238 71.84% 86.56%
Home equity loans.......... 348 6.63 7.21 301 5.24 7.28 219 3.71 6.53
Construction............... 301 5.74 1.64 181 3.15 0.75 566 9.59 0.92
Commercial real estate..... 173 3.30 3.73 100 1.74 3.16 44 0.75 2.96
Multi-family............... 97 1.85 2.09 55 0.96 1.84 26 0.44 1.73
A.I.D...................... -- -- 0.04 -- -- 0.04 -- -- 0.05
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans..... 4,761 90.74 98.91 5,045 87.82 99.05 5,093 86.33 98.75
Consumer loans............. 147 2.80 1.09 208 3.62 0.95 263 4.46 1.25
Other...................... 49 0.93 -- 14 0.24 -- 145 2.46 --
Unallocated................ 290 5.53 -- 478 8.32 -- 398 6.75 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses......... $5,247 100.00% 100.00% $5,745 100.00% 100.00% $5,899 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
---------------------------------
1992
---------------------------------
PERCENT
OF LOANS
PERCENT OF IN EACH
ALLOWANCE CATEGORY
TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS
-------- ----------- ----------
<S> <C> <C> <C>
One- to four-family........ $4,148 72.13% 87.30%
Home equity loans....... 201 3.50 6.07
Construction............... 661 11.49 1.30
Commercial real estate..... 30 0.52 2.02
Multi-family............... 26 0.45 1.75
A.I.D...................... -- -- 0.05
------ ----- -----
Total mortgage loans..... 5,066 88.09 98.49
Consumer loans............. 217 3.77 1.51
Other...................... 135 2.35 --
Unallocated................ 333 5.79 --
------ ----- -----
Total allowance for
loan losses......... $5,751 100.00% 100.00%
====== ====== ======
</TABLE>
73
<PAGE>
INVESTMENT ACTIVITIES
The Investment Policy of the Bank, which is established by the Board of
Directors and reviewed by the Investment Committee, is designed primarily to
provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk and to complement the
Bank's lending activities. The Policy currently provides for investment,
available for sale and trading portfolios. In order to enhance the Bank's
liquidity and flexibility, total return, or minimize interest rate risk,
securities may be acquired for the available for sale portfolio. 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. Investment 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. At September 30, 1997, the Bank had investment securities held
to maturity in the aggregate amount of $41.0 million, with a market value of
$41.1 million.
New Jersey state-chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and loans on federal funds. Subject to various
restrictions, state-chartered savings institutions may also invest a portion of
their assets in commercial paper, corporate debt securities and asset-backed
securities.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
"Special Report -- A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which provided the Bank with
an opportunity to reassess the appropriateness of the classifications of all its
securities, and on December 15, 1995, the Bank reclassified $13.0 million in
amortized cost of investment securities from held to maturity to available for
sale. At September 30, 1997, investment securities available for sale had a net
unrealized loss of $27,000.
INVESTMENTS AVAILABLE FOR SALE. The Bank maintains a portfolio of
investments available for sale to reduce interest rate and market value risk.
These investments, designated as available for sale at purchase, are marked to
market in accordance with SFAS No. 115. The Bank's Investment Policy designates
what type of securities may be contained in the available for sale portfolio.
This portfolio of available for sale investments is reviewed and priced at least
monthly. As of September 30, 1997, the market value of investment securities
available for sale was $18.0 million, with an amortized cost basis of $18.1
million, and was composed of U.S. Treasury and agencies securities, and
corporate debt obligations. The available for sale portfolio had a weighted
average contractual maturity of 4.75 years. A substantial portion of the
investment portfolio is comprised of callable agency notes, which have a variety
of call options available to the issuer at predetermined dates. The investment
portfolio's yield is enhanced by the addition of callable agency notes, due to
the issuer's flexibility in repricing their funding source, while creating
reinvestment risk to the Bank. At September 30, 1997, $52.0 million, or 88.2% of
the total investment portfolio, including securities available for sale, were
callable.
74
<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 SEPTEMBER 30, AT DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994
-------------------- -------------------- -------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and agency
obligations.............................. $40,959 $41,108 $38,955 $38,980 $39,003 $39,617 $23,997 $22,774
======= ======= ======= ======= ======= ======= ======= =======
Investment securities available for sale:
U.S. Government and agency
obligations.............................. $13,972 $13,943 $12,964 $12,836 $ 1,000 $ 996 $13,884 $13,206
Corporate obligations..................... 4,079 4,081 2,000 1,995 1,041 1,062 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities
available-for-sale........................ $18,051 $18,024 $14,964 $14,831 $ 2,041 $ 2,058 $13,884 $13,206
======= ======= ======= ======= ======= ======= ======= =======
Other interest-earning investments:
Federal funds sold......................... $17,925 $17,925 $ 1,850 $ 1,850 $17,875 $17,875 $ 4,375 $ 4,375
FHLB-NY stock.............................. 8,045 8,045 7,428 7,428 6,276 6,276 5,691 5,691
------- ------- ------- ------- ------- ------- ------- -------
Total other interest-earning investments... $25,970 $25,970 $ 9,278 $ 9,278 $24,151 $24,151 $10,066 $10,066
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
75
<PAGE>
The table below sets forth certain information regarding the contractual
maturities, amortized costs, market values and weighted average yields for the
Bank's investment portfolio at September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
------------------------ ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held
to maturity:
U.S. Government and Agency
obligations.................... $ -- --% $14,991 6.81% $19,972 7.31%
------- ------ ------- ------ ------- ------
Total investment securities
held to maturity............... $ -- --% $14,991 6.81% $19,972 7.31%
======= ====== ======= ====== ======= ======
Investment securities
available for sale:
U.S. Government and Agency
obligations.................... $ -- --% $10,972 6.11% $ 3,000 6.75%
Corporate obligations............ -- -- 2,000 5.95 2,079 6.15
------- ------ ------- ------ ------- ------
Total investment securities
available for sale............. $ -- --% $12,972 6.09% $ 5,079 6.51%
======= ====== ======= ====== ======= ======
Other interest-earning investments:
Federal funds sold............... $17,925 5.79% $ -- --% $ -- --%
FHLB-NY stock (1)................ 8,045 6.75 -- -- -- --
------- ------ ------- ------ ------- ------
Total other interest-earning
investments.................... $25,970 6.09% $ -- --% $ -- --%
======= ====== ======= ====== ======= ======
<CAPTION>
----------------------------------------------------------------
MORE THAN TEN YEARS TOTAL
------------------------ ------------------------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST VALUE YIELD
----------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Investment securities held
to maturity:
U.S. Government and Agency
obligations.................... $5,996 8.02% $40,959 $41,108 7.23%
------ ------ ------- ------- ------
Total investment securities
held to maturity............... $5,996 8.02% $40,959 $41,108 7.23%
====== ====== ======= ======= ======
Investment securities
available for sale:
U.S. Government and Agency
obligations.................... $ -- --% $13,972 $13,943 6.25%
Corporate obligations............ -- -- 4,079 4,081 6.05
------ ------ ------- ------- ------
Total investment securities
available for sale............. $ -- --% $18,051 $18,024 620%
====== ====== ======= ======= ======
Other interest-earning investments:
Federal funds sold............... $ -- --% $17,925 $17,925 5.79%
FHLB-NY stock (1)................ -- -- 8,045 8,045 6.75
------ ------ ------- ------- ------
Total other interest-earning
investments.................... $ -- --% $25,970 $25,970 6.09%
====== ====== ======= ======= ======
</TABLE>
____________________
(1) FHLB-NY stock does not have a stated maturity.
76
<PAGE>
SOURCES OF FUNDS
General. The Bank's primary source of funds are deposits; proceeds from
principal and interest payments on loans and mortgage-backed securities; sales
of loans, mortgage-backed securities and investments available for sale;
maturities of investment securities and short-term investment; and, to an
increasing extent, advances from the FHLB-NY, reverse repurchase agreements and
other borrowed funds.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits principally consist of fixed-term
certificates, passbook savings, money market, Individual Retirement Accounts
("IRAs") and Negotiable Order of Withdrawal ("NOW") accounts. The flow of
deposits is significantly influenced by general economic conditions, changes in
money market and prevailing interest rates and competition. The Bank's deposits
are typically obtained from the areas in which its offices are located. The Bank
relies primarily on customer service and long-standing relationships to attract
and retain these deposits. At September 30, 1997, $121.9 million of the Bank's
deposit balance consisted of IRAs. Also at that date, $76.5 million, or 9.45%,
of the Bank's deposit balance consisted of deposit accounts with a balance
greater than $100,000. The Bank does not currently accept brokered
deposits.
The Bank seeks to maintain a high level of stable core deposits by
providing convenient and high quality service through its extended branch
network. To further this objective, the Bank acquired six branch offices from
the RTC in 1991 for a deposit premium of $509,000, which was written off in
1996. Of those six offices, the Bank continues to operate four of the offices,
and transferred the deposits of the other two offices into existing First
Savings branches. During October 1997, the Bank entered into an agreement to
sell its Eatontown branch, with the transfer of deposit liabilities and physical
branch location scheduled for late February 1998. The Bank acquired two
additional branches from the RTC in 1995 with deposits of approximately $112.8
million for a premium of $12.6 million. The Bank's strategy was to strengthen
its market area within Middlesex County, and to provide better service to those
communities within which these branches reside. During the years 1995 and 1994,
the Bank's deposit base grew $11.9 million and $2.7 million, respectively,
excluding the $112.8 million in deposits acquired in 1995. The percentage
increase for those periods was 1.7% and 0.4%, respectively. During 1996,
deposits decreased $11.7 million, or 1.5%, to $794.6 million. The decrease was
due to increased competition and premium interest rates being paid by other
institutions. For the nine months ended September 30, 1997, deposits increased
$14.9 million, or 1.9%, due to partial retention of interest credited.
77
<PAGE>
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------------------------------
1997 1996 1996 1995 1994
--------- --------- ---------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits....................................... $ 1,234,631 $ 1,197,644 $ 1,672,325 $ 1,374,946 $ 1,295,191
Withdrawals.................................... (1,245,329) (1,229,251) (1,718,034) (1,396,632) (1,316,030)
Deposits acquired in purchase(1)............... -- -- -- 112,785 --
----------- ----------- ----------- ----------- -----------
Withdrawals less than (in excess of) deposits.. (10,698) (31,607) (45,709) 91,099 (20,839)
Interest credited.............................. 25,552 25,710 33,966 33,626 23,491
----------- ----------- ----------- ----------- -----------
Total increase (decrease) in deposits.......... $ 14,854 $ (5,897) $ (11,743) $ 124,725 $ 2,652
=========== =========== =========== =========== ===========
</TABLE>
_______________________
(1) Purchase of deposits from the Resolution Trust Corporation.
The following table presents by various categories, the amount of
certificate accounts outstanding at September 30, 1997 and 1996, and the time to
maturity of the certificate accounts outstanding at September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, MATURITY AT SEPTEMBER 30, 1997
--------------------------- ------------------------------------------------------
WITHIN ONE THROUGH
1997 1996 ONE YEAR THREE YEARS THEREAFTER TOTAL
---------- ------------ ------------ --------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less.............. $ 2,800 $ 3,448 $ 2,800 $ -- $ -- $ 2,800
4.00% to 4.49%............. 91 16,242 91 -- -- 91
4.50% to 4.99%............. 21,879 153,445 18,687 3,192 -- 21,879
5.00% to 5.49%............. 252,318 156,071 239,457 6,414 6,447 252,318
5.50% to 5.99%............. 123,762 44,162 70,659 38,693 14,410 123,762
6.00% to 6.49%............. 23,056 35,379 3,107 4,990 14,959 23,056
6.50% to 6.99%............. 34,628 49,583 10,288 12,698 11,642 34,628
7.00% to 7.49%............. 2,594 2,702 2,486 -- 108 2,594
7.50% to 7.99%............. 2,890 2,837 341 1,232 1,317 2,890
8.00% and greater.......... 634 656 388 246 -- 634
-------- -------- -------- ------- ------- --------
Total.................... $464,652 $464,525 $348,304 $67,465 $48,883 $464,652
======== ======== ======== ======= ======= ========
</TABLE>
78
<PAGE>
At September 30, 1997, the Bank had $45.3 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
------------------------------------- ------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Three months or less............. $ 8,328
Over 3 through 6 months.......... 6,673
Over 6 through 12 months......... 20,239
Over 12 months .................. 10,101
-------
Total...................... $45,341
=======
</TABLE>
79
<PAGE>
The following table sets forth the distribution of the Bank's average
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 1996 1995
----------------------------------- ------------------------------------- -----------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS
--------- ----------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand.... $ 21,109 2.62% --% $ 19,491 2.42% --% $ 16,610 2.10
Money market accounts.......... 134,681 16.71 3.30 124,097 15.40 3.28 129,426 16.37
Savings accounts............... 129,334 16.04 2.54 139,045 17.26 2.53 140,122 17.73
NOW accounts................... 57,077 7.08 1.90 54,079 6.71 1.96 50,552 6.40
-------- ------ -------- ------ -------- ------
Total.................... 342,201 42.45 2.56 336,712 41.79 2.57 336,710 42.60
-------- ------ -------- ------ -------- ------
Certificate accounts(1):
Less than six months...... 143,604 17.81 5.05 142,332 17.67 4.85 128,984 16.32
Over 6 through 12 months.. 167,818 20.82 5.32 166,356 20.65 5.34 157,267 19.90
Over 12 through 36 months. 54,425 6.75 5.74 59,192 7.35 5.65 67,921 8.59
Over 36 months............ 98,092 12.17 6.05 101,014 12.54 6.16 99,483 12.59
-------- ------ -------- ----- -------- ------
Total certificate
accounts................ 463,939 57.55 5.42 468,894 58.21 5.39 453,655 57.40
-------- ------ -------- ------ -------- ------
Total average
deposits................ $806,140 100.00% 4.21 $805,606 100.00% 4.22 $790,365 100.00
======== ====== ======== ======= ======== ======
<CAPTION>
1994
------------------------------------------
PERCENT
WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
RATE BALANCE DEPOSITS RATE
-------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Non-interest bearing demand.... --% $ 14,002 2.04 --%
Money market accounts.......... 3.20 124,917 18.17 2.79
Savings accounts............... 2.55 143,738 20.91 2.51
NOW accounts................... 1.89 43,251 6.29 2.00
-------- ------
Total.................... 2.57 325,908 47.41 2.44
-------- ------
Certificate accounts(1):
Less than six months...... 5.05 110,320 16.04 3.26
Over 6 through 12 months.. 5.51 110,130 16.02 3.70
Over 12 through 36 months. 5.22 52,264 7.60 4.64
Over 36 months............ 6.41 88,875 12.93 6.43
-------- ------
Total certificate
accounts................ 5.53 361,589 52.59 4.35
-------- ------
Total average
deposits................ 4.27 $687,497 100.00% 3.46
======== ======
</TABLE>
80
<PAGE>
BORROWINGS
The Bank's policy has been to utilize borrowings as an alternative and/or
less costly source of funds. The Bank obtains advances from the FHLB-NY, which
are collateralized by the capital stock of the FHLB-NY held by the Bank, and
certain mortgage loans and mortgage-backed securities of the Bank. The Bank also
borrows funds via reverse repurchase agreements with the FHLB-NY and primary
broker/dealers. Advances from the FHLB-NY are made pursuant to several different
credit programs, each of which has its own interest rate and maturity. The
maximum amount that the FHLB-NY will advance to member institutions, including
the Bank, for purposes of other than meeting withdrawals, fluctuates from time
to time in accordance with the policies of the FHLB-NY and the OTS. The maximum
amount of FHLB-NY advances permitted to a member institution generally is
reduced by borrowings from any other source. At September 30, 1997, the Bank's
FHLB-NY advances totalled $33.0 million, representing 3.5% of total liabilities.
During 1997, the Bank continued to borrow funds from primary
broker/dealers. The borrowings are collateralized by designated mortgage-backed
and investment securities. The total of these borrowings at September 30, 1997
was $90.9 million, representing 9.6% of total liabilities. The Bank has the
right to freely substitute collateral as long as the margin is at least 95% of
all outstanding borrowings, including accrued interest.
The Bank also has an available overnight line-of-credit with the FHLB-NY
for a maximum of $48.9 million. The fee for the line-of-credit for the nine
months ended September 30, 1997 was $500. The Bank may continue to increase
borrowings in the future to fund asset growth. To the extent it does so, the
Bank may experience an increase in its cost of funds.
The Bank, as part of the 1992 MHC Reorganization, established, for eligible
employees, an ESOP which became effective at completion of the 1992 MHC
Reorganization. As part of the initial minority stock offering conducted in
connection with the 1992 MHC Reorganization, the Bank's ESOP borrowed funds
totalling $700,000 from an unrelated third party lender and used the funds to
purchase 7%, or 70,000 shares, of the common stock issued in the offering. On
September 30, 1994, the third party lender was repaid by the Mutual Holding
Company, which refinanced the ESOP loan at the same interest rate. The ESOP debt
as of September 30, 1997 and December 31, 1996 and 1995, was $571,000, $646,000
and $746,000, respectively, and bears an interest rate equal to the prime rate
less 1.50%, as published in The Wall Street Journal, with principal and interest
payable in quarterly installments over a ten-year period. During the nine months
ended September 30, 1997, and the year ended December 31, 1996, $25,000 of
dividends paid on ESOP shares during each of the periods was used to pay down
ESOP debt. Total interest paid on ESOP debt for the nine months ended September
30, 1997 and 1996, was $33,000 and $37,000, respectively, and for the years
ended December 31, 1996, 1995 and 1994 was $48,000, $41,000 and $26,000,
respectively. In July 1995, the Bank completed its 1995 Secondary Offering,
whereby the ESOP purchased an additional 42,000 shares of Common Stock at $13
per share, totalling $546,000. The funds to purchase those shares were borrowed
from the Mutual Holding Company. The borrowing is currently secured by 80,102
shares of the Bank's Common Stock, as adjusted for the 10% stock dividend
declared on September 24, 1997.
Upon consummation of the Conversion and Reorganization, it is expected that
the Mutual Holding Company's loan to the ESOP will be assumed by the Company,
and that the Company will lend additional funds to the ESOP to enable it to
acquire 8% of the Conversion Stock. See "Management of the Bank--Executive
Compensation--Employee Stock Ownership Plan."
81
<PAGE>
The following table sets forth certain information regarding the Bank's borrowed
fundson the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------------------ -----------------------------
1997 1996 1996 1995 1994
-------------- ------------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB-NY advances:
Average balance outstanding........................... $ 36,200 $19,400 $21,846 $21,231 $29,538
Maximum amount outstanding at any
month-end during the period........................ 40,000 22,000 30,000 34,000 37,000
Balance outstanding at end of period.................. 33,000 20,000 30,000 19,000 34,000
Weighted average interest rate during the period...... 6.18% 6.18% 6.13% 5.72% 4.74%
Weighted average interest rate at end of period....... 6.06% 6.17% 6.06% 6.13% 5.22%
Repurchase agreements:
Average balance outstanding........................... $ 74,138 $26,862 $32,691 $11,834 $ --
Maximum amount outstanding at any
month-end during the period......................... 90,894 49,437 57,994 24,864 --
Balance outstanding at end of period.................. 90,894 49,437 57,994 19,750 --
Weighted average interest rate during the period...... 6.14% 5.91% 6.05% 6.50% --%
Weighted average interest rate at end of period....... 5.94% 6.04% 6.02% 6.13% --%
ESOP debt:
Average balance outstanding......................... $ 616 $ 716 $ 704 $ 510 $ 358
Maximum amount outstanding at any
month-end during the period ...................... 646 746 746 796 400
Balance outstanding at end of period.................. 571 671 646 746 300
Weighted average interest rate during the period...... 7.03% 6.84% 7.74% 8.08% 7.25%
Weighted average interest rate at end of period....... 7.00% 6.75% 6.75% 7.00% 8.50%
Total borrowings:
Average balance outstanding......................... $110,954 $46,978 $55,241 $33,575 $29,896
Maximum amount outstanding at any
month-end during the period ...................... 124,465 70,108 88,640 59,661 37,325
Balance outstanding at end of period.................. 124,465 70,108 88,640 39,496 34,300
Weighted average interest rate during the period...... 6.16% 6.05% 6.10% 6.06% 4.82%
Weighted average interest rate at end of period....... 5.98% 6.08% 6.04% 6.15% 5.24%
</TABLE>
82
<PAGE>
SUBSIDIARY ACTIVITIES
FSB FINANCIAL CORP. FSB Financial Corp. is a wholly-owned subsidiary of the
Bank and provides a line of fixed and variable rate annuity products, along with
mutual funds and term life insurance. For the nine months ended September 30,
1997, FSB Financial Corp. had net income of $140,000.
1000 WOODBRIDGE CENTER DRIVE, INC. 1000 Woodbridge Center Drive, Inc. is a
wholly-owned subsidiary of the Bank. 1000 Woodbridge Center Drive, Inc. was the
owner of the Bank's corporate center. For the year ended December 31, 1996, 1000
Woodbridge Center Drive, Inc. had a net loss of $110,000. The subsidiary was
inactive as of September 30, 1997.
PROPERTIES
The Bank conducts its business through its main office and 17 full service
branch offices, all located in central New Jersey. The following table sets
forth certain information concerning the main office and each branch office of
the Bank at September 30, 1997. The aggregate net book value of the Bank's
premises and equipment was $13.3 million at September 30, 1997.
83
<PAGE>
<TABLE>
<CAPTION>
DATE LEASED NET BOOK VALUE AT
LOCATION OR ACQUIRED SEPTEMBER 30, 1997 LEASED OR OWNED
- -------------------------------- --------------- ---------------------- -------------------
<S> <C> <C> <C>
MAIN OFFICE:
339 State Street 4/29 $1,306,297 Owned
Perth Amboy, NJ 08861(1)
CORPORATE HEADQUARTERS:
1000 Woodbridge Avenue
Woodbridge, NJ 07095 5/94 5,500,548 Owned
BRANCH OFFICES:
158 Wyckoff Road
Eatontown, NJ 07724(2) 7/93 105,135 Leased
980 Amboy Avenue
Edison, NJ 08837 6/74 673,607 Owned
2100 Oak Tree Road
Edison, NJ 08820 4/84 312,974 Owned
206 South Avenue
Fanwood, NJ 07023 9/91 373,090 Owned
Lafayette Road & Ford Avenue
Fords, NJ 08863 4/84 54,524 Leased
Rt. 35 & Bethany Road
Hazlet, NJ 07730 1/91 15,755 Leased
101 New Brunswick Avenue
Hopelawn, NJ 08861 6/76 63,240 Leased
1220 Green Street
Iselin, NJ 08830 11/84 644,436 Owned
599 Middlesex Avenue
Metuchen, NJ 08840(3) 1/95 44,382 Leased
1580 Rt. 35 South
Middletown, NJ 07748 4/95 226,162 Leased
97 North Main Street
Milltown, NJ 08850(3) 1/95 1,050,927 Owned
Rt. 9 & Ticetown Road
Old Bridge, NJ 08857 6/79 7,306 Leased
100 Stelton Road
Piscataway, NJ 08854(4) 9/91 298,274 Leased
325 Amboy Avenue
Woodbridge, NJ 07095 1/70 236,732 Owned
Rt. 1 & St. Georges Avenue
Woodbridge, NJ 07095 6/80 570 Leased
</TABLE>
_______________
(1) Includes an adjacent administrative building with a net book value of
$942,000.
(2) An agreement has been signed to sell the Eatontown branch. The transaction
is anticipated to close in February 1998.
(3) Acquired/leased in conjunction with purchase of deposits of the former
Carteret Savings Bank from the RTC on January 20, 1995.
(4) Includes property acquired for future branch site during 1994.
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<PAGE>
LEGAL PROCEEDINGS
The Bank is involved in various legal actions arising in the normal course
of its business. In the opinion of management, the resolution of these legal
actions are not expected to have a material adverse effect on the Bank's results
of operations.
PERSONNEL
As of September 30, 1997, the Bank had 208 full-time employees and 33 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 1984 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
percentage of taxable income method.
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 September 30, 1997, the
Bank had an excess amount subject to recapture equal to $12.7 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
85
<PAGE>
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, 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%. 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). 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).
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.
86
<PAGE>
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 has been considering 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 and what charter
alternatives will be available at that time. 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 September 30, 1997, the Bank's general policy is to limit loans-
to-one borrower to $13.5 million. At September 30, 1997, the Bank's largest
aggregate amount of loans-to-one borrower totalled $11.1 million.
87
<PAGE>
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 September 30,
1997, the Bank maintained 88.8% 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 and supervisory condition. An
institution, such as the Bank, 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 4%) of its net withdrawable deposit accounts plus short-
term borrowings. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Bank's average liquidity ratio at September 30, 1997
was 8.17%, 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 and periodic Bank examinations. The
assessments paid by the Bank to these agencies for the nine months ended
September 30, 1997 and for the years ended December 31, 1996 and 1995 totalled
$251,000, $271,000 and $217,000, respectively.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates
88
<PAGE>
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.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA, and Regulation O thereunder.
Among other things, these regulations require such loans to be made on terms and
conditions substantially the same as those offered to unaffiliated individuals
and not involve more than the normal risk of repayment. Recent legislation
created an exception for loans to insiders made pursuant to a benefit or
compensation program that are widely available to all employees of the
institution and do not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amounts of loans
the Bank may make to insiders based, in part, on the Bank's capital position,
and requires certain board approval procedures to be followed.
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
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provides that a savings institution that has a leverage capital ratio of less
than 4% (3% for institutions receiving the highest CAMEL examination rating)
will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "- Prompt Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
At September 30, 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 September 30, 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.
THRIFT RECHARTERING
Recently enacted legislation provides that the BIF (the deposit insurance
fund that covers most commercial bank deposits) and the SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would eliminate
the federal thrift charter and the OTS. A bill recently reported by the House
Banking Committee would require federal thrifts to become national banks or
state banks or savings banks within two years after enactment or they would, by
operation of law, become national banks. A national bank resulting from a
converted federal thrift could continue to engage in activities, including
holding any assets, in which it was lawfully engaged on the day before the date
of enactment. Branches operated on the day before enactment could be retained
regardless of their permissibility for national banks. Subject to a
grandfathering provision, all savings and loan holding companies would become
subject to the same regulation and activities restrictions as bank holding
companies. The grandfathering could be lost under certain circumstances, such as
a change in control of the holding company. The legislative proposal 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
Board with respect to the regulation of holding companies. The Bank is unable to
predict whether the legislation will be enacted or, given such uncertainty,
determine the extent to which the legislation, if enacted, would affect its
business. The Bank is also unable to predict whether the SAIF and BIF will
eventually be merged.
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
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undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An institution
is also placed in 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 that 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 with the most well capitalized,
healthy institutions receiving the lowest rates.
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. Until recently, members of the SAIF and BIF were paying
average deposit insurance assessments of between 24 and 25 basis points. The BIF
met the required reserve in 1995, whereas the SAIF was not expected to meet or
exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank, could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996. The SAIF Special
Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and was tax deductible. The SAIF Special Assessment recorded
by the Bank amounted to $5.2 million on a pre-tax basis and $3.3 million on an
after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points,
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while SAIF deposits pay 6.48 basis points. Full pro rata sharing of the FICO
payments between BIF and SAIF members will occur on the earlier of January 1,
2000 or the date the BIF and SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. The FDIC also lowered the SAIF assessment schedule for the
fourth quarter of 1996 to 18 to 27 basis points. Management cannot predict the
level of FDIC insurance assessments on an on-going basis, whether the federal
thrift charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
The Bank's assessment rate for the nine months ended September 30, 1997 was
6.48 basis points and the regular premium expense for this period was $285,000.
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.
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 September 30, 1997 of $8.0
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 September 30, 1997, the Bank had $33.0 million
in FHLB advances and $38.2 million in repurchase agreements with the FHLB.
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 nine months ended September 30, 1997 and the
years ended December 31, 1996 and 1995, dividends from FHLB stock to the Bank
amounted to $382,000, $469,000 and $475,000, 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 $47.8 million or less
(subject to adjustment by the Federal
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Reserve Board) the reserve requirement is 3%; and for accounts greater than
$47.8 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 $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a noninterest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
NEW JERSEY LAW
The Commissioner regulates, among other things, the Bank's internal
business procedures as well as its deposits, lending and investment activities.
The Commissioner must approve changes to the Bank's Certificate of
Incorporation, establishment or relocation of branch offices, mergers and the
issuance of additional stock. In addition, the Commissioner conducts periodic
examinations of the Bank. Certain of the areas regulated by the Commissioner are
not subject to similar regulation by the FDIC.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and SAIF-insured savings institutions in New Jersey
with respect to lending and investment authority, as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for commercial
banks, New Jersey legislation and regulations ("parity legislation") have given
New Jersey chartered savings institutions, such as the Bank, the powers of
federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by, New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
HOLDING COMPANY REGULATION
The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings institution.
The Bank must notify the OTS 30 days before declaring any dividend to the
Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See "-
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
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Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject to the prior
approval of the OTS, and to other activities authorized by OTS regulation.
Recently proposed legislation would treat all savings and loan holding companies
as bank holding companies and limit the activities of such companies to those
permissible for bank holding companies. See "Risk Factors - Financial
Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended ("Securities Act"), for the registration of
the Common Stock to be issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock will be registered with the SEC under the
Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
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. Mulkerin, Shein and Burke has a term of office expiring at
the first annual meeting of
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stockholders, a second class, consisting of Mr. Timpson and Dr. Akey, has a term
of office expiring at the second annual meeting of stockholders, and a third
class, consisting of Messrs. Martin, McLaughlin and Ruegger 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 Company will hold its first annual meeting of stockholders prior
to consummation of the Conversion and Reorganization. The Company's first annual
meeting of public stockholders is expected to occur in April 1999.
The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITIONS HELD WITH COMPANY
- -------------------------- ---------------------------------
<S> <C>
John P. Mulkerin President and Chief Executive Officer of the
Bank and Company, General Counsel
Christopher P. Martin Executive Vice President, Chief Operating
and Financial Officer, Corporate Secretary
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel of the Company has received remuneration from the
Company. Information concerning the principal occupations, employment and other
information concerning the directors and officers of the Company during the past
five years is set forth under "Management of the Bank -Biographical
Information."
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE DIRECTOR TERM
NAME AGE(1) BANK(2) SINCE EXPIRES
- ----------------------- --------- -------------------------------------------- ---------- ------------
<S> <C> <C> <C> <C>
Walter K. Timpson 75 Chairman of the Board 1964 2000
Donald T. Akey, M.D. 75 Director 1979 2000
Harry F. Burke 90 Director 1970 1999
Keith H. McLaughlin 61 Director 1983 1999
John P. Mulkerin 60 President, Chief Executive Officer, General
Counsel and Director 1996 1998
Philip T. Ruegger, Jr. 70 Director 1983 2000
Jeffries Shein 57 Director 1985 1998
Christopher P. Martin 40 Executive Vice President, Chief Financial
and Operating Officer, Corporate Secretary
and Director 1997 1998
</TABLE>
__________________
(1) As of September 30, 1997.
(2) All directors of the Bank are also directors of the Company.
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK
- --------------------------- ------- ------------------------------------------------
<S> <C> <C>
John F. Cerulo, Jr. 46 Senior Vice President/Retail Banking
Karen I. Martino 38 Senior Vice President/Audit and Compliance
Richard Spengler 36 Senior Vice President/Chief Lending Officer
</TABLE>
______________
(1) As of September 30, 1997.
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
John P. Mulkerin was named President and Chief Executive Officer and a
member of the Board of Directors of the Bank in June 1996, following the death
of Joseph S. Yewaisis. Mr. Mulkerin joined the Bank in 1987 as Executive Vice
President, Chief Operating Officer and Corporate Secretary. He was named General
Counsel of the Bank in 1993. Mr. Mulkerin also serves as President and Chief
Executive Officer of the Company and is a director of FSB Financial Corp., a
wholly-owned subsidiary of the Bank. Mr. Mulkerin is also a member of the Board
of Directors of Middlesex Water Company, Raritan Bay Medical Center and Daytop
Village Foundation, headquartered in New York.
Christopher P. Martin is the Executive Vice President, Chief Financial and
Operating Officer and Corporate Secretary. He joined the Bank in 1984 and served
as Controller of the Bank until 1989, when he was named Senior Vice President
and Chief Financial Officer. He was named Executive Vice President in 1994. Mr.
Martin is also the Executive Vice President and Chief Financial Officer of the
Company and he serves as Treasurer and a director of FSB Financial Corp.
Donald T. Akey, M.D. joined the Board of First Savings in 1979. Dr. Akey is
a surgeon who had practiced in Metuchen, New Jersey, for over forty years. Dr.
Akey retired from active practice in 1993.
Harry F. Burke joined the Board of First Savings in 1970. Mr. Burke owned
and operated a general insurance agency in Woodbridge, New Jersey prior to the
sale of said business in 1980.
Keith H. McLaughlin joined the Board of First Savings in 1983. He is the
President and Chief Executive Officer of Raritan Bay Medical Center, which
operates acute care hospitals in Perth Amboy and Old Bridge, New Jersey. Mr.
McLaughlin also serves as a director of the Princeton Insurance Company.
Philip T. Ruegger, Jr. joined the Board of First Savings in 1983. Mr.
Ruegger is now an investor. Previously, he was President of Northwest
Construction Co., a real estate construction and management firm. Mr. Ruegger
served as director of the National Bank of New Jersey, a commercial bank, from
1968 through 1981.
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Jeffries Shein joined the Board of First Savings in 1985. He is a partner
with Jacobson, Goldfarb and Tanzman Associates, L.L.C., a commercial real estate
brokerage firm. Mr. Shein serves on the Board of Directors of Middlesex Water
Co. and is Chairman of the Board of Raritan Bay Medical Center.
Walter K. Timpson was appointed Chairman of the Board of Directors in June
1996, following the death of Mr. Joseph S. Yewaisis. Mr. Timpson has operated a
real estate appraisal firm in Metuchen, New Jersey, for over forty years.
Each director named above is also a director of the Company.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
John F. Cerulo, Jr. joined the Bank in 1988 as Senior Vice President -
Retail Banking. Prior to First Savings, Mr. Cerulo worked for another savings
institution for 16 years as a Branch Administrator.
Karen I. Martino joined the Bank in 1984. She is now Senior Vice President
and Auditor, a position she has held since 1990.
Richard Spengler joined the Bank in 1983. He was appointed Assistant Vice
President in 1990, and Vice President of Mortgage Operations in 1991. In January
1995, Mr. Spengler was named Senior Vice President - Chief Lending Officer.
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 nine months ended as
of September 30, 1997, the Board of Directors held 10 regular meetings,
including the annual organization meeting, and five special meetings. During the
nine months ended September 30, 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 Akey (Chairman), Burke,
McLaughlin, Ruegger and Timpson. The Audit Committee met four times during the
nine months ended September 30, 1997. The Audit Committee reviews audit programs
and results of audits of compliance, departmental internal controls and
operating procedures.
The Nominating Committee consists of the entire Board of Directors except
those directors standing for election. The Nominating Committee meets annually
to select the nominees for the Board of Directors. The Board of Directors met
once in its capacity as a nominating committee during the nine months ended
September 30, 1997.
The Compensation Committee consists of Directors Timpson (Chairman),
McLaughlin, Ruegger and Shein. The Compensation Committee meets at least
annually to review the performance and remuneration of the officers and
employees of the Bank. The committee reviews and approves all compensation
programs to be implemented by the Bank. The Compensation Committee met twice in
its capacity as a compensation committee during the nine months ended September
30, 1997.
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DIRECTOR COMPENSATION
Nonemployee directors receive $750 for each Board of Directors meeting
attended, plus a $1,750 monthly retainer. Nonemployee directors serving on the
committees are paid $300 for each meeting attended.
DIRECTORS' DEFERRED FEE PLAN. Directors may elect to defer all or part of
their fees under the Agreement for Deferment of Directors' Fees (the "Deferral
Fee Agreement"). The fees so deferred are recorded on the books of the Bank as a
liability in the year the fees are earned; however, the Bank does not
specifically fund the amount so deferred. The Bank pays the deferred fees to the
directors not earlier than the time they cease to be a director, retirement or
when they attain age 65 (or some other age specifically elected by the
director), unless the Bank determines it serves its best interests or the best
interests of the director to disburse these funds at an earlier date.
The Bank also maintains the First Savings Bank, SLA Directors' Deferred Fee
Stock Unit Plan (the "Deferred Fee Stock Unit Plan"). During the Bank's 1992 and
1995 stock offerings, Directors who had deferred fees under the Deferred Fee
Agreement had the opportunity to elect to defer the fees under the Deferred Fee
Stock Unit Plan. Each Director who elected to participate in the Deferred Fee
Stock Unit Plan had his deferred fees credited with a number of shares of Common
Stock based on the fair market value of the stock. Messrs. Burke, McLaughlin,
Martin, Ruegger, Shein and Timpson currently participate in the Plan. It is
expected that Directors will again be able to defer fees previously earned into
the Deferred Fee Stock Unit Plan in connection with the Offerings.
RETIREMENT PLAN. First Savings also maintains a nonqualified, unfunded
retirement plan for directors who are not employees, have served as a director
for five (5) years, and who retire from the Board of Directors within the time
specified under the Retirement Plan. Benefits, in general, are equal either to
all or a portion of the current annual retainer received by Board members,
depending upon the director's age and length of service at retirement. Benefits
are paid monthly, commencing in the month following the director's retirement
from the Board and ending in the month following the director's death.
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS. During 1992, the Board of
Directors adopted the First Savings Bank, SLA 1992 Stock Option Plan for Outside
Directors (the "Directors' Stock Option Plan") of the Bank and its affiliates.
Under the terms of the Director's Stock Option Plan, 100,399 shares of the
Common Stock have been reserved for issuance to current directors who are not
employees of the Bank. The Directors' Stock Option Plan is a self administering
plan and provides that each member of the Board of Directors of the Bank who is
not an officer or employee of the Bank or the Mutual Holding Company will be
granted non-statutory stock options to purchase 16,733 shares of the Common
Stock (based on adjustments for four 10% stock dividends and a two-for-one stock
split). All stock options granted under this plan are currently exercisable at
an exercise price of $3.413 per share, as adjusted the four stock dividends and
the stock split. As of September 30, 1997, 33,466 options had been exercised
under this plan.
INCENTIVE PLAN. During 1995, the Board of Directors adopted the First
Savings Bank, SLA 1996 Omnibus Incentive Plan for directors, officers and
certain employees of the Bank and its affiliates. Under the terms of the
Incentive Plan, 21,780 shares of the Common stock have been reserved for
issuance to current directors who are not employees of the Bank. The portion of
the Incentive Plan granting awards to directors is self administering and
provides that each member of the Board of Directors who is not an officer or
employee of the Bank or the Holding Company will be granted non-statutory
options to purchase 3,630 shares of the Bank's Common Stock at an exercise price
of $13.02 per share. Stock options granted under this plan vest in equal
installments over a three-year period from the date of issuance.
98
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information as to the total remuneration paid by the Bank to the Chief Executive
Officer and other executive officers who received salary and bonuses in excess
of $100,000 during the year ended December 31, 1996 ("Named Executive
Officers"). In addition, the table sets forth information regarding total
remuneration for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
-------------------------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------------------------------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
SALARY COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR (1)(2) BONUS(3) (4) (5) (6) (7) (8)(9)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph S. Yewaisis(10) 1996 $185,770 $ -- $ -- $ -- -- $ -- $17,742
Chairman of the Board, 1995 330,000 99,000 -- -- -- -- 17,122
President and Chief Executive 1994 315,000 94,500 -- -- -- -- 14,615
Officer
John P. Mulkerin (11) 1996 202,250 67,500 -- 66,138 13,915 -- 19,813
President, Chief Executive 1995 152,000 30,400 -- -- -- -- 17,062
Officer and General Counsel 1994 145,000 29,000 -- -- -- -- 14,128
Christopher P. Martin(12) 1996 160,460 54,000 -- 66,138 13,915 -- 18,905
Executive Vice President, Chief 1995 125,000 25,000 -- -- -- -- 14,168
Financial Officer, Chief 1994 110,000 22,000 -- -- -- -- 10,718
Operating Officer and Corporate
Secretary
Richard Spengler 1996 100,000 15,000 -- 17,875 2,420 -- 13,042
Senior Vice President, Lending 1995 74,480 11,250 -- -- -- -- 7,995
1994 63,000 7,875 -- -- -- -- 6,020
</TABLE>
_________________________
(1) Includes directors' fees paid to Mr. Mulkerin in 1996.
(2) Includes amounts of salary deferred pursuant to the Bank's Incentive
Savings Plan for Employees of First Savings Bank, SLA 401(k).
(3) Includes bonuses granted pursuant to the Bank's Annual Incentive Plan.
Under this plan, bonuses are awarded by the Compensation Committee of the
Board of Directors based upon achieving certain predetermined profit
levels and other identifiable goals. See "Compensation Committee
Report."
(4) The Bank provides certain executive officers with the use an automobile,
club dues and certain other benefits, which, in the aggregate, do not
exceed the lesser of either $50,000, or 10% of the total annual salary
and bonus reported for any of the named executive officers.
(5) Pursuant to the 1996 Incentive Plan, Messrs. Mulkerin, Martin and
Spengler were awarded 4,477 shares, 4,477 shares and 1,210 shares of
Common stock, respectively, in November 1996, as adjusted for a 10% stock
dividend paid on October 30, 1997, which had a market value of $75,300,
$75,300 and $19,600, respectively, at December 31, 1996. The dollar
amounts set forth in the table represent the market value of the shares
awarded on the date of grant. A committee of non-employee directors
determines the date on which plan share awards vest. Pursuant to the
award agreements, the awards will vest over a three-year period from the
date of grant.
(6) The Bank maintains the 1992 Incentive Stock Option Plan for the benefit
of officers and employees. All options granted pursuant to the 1992
Incentive Stock Option Plan became exercisable as of July 10, 1993. The
Bank also maintains the 1996 Incentive Plan for the benefit of officers
and directors. Messrs. Mulkerin, Martin and Spengler were awarded 13,915
shares, 13,915 shares and 2,420 shares subject to options, respectively,
under the 1996 Incentive Plan, as adjusted for a 10% stock dividend paid
on October 30, 1997. Options granted become exercisable in equal
installments at an annual rate of 33-1/3% beginning November 19, 1997.
(7) For 1996, 1995 and 1994, the Bank had no long-term incentive plan;
accordingly, there were no payouts or awards under any long-term
incentive plan.
(8) Includes $4,950, $3,847 and $3,000 contributed by the Bank in 1996 to the
accounts of Messrs. Mulkerin, Martin and Spengler, respectively, under
the Incentive Savings Plan for Employees of First Savings Bank, SLA
401(k).
(9) Includes $15,063, $15,063 and $10,042, contributed by the Bank pursuant
to the Bank's Employee Stock Ownership Plan ("ESOP") in 1997 allocated
for the benefit of Messrs. Mulkerin, Martin and Spengler.
(10) Mr. Yewaisis passed away on May 29, 1996.
(11) Mr. Mulkerin was appointed to the positions of President and Chief
Executive Officer on June 12, 1996.
(12) Mr. Martin was appointed to the added positions of Chief Operating
Officer and Corporate Secretary on June 12, 1996.
99
<PAGE>
1996 Incentive Plan. On April 24, 1996, the Bank's stockholders approved
the First Savings Bank, SLA 1996 Omnibus Incentive Plan under which all
employees of the Bank are eligible to receive awards. The 1996 Incentive Plan
provides discretionary awards to officers and key employees, as determined by a
committee of non-employee directors. Stock options were awarded to officers
under the 1996 Incentive Plan on November 19, 1996. The following table lists
all grants of stock options under the Incentive Plan to the Named Executive
Officers for fiscal 1996 and contains certain information about the potential
value of those options based upon certain assumptions regarding the appreciation
of the Bank's stock over the life of the stock option.
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTIONS(1)
- -------------------------------------------------------------------------------------- ---------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTION/SARS
OPTIONS/SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (2)(3)(4)(5) FISCAL YEAR PER SHARE(6) DATE(7) 5% 10%
- ------------------------ -------------- --------------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
John P. Mulkerin 13,915 21.1% $14.773 11/19/06 $129,504 $326,844
Christopher P. Martin 13,915 21.1 14.773 11/19/06 129,504 326,844
Richard Spengler 2,420 3.7 14.773 11/19/06 22,523 56,843
</TABLE>
__________________________
(1) The amounts represent certain assumed rates of appreciation. Actual gains,
if any, on stock exercises and Common Stock holdings are dependent on the
future performance of the Common Stock and overall stock market conditions.
There can be no assurance that the amounts reflected in this table will be
realized. All stock options and their respective prices reflect the 10%
stock dividend paid on October 30, 1997.
(2) Options granted pursuant to the Incentive Plan become exercisable in equal
installments at an annual rate of 33 1/3% beginning on November 19, 1997.
(3) The purchase price may be paid in cash or in Common Stock.
(4) Under limited circumstances, such as death or disability of an employee,
the employee (or his beneficiary) may request that the Bank, in exchange
for the employee's surrender of an option, pay to the employee (or
beneficiary) the amount by which the fair market value of the Common Stock
exceeds the exercise price of the option on the date of the employee's
termination of employment. It is within the Bank's discretion to accept or
reject such a request.
(5) To the extent possible, options will be treated as incentive options.
(6) The exercise price of options granted in November 1996 will be adjusted
downward in accordance with the Exchange Ratio, to reflect the increase in
the number of options outstanding upon consummation of the exchange.
(7) The option term is ten years.
100
<PAGE>
The following table provides certain information with respect to the number
of shares of Common Stock acquired upon exercise of stock options and the value
realized thereon. Also reported is the number of shares of Common Stock
represented by outstanding stock options at December 31, 1996, held by named
executive officers and the values for "in-the-money" options which represent the
positive spread between the exercise price of any existing stock option and the
year-end price of the Common Stock.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, DECEMBER 31, 1996 (1)(2)
1996(1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
John P. Mulkerin.......... 2,130 13,915 $ 28,540 $28,460
Christopher P. Martin..... 8,785 13,915 117,740 28,460
Richard Spengler.......... -- 2,420 -- 4,950
</TABLE>
___________________________
(1) All options granted under the 1992 Incentive Stock Option Plan were
issued on July 10, 1992, and exercisable on July 10, 1993, at an
option price of $3.413 per share. All options granted under the 1996
Incentive Plan were issued on November 19, 1996, at an option price of
$14.773 per share. Options granted to Messrs. Mulkerin and Martin are
exercisable at the rate of 4,638 shares per year commencing on
November 19, 1997. Options granted to Mr. Spengler are exercisable at
the rate of 807 shares per year commencing on November 19, 1997. All
options will immediately vest upon a change in control. Such exercise
prices will be adjusted downward by the Exchange Ratio to reflect the
increase in the number of options and the decrease in per share market
price resulting from the exchange.
(2) The market value of the Common Stock at December 31, 1996, was $18.50
per share.
The 1996 Incentive Plan was implemented by the Bank and the Mutual Holding
Company as a means of providing employees and outside directors, respectively,
of the Bank and the Mutual Holding 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 November 1996, the 1996 Incentive Plan acquired 18,000 shares of
Bank Common Stock from authorized but unissued shares (21,780 shares as adjusted
for two 10% stock dividends).
A Committee of the Board of Directors of the Bank and the Company comprised
of nonemployee directors administers the 1996 Incentive Plan, and makes awards
to executive officers pursuant to the Plan. Awards under the 1996 Incentive Plan
become immediately vested in the event of death, disability, retirement or a
change in control of the Bank or its successors.
Officers, directors and employees of the Bank were awarded a total of
18,000 shares of Bank Common Stock during the year ended December 31, 1996
(21,780 as adjusted for two 10% stock dividends paid on October 30, 1997). Of
the total, 21,780 shares of Bank Common Stock acquired by the 1996 Incentive
Plan, 14,524 shares were unallocated at November 30, 1997. 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 1996 Incentive Plan.
101
<PAGE>
Adoption of Existing Bank Plans by Company. The Company has approved
adoption of the Bank's existing 1992 Stock Option Plans and 1996 Incentive Plan
(collectively the "Plans") as plans of the Company upon consummation of the
Conversion and Reorganization and will issue Common Stock in lieu of Bank Common
Stock to such Plans pursuant to the terms of such Plans. As of the effective
date of the Conversion and Reorganization, rights outstanding under the Plans
shall be assumed by the Company and thereafter shall be rights only for shares
of Company Common Stock, with each such right being for a number of shares of
Common Stock equal to the number of shares of Bank Common Stock that were
available thereunder immediately prior to such effective date times the Exchange
Ratio, and the price of each such right shall be adjusted to reflect the
Exchange Ratio and so that the aggregate purchase price of the right is
unaffected, but with no change in other terms or conditions of such right. The
Company shall make appropriate amendments to the Plans to reflect the adoption
of the Plans by the Company without adverse effect upon the rights outstanding
thereunder. In addition, the Bank's Incentive Savings Plan for Employees of
First Savings Bank, SLA (the "401(k) Plan"), will be amended to permit
participants to invest in the Common Stock of the Company. Currently, the 401(k)
Plan has an employer stock fund which enables participants to invest in Bank
Common Stock.
EMPLOYMENT AGREEMENTS
The Mutual Holding Company and the Bank currently have employment
agreements with Messrs. Mulkerin and Martin. Effective upon the Conversion and
Reorganization, the Company intends to enter into employment agreements
(collectively, the "Employment Agreements") with Messrs. Mulkerin and Martin
(the "Executives"). The Bank's contracts will remain in effect. The Employment
Agreements are subject to the review and approval of the Company, and the review
of the OTS and may be amended as a result of such review. Review of the
compensation arrangements by the OTS does not indicate, and should not be
construed to indicate that the OTS has passed upon the merits thereof. The
Employment Agreements are intended to ensure that the Bank and the Company will
be able to maintain a stable and competent management base after the Conversion
and Reorganization. The continued success of the Bank and the Company depends to
a significant degree on the skills and competence of Messrs. Mulkerin and
Martin.
The proposed Employment Agreements are expected to provide for a three-year
term for the Executives. The Employment Agreements provide that, commencing on
the first anniversary date and continuing each anniversary date thereafter, the
Board of Directors of the Bank and the Company each review the agreements and
the Executive's performance for purposes of determining whether to extend the
agreements with the Bank and the Company for an additional year such that the
remaining terms would be the amount of the original terms. The base annual
salary which will be effective for the Employment Agreement for Messrs. Mulkerin
and Martin will be $260,000 and $210,000, respectively. 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 provide for
termination by the Bank or the Company for "cause," as 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
102
<PAGE>
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 current and 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, 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, in the case of the Company's proposed Employment
Agreement, and three times the average of the three preceding taxable years'
compensation in the case of the Bank's existing Employment Agreements. It is
also expected that the Company, like the Bank, would also continue the
Executive's life, health, and disability coverage for 36 months. Notwithstanding
that both agreements would provide for a severance payment in the event of a
change in control, the Executive would only be entitled to receive a severance
payment under one agreement.
Payments to the Executives 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
Agreements would be made by the Company. All reasonable costs and legal fees
paid or incurred by the Executive pursuant to any dispute or question of
interpretation relating to the 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. The Bank's Employment Agreement
provides, and it is expected that the Company's Employment Agreement would
provide, that the Bank and Company 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 Messrs. Mulkerin and Martin in the past fiscal year and excluding any
benefits under any employee benefit plan which may be payable, would be
approximately $709,000 and $567,000, respectively.
CHANGE IN CONTROL AGREEMENTS
Effective upon the Conversion and Reorganization, the Bank intends to enter
into Change in Control Agreements ("CIC Agreements") with certain other officers
of the Bank. Such agreements will have terms ranging from one to three years.
The proposed CIC Agreements are 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. It
is also expected that the CIC Agreements with the Bank 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. 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 $2.0 million.
103
<PAGE>
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, 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 under the Severance Plan,
in the event of a change in control of the Bank or the Company, eligible
employees who are terminated from or terminate their employment within one year
of the change in control (for reasons specified under the Severance Plan), would
be entitled to receive a severance payment. The participant would be entitled to
a cash severance payment equal to one-twelfth of then-current 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 salary levels at
December 31, 1996, would be approximately $2.5 million.
BENEFITS
Pension Plan. On January 1, 1993, the Bank became a participant in the
Financial Institutions Retirement Fund, a multiple-employer defined benefit
plan. All employees who attain the age of 21 years and complete one year of
service are eligible to participate in this Plan. Retirement benefits are based
upon a formula utilizing years of service and average compensation. Participants
are vested 100% upon the completion of five years of service.
Financial Institutions Retirement Fund does not segregate its assets,
liabilities or costs by participating employer. Therefore, disclosure of the
accumulated benefit obligations, plan assets and the components of annual
pension expense attributable to the Bank cannot be ascertained.
First Savings is required to make an annual contribution to the plan based
upon the actuarial estimated provided by the actuary. During the nine months
ended September 30, 1997, this amounted to $143,000, which includes past
conversion costs from prior plan year revaluations.
104
<PAGE>
The following table illustrates annual pension benefits at age 65 under the
most advantageous plan provisions available at various levels of compensation
and years of service. The benefits listed in the table are not subject to a
deduction for Social Security or any other offset amount.
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------
AVERAGE 10 15 20 25 AND OVER
-------------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C>
$ 20,000...... $ 4,000 $ 6,000 $ 8,000 $ 10,000
$ 30,000...... 6,000 9,000 12,000 15,000
$ 50,000...... 10,000 15,000 20,000 25,000
$ 75,000...... 15,000 22,500 30,000 37,500
$100,000...... 20,000 30,000 40,000 50,000
$150,000...... 30,000 45,000 60,000 75,000
$200,000...... 40,000 60,000 80,000 100,000
$300,000 and
over(1)....... 60,000 90,000 130,000(2) 130,000(2)
</TABLE>
________________
(1) Under current law, the average final compensation for computing benefits
under the Pension Plan cannot exceed $160,000 (indexed for inflation).
However, benefits are not reduced below the level of benefits accrued as of
December 31, 1992.
(2) Under current law, the maximum benefit is limited to $130,000 per year
beginning in 1998.
(3) The compensation utilized for formula purposes include salary amounts
listed under "Summary Compensation Table."
The following table sets forth the years of credited service as of December
31, 1996, for each of the individuals named in the Executive Compensation Table.
<TABLE>
<CAPTION>
YEARS OF CREDITED
SERVICE
-------------------
<S> <C>
John P. Mulkerin 9
Christopher P. Martin 13
Richard Spengler 14
</TABLE>
Supplemental Executive Retirement Plan. Effective as of January 1, 1994,
the Board of Directors revised a previously existing plan entitled the
Retirement Benefit Maintenance Plan (the "Maintenance Plan") and restated it as
the First Savings Bank, SLA Supplemental Executive Retirement Plan ("SERP"). The
SERP provides a post-employment supplemental retirement benefit for participants
who retire on or after their "Normal Retirement Age" (age 65) equal to (i)
seventy-five percent (75%) of the participant's base salary during the twelve
months prior to retirement, (ii) less the amount of the participant's "Pension
Plan Annual Benefit" and "Primary Social Security Benefit," as defined in the
plan. The plan allows for benefits, reduced according to actuarial
considerations, for early retirement. The SERP is not a tax-qualified employee
benefit plan. Pursuant to the SERP, the estimated additional annual benefits
payable upon retirement at normal retirement age for Messrs. Mulkerin and Martin
are $107,600 and $47,900, respectively.
105
<PAGE>
The Bank intends to implement an additional supplemental executive
retirement plan to provide for supplemental benefits to certain employees whose
benefits under the ESOP and/or 401(k) Plan are reduced by limitations imposed by
the Code. From time to time, the Board will designate which employees may
participate in this additional supplemental executive retirement plan. This
supplemental executive retirement plan will also be an "unfunded" promise to pay
supplemental benefits in the future and any amount set aside to pay the benefits
under the plan remain subject to the claims of the Bank's general creditors
until they are paid to plan participants. The Bank may establish a grantor trust
in connection with the plan to satisfy the obligations of the Bank under the
plan. The grantor trust would be permitted to invest in a wide-variety of
investments, including Company Common Stock.
Employee Stock Ownership Plan and Trust. The Bank established the First
Savings Bank, SLA Employee Stock Ownership Plan (the "ESOP") and related trust
for eligible employees in connection with the 1992 MHC Reorganization. Employees
employed with the Bank as of January 1, 1992 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 participate in the
ESOP.
In July 1992, the ESOP borrowed $700,000 from an unaffiliated lender to
purchase 70,000 shares of Bank Common Stock issued in the 1992 MHC
Reorganization ("1992 ESOP Loan"). In connection with the Bank's 1995 Secondary
Issuance, the ESOP purchased an additional 42,000 shares of Bank Common Stock at
$13.00 per share. The ESOP borrowed an additional $546,000 from the MHC to fund
the purchase of the shares. The MHC also assumed the 1992 ESOP Loan. Upon
consummation of the Conversion and Reorganization, the Public Bank Shares held
by the ESOP will convert into Common Stock of the Company based upon the
Exchange Ratio, and the Company expects to refinance the MHC's existing loan to
the ESOP. 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"). A
trustee for the ESOP was appointed prior to the 1992 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, allocated
shares for which no instructions are given and unallocated shares 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 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 8% 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
existing ESOP loans, which will continue to be repaid over their original terms.
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 current market
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
106
<PAGE>
accounts after five years of credited service. Participants also vest completely
in their accounts if their service terminates 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.
Stock-Based Incentive Plan. Following the Conversion and Reorganization,
the Board of Directors of the Company intends to adopt one or more stock-based
benefit plans to provide stock options, awards of restricted stock and certain
related rights to eligible officers, employees, and directors of the Company and
Bank. The Company anticipates granting stock options and restricted stock awards
under a single plan. However, it is possible separate plans could be established
for directors and employees (including officers).
At a meeting of stockholders of the Company following the Conversion and
Reorganization, which under applicable OTS regulations may be held no earlier
than six months after the completion of the Conversion and Reorganization, the
Board of Directors intends to present the Stock-Based Incentive Plan or any
separate plan(s) to stockholders for approval. The Company has reserved an
amount equal to 10% of the shares of Common Stock issued in the Conversion and
Reorganization, or 1,439,190 shares (based upon the issuance of 14,391,900
shares), for stock options, and 4% of the shares of Common Stock issued in the
Conversion, or 575,676 shares (based upon the issuance of 14,391,900 shares),
for restricted stock awards, which will be awarded at no cost to officers,
directors and certain employees of the Bank. OTS regulations provide that no
individual officer or employee of the Bank may receive more than 25% of the
stock options available under the Stock-Based Incentive Plan (or any separate
plan for officers and employees) and non-employee directors may not receive more
than 5% individually, or 30% in the aggregate, of the stock options available
under the Stock-Based Incentive Plan (or any separate plan for directors). OTS
regulations also provide that no individual officer or employee of the Bank may
receive more than 25% of the restricted stock awards available under the Stock-
Based Incentive Plan (or any separate plan for officers and employees) and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the restricted stock awards available under the Stock-Based
Incentive Plan (or any separate plan for directors). The Bank expects to
contribute funds to a trust established in connection with the Stock-Based
Incentive Plan (or any separate plan(s)) to enable the plan to acquire, in the
aggregate, an amount equal to 4% of the shares of Common Stock issued in the
Conversion, or 575,676 shares (based upon the issuance of 14,391,900 shares).
These shares would be acquired through open market purchases, if permitted, or
from authorized but unissued shares. The Board intends to appoint an independent
fiduciary to serve as trustee of a trust to be established in connection with
the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan after the
Conversion and Reorganization, the interests of existing shareholders would be
diluted. See "Pro Forma Data."
The grants of stock options and restricted stock awards 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,
including the Bank, will be eligible to participate in the Stock-Based Incentive
Plan (or any separate plan for employees). It is expected that the committee
administering the plan will determine which officers and employees will be
granted stock options, restricted stock awards and related rights, including
limited rights. The committee will also determine whether stock options will be
incentive or non-statutory stock options, the number of shares subject to each
stock option and restricted stock award, the exercise price of each non-
statutory stock option, whether stock options may be exercised by delivering
other shares of Common Stock, and when stock options become exercisable or
restricted stock awards vest. Only employees may receive grants of Incentive
Stock Options. Therefore, under the Stock-Based Incentive Plan (or any separate
plan for directors), directors may receive only grants of Non-Statutory Stock
Options.
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The Stock-Based Incentive Plan (or any separate plan for employees) will
provide for the grant of: (i) options to purchase the 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 option rights ("Limited Option Rights"). Limited
Option Rights are exercisable only upon a change in control of the Bank or the
Company. Upon exercise of Limited Option Rights in the event of a change in
control, the employee or director will be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of any unexercised
option, whether exercisable or unexercisable at such time, and the fair market
value of the shares of common stock subject to the stock option on the date of
exercise of the right in lieu of purchasing the stock underlying the stock
option. It is anticipated that all stock options granted contemporaneously with
stockholder approval of the Stock-Based Incentive Plan will qualify as Incentive
Stock Options to the extent permitted under Section 422 of the Code. Unless
sooner terminated, the Stock-Based Incentive 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 stock options with Limited Option Rights under the Plan at an
exercise price equal to at least the fair market value of the underlying Common
Stock on the date of grant.
An individual will not be deemed to have received taxable income upon the
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 stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been 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 individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
Common Stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
Under the Stock-Based Incentive Plan (or any separate plans for directors
and employees), restricted stock awards and related Limited Stock Rights, would
be granted in the form of shares of Common Stock held by the plans. Awards will
be non-transferable and non-assignable. Allocations and grants of restricted
stock awards, and related Limited Stock Rights, to officers and employees may be
made in the form of base grants and/or performance grants (the vesting of which
would be contingent upon performance goals established by the committee
administering the plan). In establishing any performance goals, the committee
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 average equity, or such
other performance standards as determined by the committee with the approval of
the Board of Directors.
Limited Stock Rights would be exercisable by participants upon a change in
control of the Company or Bank as described in the plan. Subject to OTS
regulations, upon the exercise of a Limited Stock Right, the recipient will be
entitled to receive a cash payment equal to the fair market value of all
unvested stock awards in exchange for any rights to such unvested stock awards.
When a participant becomes vested with respect to restricted stock awards,
the participant will realize ordinary income equal to the fair market value of
the Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted stock awards
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<PAGE>
become vested and shares of Common Stock are actually distributed to
participants, the participants would receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of stock awards may
direct the voting of the shares awarded to them. Shares not subject to grants
and shares allocated subject to the achievement of performance goals will be
voted by the trustee in proportion to the directions provided with respect to
shares subject to grants. Vested shares will be distributed to recipients as
soon as practicable following the day on which they vest.
If the Stock-Based Incentive Plan (or any separate plans for employees and
directors) is adopted in the form described above, stock awards would become
vested and stock options would become vested and exercisable in the manner
specified by the Company, subject to applicable OTS regulations, which require
that stock options and restricted stock awards begin vesting no earlier than one
year from the date of shareholder approval of the plan and thereafter vest at a
rate of no more than 20% per year. Stock options could be exercisable for three
months following the date on which the employee or director 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. In the case of death or disability, stock options may be exercised for
a period of 12 months. 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. 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. In the event of death,
disability or normal retirement, the Company, if requested by the optionee, or
the optionee's beneficiary, could elect, in exchange for vested options, to pay
the optionee, or the optionee's 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.
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of stock options or stock awards granted under
a plan adopted within one year after conversion. Subject to any applicable
regulatory requirements, the Stock-Based Incentive Plan (or any separate plans
for employees and directors) 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 generally be
considered 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.
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
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<PAGE>
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. There
were no loans to the Bank's current executive officers and directors that
exceeded $500,000 as of September 30, 1997. The largest principal amount
outstanding on a pre-FIRREA basis loan during the nine months ended September
30, 1997 was a first mortgage loan of $149,000, and the amount outstanding and
the interest rate on such loan on such date were $147,000 and 8.00%,
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.
110
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BENEFICIAL OWNERSHIP OF CAPITAL STOCK
BENEFICIAL OWNERSHIP OF BANK COMMON STOCK
The following table includes, as of November 30, 1997, certain information
as to the Bank Common Stock beneficially owned by (i) the only persons or
entities, including any "group" as that term issued in Section 13(d)(3) of the
Exchange Act, who or which was known to the Bank to be the beneficial owner of
more than 5% of the issued and outstanding Bank Common Stock, (ii) the directors
of the Bank, (iii) certain executive officers of the Bank, and (iv) all
directors and executive officers of the Bank as a group. For information
concerning proposed subscriptions by directors and executive officers and the
anticipated ownership of Common Stock by such persons upon consummation of the
Conversion and Reorganization, see "-Subscriptions by Executive Officers and
Directors."
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL BENEFICIAL PERCENT OF
OWNER OR NUMBER OF OWNERSHIP AS OF BANK
PERSONS IN GROUP NOVEMBER 30, 1997(1)(3)(4)(5) COMMON STOCK
- ---------------------------------- ----------------------------- ------------
<S> <C> <C>
First Savings Bancshares, MHC (2)
1000 Woodbridge Center Drive
Woodbridge, NJ 07095 4,134,812 51.6%
Walter K. Timpson 137,426 1.7
Donald T. Akey, M.D. 29,453 0.4
Harry F. Burke 54,855 0.7
Keith H. McLaughlin 65,145 0.8
Philip T. Ruegger, Jr. 153,588 1.9
Jeffries Shein 206,132 2.6
John P. Mulkerin 87,544 1.1
Christopher P. Martin 50,543 0.6
John F. Cerulo, Jr. 12,479 0.2
Karen I. Martino 9,035 0.1
Richard Spengler 23,655 0.3
All Directors and Executive
Officers as a Group (11 persons) 829,855 10.4%
</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 First Savings Bancshares, MHC.
(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 November 30, 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 1996 Incentive Plan which may be voted by the recipient
pending vesting and distribution: 726 shares to each of Messrs. Akey,
Burke, McLaughlin, Ruegger and Shein; 2,985 shares to both Messrs. Mulkerin
and Martin; and 807 shares to each of Mr. Cerulo, Ms. Martino and Mr.
Spengler. Includes options to purchase stock pursuant to the Bank's 1992
Stock Option Plans which were vested as of November 30, 1997: 17,943 shares
to each of Messrs. Timpson, McLaughlin, Ruegger and Shein, 1,210 shares to
each of Messrs. Akey and Burke; 6,768 shares to Mr. Mulkerin; 4,638 shares
to Mr. Martin; and 807 shares to each of Messrs. Cerulo, Spengler and Ms.
Martino.
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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 November 30, 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 12,514,527 shares of
Conversion Stock are sold, which is the midpoint of the Valuation Price Range.
Due to certain purchase limitation policies imposed by the OTS in connection
with mutual holding company conversions and reorganizations, certain officers
and directors will be precluded from purchasing additional shares of Conversion
Stock in the Offerings.
<TABLE>
<CAPTION>
PROPOSED PURCHASES OF TOTAL COMMON STOCK
NUMBER OF CONVERSION STOCK(1) TO BE HELD
------------------------ --------------------------
EXCHANGE SHARES TO NUMBER NUMBER PERCENTAGE
BE HELD (2)(3)(4) AMOUNT OF SHARES OF SHARES OF TOTAL
------------------ ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Walter K. Timpson(5) 355,379 $ - - 355,379 1.48%
Donald T. Akey, M.D. 82,343 30,000 3,000 85,343 0.36
Harry F. Burke 158,359 50,000 5,000 163,359 0.68
Keith H. McLaughlin 139,079 156,000 15,500 154,079 0.64
Philip T. Ruegger, Jr.(5) 403,745 - - 423,745 1.77
Jeffries Shein (5) 560,983 - - 566,983 2.34
John P. Mulkerin 232,791 250,000 25,000 257,791 1.07
Christopher P. Martin 128,439 200,000 20,000 148,439 0.62
John F. Cerulo, Jr. 32,513 60,000 6,000 38,513 0.16
Karen I. Martino 22,206 25,000 2,500 24,706 0.10
Richard Spengler 75,957 40,000 4,000 69,957 0.29
--------- -------- ------ --------- -----
All Directors and
Executive Officers
as a Group (11 persons) 2,181,794 $805,000 80,500 2,262,294 9.55%
========= ======== ====== ========= =====
</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 2.9590 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. Timpson, 60,254 shares; Dr. Akey, 10,741 shares; Mr. Burke,
10,741 shares; Mr. McLaughlin, 60,254 shares; Mr. Ruegger, 60,254 shares;
Mr. Shein, 60,254 shares; Mr. Mulkerin, 47,477 shares; Mr. Martin, 41,174
shares; Mr. Cerulo, 7,160 shares; Ms. Martino, 7,160 shares; Mr. Spengler,
7,160 shares; and all directors and executive officers as a group, 372,629
shares.
(3) Excludes the following amount of shares awarded under the 1996 Incentive
Plan, which have not yet vested based upon the above Exchange Ratio, in the
following amounts: Mr. Timpson, 2,148 shares; Dr. Akey, 2,148 shares; Mr.
Burke, 2,148 shares; Mr. McLaughlin, 2,148 shares; Mr. Ruegger, 2,148
shares; Mr. Shein, 2,148 shares; Mr. Mulkerin, 8,832 shares; Mr. Martin,
8,832 shares; Mr. Cerulo, 2,387 shares; Ms. Martino, 2,387 shares; Mr.
Spengler, 2,387 shares; and all directors and executive officers as a
group, 37,713 shares.
(4) Excludes stock options and awards to be granted under the Company's 1998
Stock Option Plan and 1998 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 limitations, Mr. Shein, Mr. Timpson and Mr. Ruegger
may be precluded from purchasing any shares in the Offerings.
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 October 24, 1997 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. The Plan
was subsequently amended on December 16, 1997. It is intended that all of the
outstanding capital stock of the Bank will be held by the Company, which is
incorporated under Delaware law. The Plan was approved by the OTS, subject to,
among other things, approval of the Plan by the Members of the Mutual Holding
Company and the stockholders of the Bank. A special meeting of members and a
special meeting of stockholders has been called for this purpose to be held on
____________, 1998.
The Company has received approval of the OTS to become a savings and loan
holding company and to acquire all of the Common Stock of the Bank to be issued
in the Conversion and Reorganization. The Company plans to retain 50% of the net
proceeds from the sale of the Conversion Stock, with all the remaining proceeds
contributed to the Bank. The Conversion and Reorganization will be effected only
upon completion of the sale of all of the shares of Conversion Stock of the
Company to be issued pursuant to the Plan.
The Plan provides generally that (i) the Mutual Holding Company will
convert to the stock form of organization and (ii) the Company will offer shares
of Conversion Stock for sale in the Subscription Offering to the Bank's Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders, and Other
Members. Concurrently, shares will be offered in a Community Offering with a
first preference given to the holders of the Public Bank Shares. 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
$106.4 million and $143.9 million, will be determined based upon an independent
appraisal, prepared by FinPro of the estimated pro forma market value of the
Common Stock of the Company. All shares of Conversion Stock to be issued and
sold in the Conversion and Reorganization will be sold at the same price. The
independent appraisal will be affirmed or, if necessary, updated at the
completion of the Subscription and Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering. The
appraisal has been performed by FinPro, a consulting firm experienced in the
valuation and appraisal of savings institutions. See "- Stock Pricing and
Exchange Ratio" for additional information as to the determination of the
estimated pro forma market value of the Conversion Stock.
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 currently has the ability to raise additional capital
through the sale of additional shares of its common stock, that ability is
limited by the mutual holding company structure which, among other things,
requires that the Mutual Holding Company own a majority of the outstanding
shares of its savings institution subsidiary's common stock. The Conversion and
Reorganization will significantly increase the Bank's capital position to a
level whereby the Bank will be better positioned to take advantage of business
opportunities as they arise. At September 30, 1997, the Bank had stockholders'
equity, determined in accordance with generally accepted accounting principles
("GAAP"), of $99.2 million, or 9.5% 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 $162.0 million, or a ratio of
GAAP capital to adjusted assets, on a pro forma basis, of 14.63% 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 1992 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 $10.0 million raised in the 1992 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 and
Reorganization.
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<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 or the possible issuance of authorized but unissued shares for
restricted stock awards under the Stock-Based Incentive 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 October 24, 1997. 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 December 16,
1997. After receipt of all requisite regulatory approvals, the Company will form
First Interim as a first-tier, wholly owned subsidiary of the Company, and the
Board of Directors of First Interim 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 First Interim,
respectively.
Pursuant to OTS regulations, the Plan must be approved by the affirmative
vote of at least a majority of the total number of votes eligible to be cast by
Members at the Special Meeting and by holders of at least two-thirds of the
outstanding common stock of the Bank at the Stockholders' Meeting. In addition,
in accordance with current OTS policy, the Plan must be approved by a majority
of the votes cast, in person or by proxy, by the holders of the Public Bank
Shares at the Stockholders' Meeting.
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The following diagram outlines the current organizational structure of
the parties' ownership interests:
<TABLE>
<S> <C>
- ----------------------------------- ------------------------------------
FIRST SAVINGS BANCSHARES, MHC HOLDERS OF PUBLIC BANK SHARES
- ----------------------------------- ------------------------------------
51.6% 48.4%
---------------------------------
FIRST SAVINGS BANK, SLA
---------------------------------
100%
---------------------------------
FIRST SOURCE BANCORP, INC.
---------------------------------
100%
---------------------------------
FIRST INTERIM SAVINGS BANK, FSB
---------------------------------
</TABLE>
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 First
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.
<TABLE>
<S> <C>
------------------------ -----------------------
PURCHASERS HOLDERS OF
OF CONVERSION STOCK PUBLIC BANK SHARES
------------------------ -----------------------
52.1% 47.9%
-----------------------------------
FIRST SOURCE BANCORP, INC.
-----------------------------------
100%
-----------------------------------
FIRST SAVINGS BANK, SLA
-----------------------------------
</TABLE>
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
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<PAGE>
of the Mutual Holding Company without any additional payment beyond the amount
of the deposit. A depositor who reduces or closes his account receives a portion
or all of the balance in the account but nothing for his ownership interest in
the net worth of the Mutual Holding Company, which is lost to the extent that
the balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to realize
the value of their ownership interest, which has realizable value only in the
unlikely event that the Mutual Holding Company is liquidated. In such event, the
depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves after other claims, including claims of depositors
to the amounts of their deposits, are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock is created to represent the ownership of the net
worth of the Company. THE COMMON STOCK OF THE COMPANY IS SEPARATE AND APART FROM
DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
capital stock. The stock certificates are transferable and, therefore, the stock
may be sold or traded if a purchaser is available with no effect on any account
the seller may hold in the Bank.
Continuity. While the Conversion and Reorganization is being accomplished,
the normal business of the Bank of accepting deposits and making loans will
continue without interruption. The Bank will continue to be subject to
regulation by the OTS and the FDIC. After the Conversion and Reorganization, the
Bank will continue to provide services for depositors and borrowers under
current policies by its present management and staff.
The Directors serving the Bank at the time of Conversion and Reorganization
will serve initially as Directors of the Bank after the Conversion and
Reorganization. The Directors of the Company will consist initially of
individuals currently serving on the Board of Directors of the Mutual Holding
Company. All officers of the Bank at the time of Conversion and Reorganization
will retain their positions immediately after Conversion and Reorganization.
Effect on Public Bank Shares. Under the Plan, upon consummation of the
Conversion and Reorganization, the Public Bank Shares shall be converted into
Common Stock based upon the Exchange Ratio without any further action on the
part of the holder thereof. Upon surrender of the Public Bank Shares, Common
Stock will be issued in exchange for such shares.
Upon consummation of the Conversion and Reorganization, the Public
Stockholders of the Bank, a New Jersey chartered savings association, will
become stockholders of the Company, a Delaware corporation. For a description of
certain changes in the rights of stockholders as a result of the Conversion and
Reorganization, see "Comparison of Stockholders' Rights" below.
Under New Jersey law, Public Stockholders of the Bank 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.
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<PAGE>
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, the Mutual Holding Company will cease to exist and
therefore, depositors and borrowers will no longer have membership rights in the
Mutual Holding Company. Upon Conversion and Reorganization, all voting rights in
the Bank will be vested in the Company as the sole stockholder of the Bank.
Exclusive voting rights with respect to the Company will be vested in the
holders of Common Stock. Depositors and borrowers of the Bank will not have
voting rights in the Company after the Conversion and Reorganization except to
the extent that they become stockholders of the Company.
Tax Effects. The Primary Parties have received an opinion from Patton
Boggs, L.L.P. with regard to federal income taxation and from KPMG Peat Marwick
LLP with respect to 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 1992 Stock Option Plans and 1996 Incentive Plan
will become stock benefit plans of the Company and the Bank's 1992 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 - Benefits."
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
Company's Common 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 $25,000, 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.
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<PAGE>
PAGE>
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 Company's Common Stock,
after giving effect to the Conversion and Reorganization, was $240.0 million as
of December 18, 1997. In accordance with OTS requirements, the Appraisal was
multiplied by an Exchange Ratio which was determined on the basis of the Mutual
Holding Company's ownership interest in the Bank's common stock (51.6%), as
increased to reflect the waiver of $1.1 million of dividends, out of the
aggregate of $6.7 million in dividends waived by the Mutual Holding Company.
Such adjustment was required by the OTS despite prior OTS policy which permitted
the Mutual Holding Company to waive dividends without impacting any future
exchange ratio in a conversion and reorganization. After giving effect to the
adjustment for waived dividends, the payment of cash in lieu of issuing
fractional Exchange Shares, and any shares of Conversion Stock purchased by
Public Stockholders in the Offerings or by the ESOP thereafter, the Exchange
Ratio will result in the Public Stockholders holding approximately 52.1% of the
Company, as compared to their current ownership interest in the Bank of
approximately 51.6%. Based on FinPro's valuation at the midpoint, the Mutual
Holding Company's waiver of certain dividends resulted in an adjustment of
approximately 3.35 basis points. This Exchange Ratio of 52.1% was multiplied by
the Appraisal to determine the midpoint of the valuation ($125.1 million), and
the minimum and maximum of the valuation were set at 15% below and above the
midpoint, respectively, resulting in a range of $106.4 million to $143.9
million. 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
10,637,542 to 14,391,900 shares of Conversion Stock being offered. Upon
consummation of the Conversion and Reorganization, the Conversion Stock and the
Exchange Shares will represent approximately 52.1% and 47.9%, 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 in accordance with
OTS requirements. Based upon such formula and the Valuation Price Range, the
Exchange Ratio ranged from a minimum of 2.5151 to a maximum of 3.4028 Exchange
Shares for each Public Bank Shares, with a midpoint of 2.9590. Based upon these
Exchange Ratios, the Company expects to issue between 9,762,458 and 13,208,100
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 $204.0 million or
above $317.4 million (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 $143.9 million (the maximum of the Valuation Price Range) and
up to $165.5 million (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.
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<PAGE>
There is no obligation or understanding on the part of management to take and/or
pay for any shares of Conversion Stock in order to complete the Offerings.
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Price Range, the following: (i) the
total number of shares of Conversion Stock and Exchange Shares; (ii) the
percentage of the total Common Stock represented by the Conversion Stock and the
Exchange Shares; and (iii) the Exchange Ratio. The table assumes that there is
no cash paid in lieu of issuing fractional Exchange Shares.
<TABLE>
<CAPTION>
CONVERSION STOCK EXCHANGE SHARES TOTAL SHARES
TO BE OFFERED(1) TO BE ISSUED(1)(2) OF COMMON
----------------------- -----------------------
STOCK TO BE EXCHANGE
AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING(1) RATIO(1)
<S> <C> <C> <C> <C> <C> <C>
Minimum..................... 10,637,542 52.1% 9,762,458 47.9% 20,400,000 2.5151
Midpoint.................... 12,514,527 52.1 11,485,473 47.9 24,000,000 2.9590
Maximum..................... 14,391,900 52.1 13,208,100 47.9 27,600,000 3.4028
15% above maximum........... 16,550,374 52.1 15,189,626 47.9 31,740,000 3.9133
</TABLE>
________________________________
(1) Assumes that outstanding options to purchase 142,541 shares of Bank Common
Stock at October 31, 1997 are not exercised prior to consummation of the
Conversion and Reorganization.
(2) Based upon 3,881,539 Public Bank Shares outstanding as of October 31, 1997.
Does not reflect unexercised options.
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
16,550,374 shares due to regulatory considerations or changes in market or
general financial and economic conditions, without the resolicitation of
subscribers. See "- Limitations on Conversion Stock Purchases" as to the method
of distribution and allocation of additional shares that may be issued in the
event of an increase in the Estimated Price Range to fill unfilled orders in the
Subscription and Community Offerings.
No sale of shares of Conversion Stock may be consummated unless, prior to
such consummation, FinPro confirms to the Primary Parties and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, would cause FinPro to conclude that
the value of the Conversion Stock at the price so determined is incompatible
with its estimate of the pro forma market value of the Common Stock at the
conclusion of the Subscription and Community Offerings.
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the
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<PAGE>
Company, after consulting with the OTS, may terminate the Plan and return all
funds promptly with interest at the Bank's passbook rate of interest on payments
made by check, bank draft or money order, extend or hold a new Subscription and
Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by the OTS
in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the OTS
for periods of up to 90 days not to extend beyond ____________________, 2000.
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 Offerings, extend, reopen or commence new Subscription and Community
Offerings or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of the
OTS or take such other actions as permitted by the OTS in order to complete the
Conversion and Reorganization, or terminate the Plan and cancel the Subscription
and Community Offerings and/or the Syndicated Community Offering. In the event
market or financial conditions change so as to cause the aggregate purchase
price of the shares to be below the minimum of the Estimated Price Range or more
than 15% above the maximum of such range, and the Company and the Bank determine
to continue the Conversion and Reorganization, subscribers will be resolicited
(i.e., be permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to
decrease or cancel their subscriptions). Any change in the Estimated Price Range
must be approved by the OTS. A resolicitation, if any, following the conclusion
of the Subscription and Community Offerings would not exceed 45 days, or if
following the Syndicated Community Offering, 90 days, unless further extended by
the OTS for periods up to 90 days not to extend beyond ____________, 2000. 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."
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<PAGE>
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan by the Boards of Directors of the Primary
Parties will be final, subject to the authority of the OTS, including but not
limited to interpretations relating to residence requirements applicable to
subscribers and purchase limitations. The Plan provides that, if deemed
necessary or desirable by the Boards of Directors of the Primary Parties, the
Plan may be substantively amended prior to the solicitation of proxies from
members entitled to vote on the Plan by a two-thirds vote of the Boards of
Directors; amendment of the Plan thereafter requires the approval of the OTS.
The Plan will terminate if the sale of all shares of stock being offered
pursuant to the Plan is not completed prior to 24 months after the date of the
Special Meeting. The Plan may be terminated by a two-thirds vote of the Boards
of Directors of the Primary Parties at any time prior to the Special Meeting,
and thereafter by such a vote with the approval of the OTS. The Company has
undertaken to file a post-effective amendment with the Securities and Exchange
Commission to reflect any material change in the plan of distribution of the
Common Stock or any information contained within this Prospectus.
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 $106.4 million to a maximum, as increased by 15%, of
$165.5 million, the number of shares of Conversion Stock expected to be issued
is between a minimum of 10,637,542 shares and a maximum, as adjusted by 15%, of
16,550,374 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 and Reorganization 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 52.4% and 47.6%, 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."
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<PAGE>
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, 1995
("Eligible Account Holders"); (2) the ESOP; (3) holders of savings accounts with
a balance of $50 or more as of December 31, 1997 ("Supplemental Eligible Account
Holders"); and (4) members of the Bank, consisting of depositors of the Bank as
of ___________, 1998, the Voting Record Date, and borrowers with loans
outstanding as of July 10, 1992, which continue to be outstanding as of the
Voting Record Date other than Eligible Account Holders and Supplemental Eligible
Account Holders ("Other Members"). All subscriptions received will be subject to
the availability of Conversion Stock after satisfaction of all subscriptions of
all persons having prior rights in the Subscription Offering and to the maximum
and minimum purchase limitations set forth in the Plan of Conversion and as
described below under "- Limitations on Conversion Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of the
amount permitted to be purchased in the Community Offering, currently $750,000
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, 1995) 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
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<PAGE>
Conversion or 851,003 shares and 1,151,352 shares, based on the issuance of
10,637,542 shares and 14,391,900 shares, respectively. Subscriptions by the ESOP
will not be aggregated with shares of Conversion Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
and Community Offerings, including subscriptions of any of the Bank's directors,
officers, employees or associates thereof. See "Management of the Bank - Benefit
Plans - Employee Stock Ownership Plan and Trust."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $750,000 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 $750,000 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
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rata basis in the same proportion as a subscribing Other Member's total votes on
the Voting Record Date for the Special Meeting bears to the total votes of all
subscribing Other Members on such date.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at ______ .m., New Jersey time, on ___________, 1998, unless
extended for up to 45 days by the Primary Parties or such additional periods
with the approval of the OTS. Subscription rights which have not been exercised
prior to the Expiration Date will become void.
The Primary Parties will not execute orders until all shares of Conversion
Stock have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the Bank
pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be canceled. If
an extension beyond the 45 day period following the Expiration Date is granted,
the Primary Parties will notify subscribers of the extension of time and of any
rights of subscribers to modify or rescind their subscriptions and have their
funds returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Primary Parties of their intention to
confirm, modify, or rescind their subscription. If an affirmative response to
any resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond __________, 2000.
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 preference given to holders of Public Bank Shares, 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 $750,000 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 $750,000 of Conversion Stock at the sole discretion of the Primary
Parties. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF CONVERSION STOCK IN THE
COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE PRIMARY PARTIES, IN
THEIR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART
EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING
THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of the Public Stockholders after completion of the
Subscription and Community Offerings, such stock will be allocated first to each
holder of Public Bank Shares whose order is accepted by the Bank, in an amount
equal to the lesser of 100 shares or the number of shares subscribed for by each
such Public Stockholder, if possible. Thereafter, unallocated shares will be
allocated among the Public Stockholders whose order remains unsatisfied on a 100
shares per order basis until all such orders have been filled or the remaining
shares have been allocated. To the extent that there are shares remaining after
all subscriptions by Public Stockholders have been filled, shares will be
allocated, applying the same allocation formula described above, to Preferred
Subscribers. If there are any shares remaining, shares will be allocated to
other subscribers 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
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subscribe for stock pursuant to the Plan reside. However, the Plan provides that
the Primary Parties are not required to offer stock in the Subscription Offering
to any person who resides in a foreign country or resides in a state of the
United States with respect to which both of the following apply: (i) a small
number of persons otherwise eligible to subscribe for shares of Conversion Stock
reside in such state; and (ii) the Primary Parties determines that compliance
with the securities laws of such state would be impracticable for reasons of
cost or otherwise, including but not limited to a request that the Primary
Parties or their officers, directors or trustees register as a broker, dealer,
salesman or selling agent, under the securities laws of such state, or a request
to register or otherwise qualify the subscription rights or Conversion Stock for
sale or submit any filing with respect thereto in such state. Where the number
of persons eligible to subscribe for shares in one state is small, the Primary
Parties will base their decision as to whether or not to offer the Conversion
Stock in such state on a number of factors, including the size of accounts held
by account holders in the state, the cost of registering or qualifying the
shares or the need to register the Company, its officers, directors or employees
as brokers, dealers or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank has engaged Sandler O'Neill as a consultant and financial advisor
in connection with the offering of the Conversion Stock, and Sandler O'Neill has
agreed to use its best efforts to assist the Company with the solicitation of
subscriptions and purchase orders for shares of Conversion Stock in the
Offerings. Based upon negotiations between the Primary Parties concerning fee
structure, Sandler O'Neill will receive a equal to 1.15% of the aggregate
Purchase Price of all shares sold in 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 1.15% 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 1.15% 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.
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. Such fee will not exceed
$50,000. The Primary Parties have agreed to indemnify Sandler O'Neill for
reasonable costs and expenses in connection with claims or liabilities under
applicable federal or state law, or otherwise, related to or arising out of the
Conversion except to the extent that such claim or liability arose out of or was
based upon any untrue statement of material fact, omission of a material fact
related to or made in reliance upon and in conformity with written information
furnished to the Primary Parties by Sandler O'Neill or such claim or liability
was primarily attributable to the gross negligence, willful misconduct or bad
faith of Sandler O'Neill. Such claims and liabilities could include claims under
the federal and state securities laws. Sandler O'Neill has received advances
towards its fees totaling $25,000. Total marketing fees to Sandler O'Neill are
expected to be $1.1 million and $1.5 million 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.
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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 services of approximately
$10,000. Sandler O'Neill has received advances toward its fees for these
services totaling $5,000.
Directors and executive officers of the Primary Parties may participate in
the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
Other employees of the Bank may participate in the Offering in administrative
capacities or providing clerical work in effecting a sales transaction. Such
other employees have been instructed not to solicit offers to purchase Common
Stock or provide advice regarding the purchase of Common Stock. The Company will
rely on Rule 3a4-1 under the Exchange Act, and sales of Common Stock will be
conducted within the requirements of Rule 3a4-1, so as to permit officers,
directors and employees to participate in the sale of Common Stock. No officer,
director or employee of Primary Parties will be compensated in connection with
his participation by the payment of commissions or other remuneration based
either directly or indirectly on the transactions in the Conversion Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.
To purchase shares in the Subscription and Community Offerings, an executed
stock order form and certification form with the required payment for each share
subscribed for, or with appropriate authorization for withdrawal from the Bank's
deposit account (which may be given by completing the appropriate blanks in the
stock order form), must be received by the Bank at any of its offices by 12:00
noon, 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,
1995) and/or the Supplemental Eligibility Record Date (December 31, 1997) and/or
the Voting Record Date (__________, 1998) 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
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cash, check, bank draft or money order at the Bank's passbook rate of interest
from the date payment is received until the completion or termination of the
Conversion and Reorganization. If payment is made by authorization of withdrawal
from deposit accounts, the funds authorized to be withdrawn from a deposit
account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion and Reorganization, but a hold will
be placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the Conversion and Reorganization.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Conversion and Reorganization. The Bank will waive any applicable penalties
for early withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance requirement
at the time that the funds actually are transferred under the authorization, the
certificate will be canceled at the time of the withdrawal, without penalty, and
the remaining balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Conversion Stock subscribed
for at the Purchase Price upon consummation of the Subscription and Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Conversion Stock in the Subscription
and Community Offerings, provided that such IRAs are not maintained at the Bank.
Persons with self-directed IRAs maintained at the Bank must have their accounts
transferred to an unaffiliated institution or broker to purchase shares of
Common Stock in the Subscription and Community Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and 10%
shareholders who use self-directed IRA funds to purchase shares of Conversion
Stock in the Subscription and Community Offerings, make such purchases for the
exclusive benefit of the IRAs.
Certificates representing shares of Conversion Stock purchased will be
mailed to purchasers at the address specified in properly completed stock order
forms, as soon as practicable following consummation of the sale of all shares
of Conversion Stock. Any certificates returned as undeliverable will be disposed
of in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion and Reorganization, the OTS
conversion regulations prohibit any person with subscription rights, including
the Eligible Account Holders, the ESOP, the Supplemental Eligible Account
Holders and Other Members of the Bank, from transferring or entering into any
agreement or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the Plan or the shares of Conversion Stock to
be issued upon their exercise. Such rights may be exercised only by the person
to whom they are granted and only for his account. Each person exercising such
subscription rights will be required to certify that he is purchasing shares
solely for his own account and that he has no agreement or understanding
regarding the sale or transfer of such shares. The regulations also prohibit any
person from offering or making an announcement of an offer or intent to make an
offer to purchase such subscription rights or shares of Conversion Stock prior
to the completion of the Conversion and Reorganization.
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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.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion and Reorganization, the Plan provides
that, if feasible, all shares of Conversion Stock not purchased in the
Subscription and Community Offerings, if any, will be offered for sale to the
general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers to be formed and managed by Sandler O'Neill acting as
agent of the Company to assist the Company and the Bank in the sale of the
Conversion Stock. The Company and the Bank have the right to reject orders in
whole or in part in their sole discretion in the Syndicated Community Offering.
Neither Sandler O'Neill nor any registered broker-dealer shall have any
obligation to take or purchase any shares of the Conversion Stock in the
Syndicated Community Offering, however, Sandler O'Neill 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 $750,000 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.
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Certificates representing shares of Conversion Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the sale of the
Conversion Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the OTS. Such extensions may not be beyond ____________, 2000.
See "- Stock Pricing and Exchange Ratio" above for a discussion of rights of
subscribers, if any, in the event an extension is granted.
LIMITATIONS ON CONVERSION STOCK PURCHASES
The Plan includes the limitations set forth below on the number of shares
of Conversion Stock which may be purchased during the Conversion. The purchase
limits set forth in paragraphs (2), (4), (5), (6) and (7) are subject to the
overall maximum purchase limitations in (8) below which includes Exchange Shares
received by purchasers.
(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 $750,000 of Conversion
Stock offered, one-tenth of one percent (.10%) of the total offering
of shares of Conversion Stock or fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total
number of shares of Conversion Stock to be issued by a fraction of
which the numerator is the amount of the Qualifying Deposit of the
Eligible Account Holder and the denominator is the total amount of
Qualifying Deposits of all Eligible Account Holders in each case on
the Eligibility Record Date subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Conversion Stock issued in the Conversion and
Reorganization, including shares issued in the event of an increase in
the Estimated Price Range of 15% and intends to purchase 8% of the
shares of Conversion Stock issued in the Conversion and
Reorganization, including any increase in the number of shares to be
issued after the date hereof as a result of an increase of up to 15%
in the maximum of the Estimated Price Range;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently
$750,000 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%;
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(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 $750,000 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 $750,000 of Conversion Stock offered in the Conversion and
Reorganization subject to the overall maximum purchase limitation in
(8) below and exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Conversion Stock in the Syndicated
Community Offering, together with associates of and persons acting in
concert with such persons, may purchase in the Syndicated Offering up
to $750,000 of shares of Conversion Stock offered in the Conversion
and Reorganization subject to the overall maximum purchase limitation
in (8) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to
15% and, provided further that shares of Conversion Stock purchased in
the Community Offering by any persons, together with associates of and
persons acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering in applying the
$750,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may purchase stock in the Community Offering and
Syndicated Community Offering subject to the purchase limitations
described in (6) and (7) above, provided that, except for the ESOP,
the overall maximum number of shares of Conversion Stock subscribed
for or purchased in all categories of the Conversion and
Reorganization by any person, together with associates of and groups
of persons acting in concert with such persons when combined with any
Exchange Shares received by such persons, shall not exceed 2.1% 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 25.0% of the total number of shares of Conversion Stock
offered for sale in the Conversion and Reorganization may be purchased
by directors and officers of the Bank and the Mutual Holding Company
and their associates in the aggregate, when combined with any Exchange
Shares received and excluding purchases by the ESOP.
Except as may otherwise be required by the OTS, the Public Stockholders
will not have to sell any Company Common Stock or be limited in receiving
Exchange Shares even if their ownership of Bank Common Stock when converted into
Exchange Stock would exceed the above purchase limitations. However, any Public
Stockholder receiving Exchange Shares in excess of the purchase limitations will
be precluded from purchasing new shares of Company Common Stock in the
Offerings. 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
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to purchase additional shares of Conversion Stock under this provision will be
determined by the Boards of Directors and, if approved, allocated on a pro rata
basis giving priority in accordance with the priority rights set forth herein.
In any event, any Exchange Shares received by an individual will be aggregated
with shares subscribed for by such person for purposes of applying the maximum
purchase limitation.
The overall maximum purchase limitation may not be reduced to less than 1%
but the individual amount permitted to be subscribed for may be reduced by the
Primary Parties to less than 1%, subject to paragraphs (2), (4), and (5) above
without the further approval of members or Public Stockholders or resolicitation
of subscribers, but subject to any other approvals as may be required by the
OTS. 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 2.1% of the shares of Conversion Stock
offered, but may make such purchase, together with associates of and persons
acting in concert with such person, by also purchasing in other available
categories of the Conversion and Reorganization, subject to availability of
shares, the overall maximum purchase limit for purchases in the Conversion and
Reorganization and the amount of Exchange Shares received by such individual.
In the event of an increase in the total number of shares offered in the
Conversion and Reorganization due to an increase in the Estimated Price Range of
up to 15% (the "Adjusted Maximum"), the additional shares will be allocated in
the following order or priority in accordance with the Plan: (i) to fill the
ESOP's subscription of 8% of the Adjusted Maximum number of shares; (ii) in the
event that there is an oversubscription by Eligible Account Holders, to fill
unsatisfied subscriptions of Eligible Account Holders, exclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unsatisfied subscriptions of Supplemental
Eligible Account Holders, exclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unsatisfied
subscriptions of Other Members exclusive of the Adjusted Maximums; and (v) to
fill unsatisfied subscriptions in the Community Offering to the extent possible,
exclusive of the Adjusted Maximum and with a preference to Public Stockholders.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Primary Parties or a majority-owned subsidiary of the Bank) of
which such person is an officer, partner or 10% stockholder; (ii) any trust or
other estate in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity; provided, however, such
term shall not include any employee stock benefit plan of the Bank in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; and (iii) any relative or spouse of such person, or
any relative of such spouse, who either has the same home as such person or who
is a director or officer of the Bank. Directors are not treated as associates of
each other solely because of their Board membership. For a further discussion of
limitations on purchases of a converting institution's stock at the time of
Conversion and subsequent to Conversion, see "Beneficial Ownership of Capital
Stock - Subscriptions by Executive Officers and Directors," "- Certain
Restrictions on Purchase or Transfer of Shares After Conversion and
Reorganization" and "Restrictions on Acquisition of the Company and the Bank."
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
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creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank or
the Company above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion and Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders in
an amount equal to the greater of (1) the Bank's retained earnings at December
31, 1991, the date of the latest statement of financial condition contained in
the final offering circular utilized in the 1992 MHC Reorganization or (2) 51.6%
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, 1995 and September 30, 1997, respectively. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account based on the proportion that the
balance of his Qualifying Deposits on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the Bank. For Qualifying Deposits in existence at
both dates separate subaccounts shall be determined on the basis of the
Qualifying Deposits in such deposit accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time to time by the proportion of any
such reduction, and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion and Reorganization is expressly conditioned
upon the receipt by the Primary Parties of either a favorable ruling from the
IRS or an opinion of counsel with respect to federal and New Jersey income
taxation to the effect that the Conversion and Reorganization will not be a
taxable transaction to the Mutual Holding Company, the Company, the Bank,
Eligible Account Holders, or Supplemental Eligible Account Holders except as
noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion and Reorganization. Instead, the Bank has received an
opinion of Patton Boggs, L.L.P, 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
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receipt of the assets of the Mutual Holding Company in such merger, (3) the
merger of the First 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
First 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 First 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 may 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, to the extent of the
value, if any, of the interest in the Liquidation Account and the subscription
rights, and (12) the tax basis to the holders of Conversion Stock purchased in
the Offerings will be the amount paid therefore, and the holding period for the
shares of Conversion Stock will begin on the date of consummation of the
Offerings if purchased through the exercise of subscription rights and on the
day after the date of purchase if purchased in the Community Offering or
Syndicated Community Offering.
KPMG Peat Marwick LLP has opined that the Conversion and Reorganization
will not be a taxable transaction to the Company, the Bank, Eligible Account
Holders or Supplemental Eligible Account Holders for New Jersey income and/or
franchise tax purposes. Certain portions of both the federal and the state and
local tax opinions are based upon the assumption that the subscription rights
issued in connection with the Conversion and Reorganization will have no value.
Unlike private rulings, an opinion of counsel 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
and Reorganization by a director or an executive officer of the Primary Parties
will be subject to a restriction that the shares not be sold for a period of one
year following the Conversion and Reorganization, except in the event of the
death of such director or executive officer. Each certificate for restricted
shares will bear a legend giving notice of this restriction on transfer, and
instructions will be issued to the effect that any transfer within such time
period of any certificate or record ownership of such shares other than as
provided above is a violation
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of the restriction. Any shares of Common Stock issued at a later date as a stock
dividend, stock split, or otherwise, with respect to such restricted stock will
be subject to the same restrictions. The directors and executive officers of the
Company and the Bank will also be subject to the insider trading rules
promulgated pursuant to the Exchange Act and any other applicable requirements
of the federal securities laws.
Purchases of outstanding shares of Conversion Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Primary Parties after adoption of the Plan of Conversion) and
their associates during the three-year period following Conversion and
Reorganization may be made only through a broker or dealer registered with the
SEC, except with the prior written approval of the OTS. This restriction does
not apply, however, to negotiated transactions involving more than 1.0% of the
Company's outstanding Common Stock or to the purchase of stock pursuant to any
Stock-Based Incentive Plan to be established after the Conversion and
Reorganization.
Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, beginning one year following completion of the Conversion and
Reorganization the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a twelve-
month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than ten days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. 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 all
material 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 85,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock,
both with a par value $0.01 per share, whereas the Bank's authorized capital
stock consists of 10,000,000 shares of Bank Common Stock and 1,000,000 shares of
serial preferred stock, both with a par value $0.01 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
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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-Based Incentive Plan and upon exercise of stock options to be
issued pursuant to the terms of the Stock-Based Incentive Plan, all of which are
to be established and presented to stockholders at a meeting after the
Conversion and Reorganization.
The Company will be subject to annual franchise taxes under Delaware law
based on its authorized capitalization. As a New Jersey chartered institution,
the Bank is not subject to franchise taxes, regardless of the amount of its
authorized capitalization.
Issuance of Capital Stock. Pursuant to applicable laws and regulations, the
Mutual Holding Company is required to own not less than a majority of the
outstanding Bank Common Stock. There will be no such restriction applicable to
the Company following consummation of the Conversion and Reorganization.
Neither the Certificate of Incorporation of the Bank nor the Certificate of
Incorporation of the Company contains a restriction on the issuance of shares of
capital stock to directors, officers or controlling persons of the Company and
the Bank, respectively. Thus, stock-related compensation plans such as stock
option plans could be adopted by the Company and the Bank without stockholder
approval and shares of Company capital stock and Bank capital stock could be
issued directly to directors, officers or controlling persons without
stockholder approval. The Bylaws of the NASD, however, generally require
corporations with securities which are quoted on the Nasdaq National Market to
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
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dividends from the Bank will be a primary source of funds of the Company for the
payment of dividends to stockholders of the Company.
The Delaware General Corporation Law generally provides that, subject to
any restrictions in the corporation's Certificate of Incorporation, dividends
may be declared from the corporation's surplus or, if there is no surplus, from
its net profits for the fiscal year in which the dividend is declared and the
preceding fiscal year. However, if the corporation's capital (generally defined
in the Delaware General Corporation Law as the sum of the aggregate par value of
all shares of the corporation's capital stock, where all such shares have a par
value and the board of directors has not established a higher level of capital)
has been diminished to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, dividends may not be declared and
paid out of such net profits until the deficiency in such capital has been
repaired.
Board of Directors. The Bank's Certificate of Incorporation and the
Certificate of Incorporation and Bylaws of the Company, respectively, require
the Board of Directors of the Bank and the Company to be divided into three
classes as nearly equal in number as possible and that the members of each class
shall be elected for a term of three years and until their successors are
elected and qualified, with one class being elected annually.
Under the Bank's Bylaws, any vacancies in the Board of Directors of the
Bank may be filled by the affirmative vote of a majority of the remaining
directors although less than a quorum of the board of directors. Persons elected
by the directors of the Bank to fill vacancies may only serve until the next
annual meeting of stockholders. However, under the Company's Certificate of
Incorporation, any vacancy occurring in the Board of Directors of the Company,
including any vacancy created by reason of an increase in the number of
directors, may be filled by the remaining directors, and any director so chosen
shall hold office for the remainder of the term to which the director has been
elected and until his successor is elected and qualified.
Under the Bank's Bylaws, any director may be removed for cause by a two-
thirds vote of the Board of Directors or by the affirmative vote of at least 80%
of the voting power of the then outstanding shares of capital stock of the Bank
entitled to vote in an election of directors. Under the Company's Certificate of
Incorporation, a director or the entire board of directors may be removed only
for cause and only by the affirmative vote of the holders of at least 80% of the
outstanding voting shares of the Company.
Limitations on Liability. The Company's Certificate of Incorporation
provides that the personal liability of the directors and officers of the
Company for monetary damages shall be eliminated to the fullest extent permitted
by the Delaware General Corporation Law as it exists on the effective date of
the Certificate of Incorporation or as such law may be thereafter in effect.
Section 102(b)(7) of the Delaware General Corporation Law currently provides
that 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
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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 provides 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, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was a director, officer or employee of the Company or any
predecessor of the Company, or is or was serving at the request of the Company
or any predecessor of the Company as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, liability and loss reasonably incurred or suffered by such indemnitee
in connection therewith to the fullest extent authorized by the Delaware General
Corporation Law of the State of Delaware 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 1992 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
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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.
Limitations on Acquisitions of Voting Stock and Voting Rights. The Bank's
Certificate of Incorporation provides that no person, other than the MHC or the
Company, shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of the issued and outstanding shares of any class of
an equity security of the Bank, unless such offer to acquire or acquisition is
approved by a majority of the Board of Directors. In the event that shares are
acquired in violation of this restriction, all shares beneficially owned by any
person in excess of 10% shall be considered "Excess Shares" and shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to
stockholders for a vote.
The Certificate of Incorporation of the Company provides that in no event
shall any record owner of any outstanding Common Stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the then outstanding shares of Common Stock (the "Limit") be entitled or
permitted to any vote in respect of the shares held in excess of the Limit.
Beneficial ownership is determined pursuant to Rule 13d-3 of the General Rules
and Regulations promulgated pursuant to the Exchange Act, and includes shares
beneficially owned by such person or any of his affiliates (as defined in the
Certificate of Incorporation), shares which such person or his affiliates have
the right to acquire upon the exercise of conversion rights or options and
shares as to which such person and his affiliates have or share investment or
voting power, but shall not include shares beneficially owned by the ESOP or
directors, officers and employees of the Bank or Company or shares that are
subject to a revocable proxy and that are not otherwise beneficially owned, or
deemed by the Company to be beneficially owned, by such person and his
affiliates. The Certificate of Incorporation of the Company further provides
that this provision limiting voting rights may only be amended upon the vote of
80% of the outstanding shares of voting stock (after giving effect to the
limitation on voting rights).
Mergers, Consolidations and Sales of Assets. The Bank's Certificate of
Incorporation and Bylaws do not impose any specific vote requirement for
stockholder approval of mergers and certain business transactions.
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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 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.
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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 and Reorganization, together with provisions of
Delaware corporate law, may have anti-takeover effects. In addition, regulatory
restrictions may make it difficult for persons or companies to acquire control
of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
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).
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Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, shall be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides that a director may be
removed from the Board of Directors prior to the expiration of his term only for
cause, upon the vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 85,000,000 shares of Common Stock and 10,000,000 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 restricted stock awards and upon exercise of
stock options to be issued pursuant to the terms of the Stock-Based Incentive
Plan all of which are to be established and presented to stockholders no earlier
than six months after the Conversion and Reorganization.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business Combinations,
including mergers, consolidations and sales of all or substantially all of the
assets of a corporation must, subject to certain exceptions, be approved by the
vote of the holders of only a majority of the outstanding shares of Common Stock
of the Company and any other affected class of stock. Under the Certificate of
Incorporation, at least 80% approval of stockholders is required in connection
with any transaction involving an Interested Stockholder (as defined below)
except (i) in cases where the proposed transaction has been approved in
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advance by a majority of those members of the Company's Board of Directors who
are unaffiliated with the Interested Stockholder and were directors prior to the
time when the Interested Stockholder became an Interested Stockholder or (ii) if
the proposed transaction meets certain conditions set forth therein which are
designed to afford the stockholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The term
"Interested Stockholder" is defined to include any individual, corporation,
partnership or other entity (other than the Company or its subsidiary) which
owns beneficially or controls, directly or indirectly, 10% or more of the
outstanding shares of voting stock of the Company. This provision of the
Certificate of Incorporation applies to any "Business Combination," which is
defined to include (i) any merger or consolidation of the Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined in
the Certificate of Incorporation) of an Interested Stockholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 25% or more of the assets of the Company
or combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash or
securities the value of which equals or exceeds 25% of the fair market value of
the Common Stock of the Company; (iv) the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportionate share of Common Stock or any class of
equity or convertible securities of the Company owned directly or indirectly by
an Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 0.6% 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 and Reorganization stockholder approval of the proposed
Stock-Based Incentive Plan is received, the Company expects to acquire 4% of the
aggregate of the Conversion Stock issued in the Conversion and Reorganization
and expects to issue an amount equal to 10% of the aggregate of the Conversion
Stock issued in the Conversion and Reorganization to directors and executive
officers. As a result, assuming the Stock-Based Incentive Plan is 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
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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.
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, and the
Stock-Based Incentive 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"
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is defined broadly to cover a wide range of corporate transactions including
mergers, sales of assets, issuances of stock, transactions with subsidiaries and
the receipt of disproportionate financial benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S CERTIFICATE OF INCORPORATION 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
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more difficult for a majority of shares to force an immediate change in the
Board of Directors since only one-third of the Board is elected each year. The
purpose of these provisions is to assure stability and continuity of management
of the Bank in the years immediately following the Conversion and
Reorganization.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company - Preferred Stock," for the issuance or use of the shares of Bank
Preferred Stock proposed to be authorized, the Board of Directors believes that
the availability of such shares will provide the Bank with increased flexibility
in structuring possible future financings and acquisitions and in meeting other
corporate needs which may arise. In the event of a proposed merger, tender offer
or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Bank Preferred Stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of such Bank Preferred Stock, therefore, may be to
deter a future takeover attempt. The Board of Directors does not intend to issue
any Bank Preferred Stock except on terms which the Board deems to be in the best
interest of the Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion and Reorganization, from transferring, or from entering into any
agreement or understanding to transfer, to the account of another, legal or
beneficial ownership of the subscription rights issued under the Plan or the
Conversion Stock to be issued upon their exercise. The Plan also prohibits any
person, prior to the completion of the Conversion and Reorganization, from
offering, or making an announcement of an offer or intent to make an offer, to
purchase such subscription rights or Conversion Stock.
For three years following the Conversion and Reorganization, OTS
regulations prohibit any person from acquiring or making an offer to acquire
more than 10% of the stock of any converted savings institution, except for: (i)
offers that, if consummated, would not result in the acquisition by such person
during the preceding 12-month period of more than 1% of such stock; (ii) offers
for up to 25% in the aggregate by the ESOP or other tax qualified plans of the
Bank or the Company; or (iii) offers which are not opposed by the Board of
Directors of the Bank and which receive the prior approval of the OTS. Such
prohibition is also applicable to the acquisition of the stock of the Company.
Such acquisition may be disapproved by the OTS if it is found, among other
things, that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the savings
institution's conversion proceeds. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matters submitted to a vote of stockholders. The definition of beneficial
ownership for this regulation extends to persons holding revocable or
irrevocable proxies for the Company's stock under circumstances that give rise
to a conclusive or rebuttable determination of control under the OTS
regulations.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the OTS under the Change
in Bank Control Act. The OTS requires all persons seeking control of a savings
institution and, therefore, indirectly its holding company, to obtain regulatory
approval prior to offering to obtain control. Federal law generally provides
that no "person," acting directly or indirectly or through or in concert with
one or more other persons, may acquire directly
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or indirectly "control," as that term is defined in OTS regulations, of a
federally-insured savings institution without giving at least 60 days' written
notice to the OTS and providing the OTS an opportunity to disapprove the
proposed acquisition. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings institution or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person. Such change in control restrictions on
the acquisition of holding company stock are not limited to three years after
conversion but will apply for as long as the regulations are in effect. Persons
holding revocable or irrevocable proxies may be deemed to be beneficial owners
of such securities under OTS regulations and therefore prohibited from voting
all or the portion of such proxies in excess of the 10% aggregate beneficial
ownership limit. Such regulatory restrictions may prevent or inhibit proxy
contests for control of the Company or the Bank which have not received prior
regulatory approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 85,000,000 shares of Common Stock having
a par value of $.01 per share and 10,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). The Company currently
expects to issue up to 27,600,000 shares of Common Stock (or 31,740,000 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 and Reorganization, 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."
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Subsequent to the Conversion and Reorganization, voting rights will be
vested exclusively in the owners of the shares of capital stock of the Bank,
which will be the Company, and voted at the direction of the Company's Board of
Directors. Consequently, the holders of the Common Stock will not have direct
control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The Conversion
and Reorganization --Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion and Reorganization. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Certificate of Incorporation of the Bank authorizes the issuance of
capital stock consisting of 10,000,000 shares of common stock, par value $0.01
per share, and 1,000,000 shares of preferred stock, par value $.01 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.
148
<PAGE>
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 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 Registrar and
Transfer Company, Cranford, New Jersey.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries as
of December 31, 1996 and for each of the years in the three year period ended
December 31, 1996 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 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 Patton Boggs, L.L.P., Washington, D.C., special counsel to the
Bank and the Company. Patton Boggs, L.L.P. will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The federal
income tax consequences of the Conversion and Reorganization will be passed upon
for the Bank and the Company by Patton Boggs, L.L.P. and the 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
149
<PAGE>
SEC maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC, including the Company. This Prospectus contains a
description of the material terms and features of all material contracts,
reports or exhibits to the Registration Statement required to be described,
however, the statements contained in this Prospectus as to the contents of any
contract or other document filed as an exhibit to the registration statement
are, of necessity, brief descriptions thereof and are not necessarily complete;
each such statement is qualified by reference to such contract or document.
The Mutual Holding Company has filed an application for conversion with the
OTS with respect to the Conversion and Reorganization. Pursuant to the rules and
regulations of the OTS, this Prospectus omits certain information contained in
that application. The application may be examined at the principal office of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the Office of the
Regional Director of the OTS located at 10 Exchange Place, 18th Floor, Jersey
City, New Jersey 07302.
In connection with the Conversion and Reorganization, the Company will
register its Common Stock with the SEC under Section 12(b) of the Exchange Act
and, upon such registration, the Company and the holders of its stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act. Under the Plan, the Company has undertaken
that it will not terminate such registration for a period of at least three
years following the Conversion and Reorganization.
A copy of the Certificate of Incorporation and the Bylaws of the Company
and the Stock Certificate of Incorporation and Bylaws of the Bank are available
without charge from the Bank.
150
<PAGE>
FIRST SAVINGS BANK, SLA AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report........................................ F-2
Consolidated Statements of Financial Condition as of September
30, 1997 (unaudited) and December 31, 1996 and 1995................. F-3
Consolidated Statements of Income for the Nine Months Ended
September 30, 1997 and 1996 (unaudited) and for the Years
Ended December 31, 1996, 1995 and 1994.............................. 43
Consolidated Statements of Stockholders' Equity for the Nine
Months Ended September 30, 1997 (unaudited) and for the Years
Ended December 31, 1996, 1995 and 1994.............................. F-4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 (unaudited) and for the Years
Ended December 31, 1996, 1995 and 1994.............................. F-5
Notes to Consolidated Financial Statements.......................... F-7 to F-33
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes thereto.
The financial statements of First Source Bancorp, Inc. have been omitted
because First Source Bancorp, Inc. has not yet issued any stock, has no assets
and no liabilities, and has not conducted any business other than of an
organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Savings Bank, SLA:
We have audited the consolidated financial statements of First Savings Bank,
SLA, 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,
SLA, and Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 27, 1997, except as to note 19,
which is as of December 31, 1997
F-2
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------
1997 1996 1995
--------------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks....................................................... $ 5,873 $ 7,192 $ 8,674
Federal funds sold............................................................ 17,925 1,850 17,875
---------- --------- ---------
Total cash and cash equivalents.......................................... 23,798 9,042 26,549
Federal Home Loan Bank of New York (FHLB-NY) stock,
at cost, (note 10)....................................................... 8,045 7,428 6,276
Investment securities, at amortized cost (estimated fair value
of $41,108, $38,980 and $39,617 at 9/30/97, 12/31/96
and 12/31/95, respectively) (notes 4 and 10)............................. 40,959 38,955 39,003
Investment securities available for sale (notes 4 and 10)..................... 18,024 14,831 2,058
Mortgage-backed securities (estimated fair value of
$231,667, $255,052 and $291,689 at 9/30/97,
12/31/96 and 12/31/95, respectively) (notes 5 and 10)..................... 228,158 252,383 288,143
Mortgage-backed securities available for sale (notes 5 and 10)................ 122,371 120,797 89,339
Loans receivable, net (notes 6 and 10)........................................ 567,197 509,627 457,756
Loans available for sale (notes 6 and 10)..................................... -- 287 424
Interest and dividends receivable, net (note 7)............................... 7,719 7,415 6,793
Premises and equipment, net (note 8).......................................... 13,283 10,356 9,347
Excess of cost over fair value of net assets acquired......................... 9,018 10,950 12,299
Other assets (note 12)........................................................ 5,941 5,044 7,025
---------- --------- ---------
Total assets............................................................. $1,044,513 $ 987,115 $ 945,012
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 9)............................................................. $ 809,449 $794,595 $ 806,338
Borrowed funds (note 10)...................................................... 123,894 87,994 38,750
Employee Stock Ownership Plan (ESOP) debt (note 11)........................... 571 646 746
Advances by borrowers for taxes and insurance................................. 5,382 4,600 3,813
Other liabilities (note 12 and 13)............................................ 6,004 6,417 5,652
---------- -------- ---------
Total liabilities........................................................... 945,300 894,252 855,299
---------- -------- ---------
Commitments and contingencies (note 14).......................................
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized; issued and
outstanding - none.......................................................
Common Stock, $0.01 par value, 10,000,000 shares authorized;
8,006,707, 7,903,719 and 7,872,604 shares issued and outstanding
at 9/30/97, 12/31/96 and 12/31/95, respectively (note 13)................ 73 72 65
Paid-in capital (note 13)..................................................... 27,856 27,427 22,007
Retained earnings (note 12)................................................... 71,870 66,299 68,222
Net unrealized gain (loss) on securities available for sale (net of tax)
(notes 4 and 5).......................................................... 193 (3) 165
Less: Common Stock acquired by the ESOP (note 13)............................. (571) (646) (746)
Common Stock acquired by the Recognition and
Retention Plan (RRP) (note 13)......................................... (208) (286) --
---------- -------- ---------
Total stockholders' equity (notes 2 and 3)............................... 99,213 92,863 89,713
---------- -------- ---------
Total liabilities and stockholders' equity............................... $1,044,513 $987,115 $ 945,012
========== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN/(LOSS)
ON SECURITIES COMMON COMMON
AVAILABLE STOCK STOCK TOTAL
COMMON PAID-IN RETAINED FOR SALE, ACQUIRED ACQUIRED STOCKHOLDERS'
STOCK CAPITAL EARNINGS NET OF TAX BY ESOP BY RRP EQUITY
------ ------- -------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993................ $29 $11,606 $56,539 $ 1,105 $(400) $ (70) $68,809
Net income for the year
ended December 31, 1994.................. 8,275 8,275
Issuance of 10% stock dividend.............. 3 3,100 (3,103) -
Cash dividends ($0.27 per share)............ (787) (787)
Net change in unrealized gain/(loss)........ (2,502) (2,502)
2-for-1 stock split......................... 33 (33) -
Amortization of RRP......................... 70 70
Principal payments on ESOP loan............. 100 100
Exercise of stock options................... 99 99
--- ------ ------- ------- ----- ----- -------
Balance at December 31, 1994................ 65 14,772 60,924 (1,397) (300) -- 74,064
Net income for the year
ended December 31, 1995.................. 8,302 8,302
Net proceeds from stock offering
(600,000 shares)......................... 7,205 7,205
Stock acquired by ESOP (42,000 shares)...... (546) (546)
Cash dividends ($0.30 per share)............ (1,004) (1,004)
Net change in unrealized gain/(loss)........ 1,562 1,562
Principal payments on ESOP loan............. 100 100
Exercise of stock options................... 30 30
--- ------ ------ ------- ----- ----- -------
Balance at December 31, 1995................ 65 22,007 68,222 165 (746) -- 89,713
Net income for the year
ended December 31, 1996.................. 4,710 4,710
Issuance of 10% stock dividend.............. 7 5,388 (5,395) -
Cash in lieu of fractional shares........... (3) (3)
Stock acquired by RRP (21,780 shares)....... (310) (310)
Cash dividends ($0.33 per share)............ (1,238) (1,238)
Net change in unrealized gain/(loss)........ (168) (168)
Amortization of RRP......................... 24 24
Principal payments on ESOP loan............. 100 100
Exercise of stock options................... 35 32
--- ------ ------- ------- ----- ----- -------
Balance at December 31, 1996................ 72 27,427 66,299 (3) (646) (286) 92,863
Net income for the nine months
ended September 30, 1997................. 6,760 6,760
Cash dividends ($0.31 per share)............ (1,189) (1,189)
Net change in unrealized gain/(loss)........ 196 196
Amortization of RRP......................... 78 78
Principal payments on ESOP loan............. 75 75
Exercise of stock options................... 1 429 430
--- ------- ------- ------- ----- ----- -------
Balance at September 30, 1997............... $73 $27,856 $71,870 $ 193 $(571) $(208) $99,213
=== ======= ======= ======= ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30, Year Ended December 31,
------------- -----------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 6,760 $ 2,364 $ 4,710 $ 8,302 $ 8,275
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of premises and equipment.................................. 754 630 842 1,018 1,241
Amortization of excess of cost over fair value of assets acquired....... 1,932 1,138 1,349 1,066 223
Amortization of ESOP.................................................... 75 75 100 100 100
Amortization of RRP..................................................... 78 -- 24 -- 70
Net accretion and amortization of deferred loan fees.................... 44 (95) (284) (335) (256)
Provision for loan losses............................................... 900 375 550 310 300
Provision for losses on real estate owned............................... 61 105 105 222 149
Net (gain) loss on sales of investment securities available for sale.... (149) 19 (114) 104 (21)
Net loss on market adjustment to investment securities held for trading. 29 -- -- -- --
Net (gain) loss on sales of mortgage loans available for sale........... (12) 41 40 (15) 77
Net gain on sales of mortgage-backed securities available for sale...... (461) (199) (162) (840) (96)
Net gain on sales of real estate owned.................................. (92) (161) (183) (52) (59)
Investment securities purchased for trading............................. (1,989) -- -- -- --
Proceeds from sales of investment securities held for trading........... 1,971 -- -- -- --
Net amortization of premiums and discounts.............................. 112 410 716 (1,275) 795
Increase in interest and dividends receivable........................... (304) (370) (622) (1,552) (629)
(Decrease) increase in other liabilities................................ (413) 3,846 765 1,011 247
(Decrease) increase in other assets..................................... (1,127) (589) 5 (461) 110
-------- -------- -------- -------- --------
Net cash provided by operating activities............................. 8,169 7,589 7,841 7,603 10,526
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale......... 8,149 10,877 20,978 25,823 47,821
Proceeds from sales of mortgage loans available for sale................ 3,048 6,157 6,892 6,358 5,310
Proceeds from sales of mortgage-backed securities available for sale.... 116,891 73,210 96,309 82,632 36,001
Proceeds from sale of real estate owned................................. 1,035 3,495 4,351 3,299 2,681
Purchases of investment securities available for sale................... (11,000) (28,807) (31,808) (1,016) (23,716)
Loans originated for sale............................................... (2,750) (5,923) 6,798 (6,619) (4,701)
Purchases of mortgage-backed securities available for sale.............. (129,974) (87,005) (136,935) (86,767) (38,580)
Purchases of investment securities...................................... (15,998) (15,950) (20,937) (47,002) (14,000)
Maturities of investment securities..................................... 14,000 13,000 19,000 19,000 11,000
Origination of loans.................................................... (105,179) (97,339) (124,134) (95,674) (79,338)
Purchases of loans...................................................... (4,665) (4,631) (10,118) (5,181) --
Purchases of mortgage-backed securities................................. (30,689) (54,392) (54,392) (128,524) (108,049)
Principal payments on loans............................................. 51,023 59,701 80,178 54,993 77,202
Principal payments on mortgage-backed securities........................ 66,292 79,493 98,392 64,785 72,220
(Purchase) redemption of FHLB-NY stock.................................. (617) (1,152) (1,152) (585) 726
Purchases of premises and equipment..................................... (3,681) (673) (1,849) (2,065) 2,434
Cost in excess of fair value of assets acquired......................... -- -- -- (12,640) --
-------- -------- -------- -------- --------
Net cash used in investing activities................................. (44,115) (49,939) (62,023) (129,183) (17,857)
-------- -------- -------- -------- --------
</TABLE>
F-5
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30, Year Ended December 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock offering......................................... -- -- -- 7,205 --
Proceeds from ESOP debt.................................................. -- -- -- 546 --
Cost of stock contributed to RRP......................................... -- -- (310) -- --
Payment on ESOP debt..................................................... (75) (75) (100) (100) (100)
Purchase of ESOP shares.................................................. -- -- -- (546) --
Stock options exercised.................................................. 430 35 35 30 99
Cash dividends paid...................................................... (1,189) (928) (1,238) (1,004) (787)
Proceeds from acquisition of deposits.................................... -- -- -- 112,784 --
Net increase (decrease) in deposits...................................... 14,854 (5,897) (11,743) 11,941 2,652
Net increase in borrowed funds........................................... 35,900 30,687 49,244 4,750 8,000
Net increase (decrease) in advances by borrowers for taxes and
insurance............................................................... 782 684 787 80 (80)
--------- -------- --------- --------- ---------
Net cash provided by financing activities....................... 50,702 24,506 36,675 135,686 9,784
========= ======== ========= ========= =========
Net increase (decrease) in cash and cash equivalents............ 14,756 (17,844) (17,507) 14,106 2,453
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,042 26,549 26,549 12,443 9,990
--------- -------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,798 $ 8,705 $ 9,042 $ 26,549 $ 12,443
========= ======== ========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.............................................................$ 30,196 $ 27,443 $ 36,967 $ 35,409 $ 24,953
Income taxes......................................................... 3,851 3,824 3,831 4,495 4,474
Non cash investing and financing activities for the period:
Transfer of loans to real estate owned.............................. 885 2,105 2,535 4,960 2,365
Transfer of investment and mortgage-backed securities from
held to maturity to available for sale........................ -- -- -- 77,549 --
Transfer of loans available for sale to loans receivable............ -- -- -- -- 596
========= ======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies used
in preparation of the accompanying consolidated financial statements of First
Savings Bank, SLA, and its Subsidiaries ("the Bank"). FSB Financial Corp. is a
wholly-owned subsidiary and provides a line of fixed and variable rate annuity
products and mutual funds. 1000 Woodbridge Center Drive, Inc. is a wholly-owned
subsidiary of the Bank, and is currently inactive.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are comprised of the accounts of the Bank
and its wholly-owned subsidiaries, FSB Financial Corp. and 1000 Woodbridge
Center Drive, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. 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, management generally obtains independent appraisals for significant
properties.
The unaudited consolidated financial statements as of September 30, 1997, and
for the nine month periods ended September 30, 1997 and 1996, have been prepared
in accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of such interim periods have been made. The
results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1997.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash equivalents
consist of interest-bearing deposits in other financial institutions and loans
of federal funds.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Management determines the appropriate classification of investment and mortgage-
backed securities as either available for sale, held to maturity, or held for
trading at the purchase date. Securities available for sale include debt,
mortgage-backed, and marketable equity securities that are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions. These securities are reported at fair value with
unrealized gains and losses, net of tax, included as a separate component of
stockholders' equity. Upon realization, such gains and losses will be included
in earnings using the specific identification method. In November, 1995, the
Financial Accounting Standards Board ("FASB") issued "Special Report - A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity
F-7
<PAGE>
Securities" within which there was offered transition guidance permitting an
enterprise to reassess the appropriateness of the classifications of all of its
securities before December 31, 1995. The Bank reassessed its classifications
and, on December 15, 1995, transferred $77.5 million in amortized cost of
investment and mortgage-backed securities to the available for sale
classification. The net unrealized loss (net of taxes) as of the date of
transfer was $40,000.
Trading account securities are adjusted to market value through earnings. Gains
and losses from adjusting trading account securities to market value and from
the sale of these securities are included in noninterest income. There were no
trading account securities outstanding at September 30, 1997, December, 31, 1996
or 1995.
Investment securities, other than those designated as available for sale or
trading, are carried at amortized historical cost and consist of those
securities for which there is a positive intent and ability to hold to maturity.
Investment securities are adjusted for amortization of premiums and accretion of
discounts using the level-yield method over the estimated lives of the
securities.
Mortgage-backed securities, other than those designated as available for sale or
trading, are carried at their outstanding principal balance, adjusted for
amortization of premiums and accretion of discounts using the level-yield method
over the estimated lives of the securities.
FEDERAL HOME LOAN BANK OF NEW YORK STOCK
The Bank, as a member of the FHLB-NY, is required to hold shares of capital
stock in the FHLB-NY in an amount equal to 1% of the Bank's outstanding balance
of residential mortgage loans or 5% of its outstanding advances from the FHLB-
NY, whichever is greater.
LOANS RECEIVABLE, NET
Loans receivable, other than loans available for sale, are stated at the unpaid
principal balance, net of premiums, unearned discounts, net deferred loan
origination and commitment fees, and the allowance for loan losses.
Loans are classified as non-accrual when they are past due 90 days or more as to
principal or interest, or where reasonable doubt exists as to timely
collectibility. However, if a loan meets the above criteria but a current
appraisal of the property indicates that the total outstanding balance is less
than 55% of the appraised value, the loan is not classified as non-accrual. At
the time a loan is place on non-accrual status, previously accrued and
uncollected interest is reversed against interest income. Interest received on
non-accrual loans is generally credited to interest income for the current
period. If principal and interest payments are brought contractually current and
future collectibility is reasonably assured, loans are returned to accrual
status. Discounts are accreted and premiums amortized to income using the level
yield method over the estimated lives of the loans. Loan fees and certain direct
loan origination costs are deferred, and the net fee or cost is recognized in
interest income using the level-yield method over the contractual life of the
individual loans, adjusted for actual prepayments.
Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" were adopted
prospectively by the Bank on January 1, 1995. These statements address the
accounting for impaired loans and specify how allowances for loan losses related
to these impaired loans should be determined. The adoption of the statements did
not effect the level of the overall allowance or the operating results. Income
recognition and charge-off policies were not changed as a result of SFAS 114 and
SFAS 118. The Bank has defined the population of impaired loans to be all non-
accrual commercial real
F-8
<PAGE>
estate, multi-family and land loans. Impaired loans are individually assessed to
determine that the loan's carrying value is not in excess of the fair value of
the collateral or the present value of the loan's expected future cash flows.
Smaller balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and installment loans are
specifically excluded for the impaired loan portfolio. There were no impaired
loans at September 30, 1997, nor at December 31, 1996 and 1995, as defined by
SFAS 114 and SFAS 118.
Loans available for sale are carried at the lower of cost or market using the
aggregate method. Valuation adjustments, if applicable, are reflected in current
operations. Gains and losses on sales are recorded using the specific
identification method. Management determines the appropriate classification of
loans as either held to maturity or available for sale at origination, in
conjunction with the Bank's overall asset/liability management strategy.
Effective January 1, 1996, SFAS 122, "Accounting for Mortgage Servicing Rights,"
was adopted on a prospective basis. SFAS 122 requires capitalization of the
rights to service mortgage loans for others, whether those rights are acquired
through purchase or origination. The Bank determines the value of servicing
rights through an evaluation of prepayment trends, the market for purchased
servicing and underlying interest rate of the loans. All capitalized mortgage
servicing rights, both originated and purchased, will be evaluated for
impairment on a quarterly basis with any adjustments recognized through a
valuation allowance. The Bank amortizes mortgage servicing rights over the
estimated life of the loans on a straight line basis. Certain provisions of SFAS
122 were amended by SFAS 125. See Note 16, "Recent Accounting Pronouncements,"
for a description of SFAS 125.
A substantial portion of the Bank's loans are secured by real estate in the
State of New Jersey. Accordingly, as with most financial institutions in the
market area, the collectibility of a substantial portion of the carrying value
of the Bank's loan portfolio and real estate owned is susceptible to changes in
market conditions.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, review of individual loans for adverse situations that may
affect the borrower's ability to repay, the estimated value of any underlying
collateral, and consideration of current economic conditions.
Additions to the allowance arise from charges to operations through the
provision for loan losses or from the recovery of amounts previously charged
off. The allowance is reduced by loan charge-offs.
Management believes that the allowance for loan losses 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 the Bank's 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.
REAL ESTATE OWNED, NET
Real estate owned is recorded at the fair value at the date of acquisition, with
a charge to the allowance for loan losses for any excess of cost over fair
value. Subsequently, real estate owned is carried at the lower of cost or fair
value, less estimated selling costs. Certain costs incurred in preparing
properties for sale are capitalized, and expenses of holding foreclosed
properties are charged to operations as incurred. There was
F-9
<PAGE>
$1.4 million, $1.5 million, and $3.1 million in real estate owned included in
Other Assets at September 30, 1997, December 31, 1996 and 1995, respectively.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired from the acquisition
of deposits is amortized to expense over the expected life of the acquired
deposit base (7 to 15 years) using the straight-line method. During 1995, the
Bank acquired the deposits and former branch locations of two offices of the
former Carteret Savings for a premium of $12.6 million. Core deposit studies
regarding the retention of the deposits acquired are performed by the Bank on an
annual basis. After reviewing the results of the core deposit studies, a
writedown of the core deposit premium may be recognized if the current balance
of the core deposit premium is considered impaired. The Bank recognized
writedowns of $1.3 million and $334,000 for the nine months ended September 30,
1997, and for the year ended December 31, 1996, respectively.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost,
less accumulated amortization and depreciation. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives,
ranging from three to forty years, depending on the asset or lease. Repair and
maintenance items are expensed and improvements are capitalized. Upon retirement
or sale, any gain or loss is charged to operations.
STOCK-BASED COMPENSATION
In October 1995, SFAS 123, "Accounting for Stock-Based Compensation" was issued.
SFAS 123 encourages recording in current period earnings compensation expense
related to the fair value of certain stock-based compensation. Companies may
choose to continue to follow the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), where
compensation expense is not recorded for certain stock-based compensation plans.
However, companies are required to disclose pro forma net income and earnings
per share as if they adopted the fair value based method of accounting. The Bank
has elected to continue to account for stock-based compensation under APB 25 and
the pro forma disclosures required by SFAS 123 have been included in Note 13,
"Stock Option Plans." The adoption of SFAS 123 had no impact on the Bank's
consolidated financial statements.
RECOGNITION AND RETENTION PLAN (RRP)
RRP awards are granted in the form of shares of common stock held by the RRP,
and are payable over a three year vesting period at a rate of 33.3% per year,
commencing on the date of the award grant. Compensation expense is recorded at
the fair market value of the shares at the grant date ratably over the vesting
period.
INCOME TAXES
The Bank accounts for income taxes according to SFAS 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates applicable to taxable
income for the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
F-10
<PAGE>
PENSION PLAN
Pension plan costs based on actuarial computation of current and future benefits
for employees are charged to expense and are funded based on the maximum amount
that can be deducted for Federal income tax purposes.
POST-RETIREMENT BENEFITS
The Bank accounts for post-retirement benefits under SFAS 106 "Employers'
Accounting for Post-Retirement Benefits Other than Pensions." SFAS 106 requires
the accrual of the expected cost of providing health care and other benefits to
employees subsequent to their retirement during the service periods of the
employees.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding. Common stock
equivalents are determined by applying the treasury stock method.
Per share data reflects 10% stock dividends paid on April 1, 1994, and December
16, 1996, and declared on September 24, 1997, respectively, and a 2-for-1 stock
split on December 1, 1994, all applied retroactively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 amounts to conform
to the 1997 presentation.
(2) REORGANIZATION AND STOCK ISSUANCE
On July 10, 1992, the Office of Thrift Supervision ("OTS") approved the Plan of
Reorganization adopted by the Board ("the Reorganization"), whereby the Bank was
reorganized into a federal mutual holding company. At that time, First Savings
Bank, SLA, reorganized from a New Jersey-chartered mutual savings association
into a federal mutual holding company, First Savings Bancshares, MHC ("Holding
Company"). The Bank has continued to operate under the mutual holding company
regulations as proscribed by the OTS.
As part of the Reorganization, a minority stock offering was completed on July
10, 1992, whereby 1,000,000 shares were sold at a price of $10 per share, for
gross proceeds of $10.0 million, which represented a minority ownership of 37.6%
of the Bank. On July 11, 1995, the Bank completed a secondary stock offering of
600,000 shares of common stock at $13 per share for gross proceeds of $7.8
million, offset by offering-related expenses totaling $595,000. The net proceeds
were used to purchase investment and mortgage-backed securities. The total
minority ownership, after the secondary stock offering, totaled 47.5% at
December 31, 1995. At September 30, 1997, the total minority ownership was
48.4%.
On October 24, 1997, the Boards of Directors for First Savings Bank and First
Savings Bancshares, MHC, the mutual holding company of the Bank, announced that
a Plan of Conversion was adopted to convert First Savings Bancshares, MHC to
stock form and to reorganize First Savings Bancshares, MHC and First Savings
Bank into the stock holding company structure by forming a new stock Delaware
corporation to become the parent holding company for the Bank. Pursuant to the
Plan, 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 Plan of Conversion must
receive regulatory approval from the Office of Thrift Supervision, along with
approval from the members of First Savings Bancshares, MHC, and the Bank's
stockholders. The transaction is expected to be completed during the second
quarter of 1998.
The Plan of Conversion provides for the establishment, upon the completion of
the Conversion and Reorganization, of a special "liquidation account" for the
benefit of account holders in an amount equal to the greater of (1) the Bank's
retained earnings at December 31, 1991, or (2) 51.6% 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
account holder, if he were to continues 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 account holder would have
an initial interest in such liquidation account for each deposit account with a
balance of $50 or more held in the Bank on December 31, 1995 and September 30,
1997, respectively. Each account holder will have a pro rata interest in the
total liquidation account based on the proportion that the balance of his
deposits on the eligibility record date bore to the total amount of all deposits
in the Bank.
If, however, on any annual closing date subsequent to the eligibility record
date, the amount of the deposit is less than the amount of the deposit of such
eligible account holder as of the eligibility record date, or less than the
amount of the deposits as of the previous annual closing date, then the interest
in the liquidation account relating to such deposit would be reduced from time
to time by the proportion of any such reduction, and such interest will cease to
exist if such deposit accounts are closed.
As of September 30, 1997, the MHC had waived $6.7 million of dividends. Upon
completion of the Conversion, as all shares of the Holding Company stock will be
publicly owned, the restriction and availability of waived dividends will cease.
Conversion costs will be deferred and reduce the proceeds from the common
stock sold in the Conversion. If the Conversion is not completed all costs will
be charged to expense. As of September 30, 1997, no Conversion costs had been
deferred.
F-11
<PAGE>
(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.
OTS regulations require savings institutions to maintain minimum levels of
regulatory capital. Under the regulations in effect at September 30, 1997,
December 31, 1996 and 1995, the Bank was required to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier 1
(core) capital to total adjusted assets of 3.0%; and a minimum ratio of total
(core and supplementary) capital to risk-weighted assets of 8.0%.
Under the prompt corrective action regulations, the OTS is required to take
certain supervisory actions and may take additional discretionary actions with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a Tier 1 (core) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the OTS about capital components, risk
weightings and other factors.
Management believes that, as of September 30, 1997, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent OTS
notification categorized the Bank as a well capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and ratios as of
September 30, 1997, December 31, 1996 and 1995, compared to the OTS minimum
capital adequacy requirements and the OTS requirements for classification as a
well-capitalized institution:
F-12
<PAGE>
<TABLE>
<CAPTION>
OTS REQUIREMENTS
--------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL-CAPITALIZED
---------------------- ----------------------- ----------------------
AMOUNT RATIO (%) AMOUNT RATIO (%) AMOUNT RATIO (%)
--------- ----------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
September 30, 1997
- ------------------------------
Tangible capital.............. $89,992 8.68 $15,552 1.50
Tier 1 (core) capital........ 89,992 8.68 31,104 3.00 $51,840 5.00
Risk-based capital:
Tier 1..................... 89,992 21.13 25,552 6.00
Total...................... $95,319 22.38 $34,070 8.00 $42,587 10.00
======= ===== ======= ==== ======= =====
December 31, 1996
- ------------------------------
Tangible capital.............. $81,909 8.38 $14,670 1.50
Tier 1 (core) capital......... 81,909 8.38 29,340 3.00 $48,900 5.00
Risk-based capital:
Tier 1..................... 81,909 20.85 23,571 6.00
Total...................... $86,822 22.10 $31,428 8.00 $39,286 10.00
======= ===== ======= ==== ======= =====
December 31, 1995
- ------------------------------
Tangible capital.............. $77,249 8.28 $13,995 1.50
Tier 1 (core) capital......... 77,751 8.33 28,005 3.00 $46,675 5.00
Risk-based capital:
Tier 1.................... 77,751 20.85 22,371 6.00
Total..................... $80,680 21.64 $29,828 8.00 $37,285 10.00
======= ===== ======= ==== ======= =====
</TABLE>
The following is a reconciliation of regulatory capital to capital under
generally accepted accounting principles (in thousands):
<TABLE>
<CAPTION>
Tangible Core Risk-Based
-------- ---- ----------
<S> <C> <C> <C>
GAAP capital $99,213 $99,213 $99,213
Unrealized gain on securities (193) (193) (193)
Goodwill and other intangibles (9,018) (9,018) (9,018)
Mortgage servicing rights disallowance (10) (10) (10)
General valuation allowance -- -- 5,327
------- ------- -------
Regulatory capital $89,992 $89,992 $95,319
======= ======= =======
</TABLE>
F-13
<PAGE>
(4) INVESTMENT SECURITIES
A summary of investment securities at September 30, 1997, December 31, 1996 and
1995, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENTS HELD TO MATURITY
U.S. Government and Agency obligations....................... $40,959 $193 $(44) $41,108
======= ==== ==== =======
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agency obligations....................... $13,972 $ 26 $(55) $13,943
Corporate obligations........................................ 4,079 3 (1) 4,081
------- ---- ---- -------
Total investment securities available for sale............... $18,051 $ 29 $(56) $18,024
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENTS HELD TO MATURITY
U.S. Government and Agency obligations....................... $38,955 $247 $(222) $38,980
======= ==== ===== =======
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agency obligations....................... $12,964 $ 4 $(132) $12,836
Corporate obligations........................................ 2,000 -- (5) 1,995
------- ---- ----- -------
Total investment securities available for sale............... $14,964 $ 4 $(137) $14,831
======= ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INVESTMENTS HELD TO MATURITY
U.S. Government and Agency obligations....................... $39,003 $621 $(7) $39,617
======= ==== === =======
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agency obligations....................... $ 1,000 $ -- $(4) $ 996
Corporate obligations........................................ 1,041 21 -- 1,062
------- ---- --- -------
Total investment securities available for sale............... $ 2,041 $ 21 $(4) $ 2,058
======= ==== === =======
</TABLE>
As of September 30, 1997 and December 31, 1996 and 1995, corporate obligations
consisted primarily of corporate notes with ratings of A or better, and
preferred stock with an Aa2/AA2 rating. All corporate obligations are available
for sale. The cost and estimated fair value of investment securities at
September 30, 1997 and December 31, 1996, by contractual maturity, are shown
below (in thousands). Expected maturities may differ from contractual maturities
because borrowers may have the right to call or repay obligations at par value
without prepayment penalties.
F-14
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
INVESTMENTS HELD TO MATURITY COST VALUE COST VALUE
---------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Due in:
Less than one year............................. $ -- $ -- $ 1,000 $ 1,002
One to five years.............................. 14,991 15,041 13,990 14,054
Five to ten years.............................. 19,972 20,022 17,970 17,953
Ten to fifteen years........................... 5,996 6,045 5,995 5,971
------- ------- ------- -------
$40,959 $41,108 $38,955 $38,980
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
INVESTMENTS AVAILABLE FOR SALE.................... COST VALUE COST VALUE
<S> ------------- ------------- ------------ ------------
Due in: <C> <C> <C> <C>
One to five years............................. $12,972 $12,942 $13,964 $13,856
Five to ten years............................. 5,079 5,082 1,000 975
------- ------- ------- -------
$18,051 $18,024 $14,964 $14,831
======= ======= ======= =======
</TABLE>
Proceeds from sales of investment securities and the realized gross gains and
losses from those sales are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31
------------------ -----------------------------
1997 1996 1996 1995 1994
------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Proceeds from sales............ $10,120 $10,877 $20,978 $25,823 $47,821
======= ======= ======= ======= =======
Gross realized gains........... $ 180 $ 12 $ 147 $ 94 $ 317
Gross realized losses.......... (60) (31) (33) (198) (296)
------- ------- ------- ------- -------
$ 120 $ (19) $ 114 $ (104) $ 21
======= ======= ======= ======= =======
</TABLE>
Investment securities with an amortized cost of $15.4 million and $15.0 million
at September 30, 1997 and December 31, 1996, respectively, are pledged as
collateral for other borrowings. Pursuant to a collateral agreement with the
FHLB-NY, all unpledged, qualifying investment securities, including those
available for sale, are pledged to secure advances from the FHLB-NY (see note
10).
(5) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at September 30, 1997, December 31, 1996
and 1995, is as follows (in thousands):
F-15
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
FHLMC......................................................... $132,388 $2,988 $ (73) $135,303
GNMA.......................................................... 18,612 536 -- 19,148
FNMA.......................................................... 33,164 307 (15) 33,456
Collateralized mortgage obligations........................... 43,994 61 (295) 43,760
-------- ------ ----- --------
Total mortgage-backed securities held to maturity............. $228,158 $3,892 $(383) $231,667
======== ====== ===== ========
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
FHLMC......................................................... $ 69,272 $ 537 $(238) $ 69,571
FNMA ........................................................ 35,009 11 (102) 34,918
Collateralized mortgage obligations........................... 17,761 128 (7) 17,882
-------- ------ ----- --------
Total mortgage-backed securities available for sale........... $122,042 $ 676 $(347) $122,371
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
FHLMC......................................................... $161,180 $2,663 $(187) $163,656
GNMA.......................................................... 20,851 398 -- 21,249
FNMA.......................................................... 32,225 217 (115) 32,327
Collateralized mortgage obligations........................... 38,127 75 (382) 37,820
-------- ------ ----- --------
Total mortgage-backed securities held to maturity............. $252,383 $3,353 $(684) $255,052
======== ====== ===== ========
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
FHLMC......................................................... $ 88,818 $ 505 $(343) $ 88,980
GNMA.......................................................... 7,320 17 (23) 7,314
FNMA.......................................................... 22,528 53 (73) 22,508
Collateralized mortgage obligations........................... 2,004 -- (9) 1,995
-------- ------ ----- --------
Total mortgage-backed securities available for sale........... $120,670 $ 575 $(448) $120,797
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS GAINS VALUE
--------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
FHLMC......................................................... $199,320 $3,241 $ (48) $202,513
GNMA.......................................................... 19,690 588 -- 20,278
FNMA.......................................................... 12,474 181 (9) 12,646
Collateralized mortgage obligations........................... 56,659 139 (546) 56,252
-------- ------ ----- --------
Total mortgage-backed securities held to maturity............. $288,143 $4,149 $(603) $291,689
======== ====== ===== ========
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
FHLMC......................................................... $ 62,029 $ 334 $ (81) $ 62,282
GNMA.......................................................... 12,059 13 -- 12,072
FNMA.......................................................... 6,206 90 (10) 6,286
Collateralized mortgage obligations........................... 8,805 21 (127) 8,699
-------- ------ ----- --------
Total mortgage-backed securities available for sale........... $ 89,099 $ 458 (218) $ 89,339
======== ====== ===== ========
</TABLE>
F-16
<PAGE>
Proceeds from sales of mortgage-backed securities and the realized gross gains
and losses from those sales are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------------- ---------------------------------
1997 1996 1996 1995 1994
------------- ---------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Proceeds from sales $116,891 $73,210 $96,309 $82,632 $36,001
======== ======= ======= ======= =======
Gross realized gains $ 513 $ 243 $ 324 $ 986 $ 217
Gross realized losses (52) (44) (162) (146) (121)
-------- ------- ------- ------- -------
$ 461 $ 199 $ 162 $ 840 $ 96
======== ======= ======= ======= =======
</TABLE>
Mortgage-backed securities with an amortized cost of $301,000, $338,000 and
$444,000 at September 30, 1997, December 31, 1996 and 1995, respectively, were
pledged as collateral to secure deposits held for municipalities within the
State of New Jersey. Mortgage-backed securities with an amortized cost of $87.8
million, $48.7 million and $21.8 million at September 30, 1997, December 31,
1996 and 1995, respectively, were pledged as collateral for other borrowings.
Pursuant to a collateral agreement with the FHLB-NY, all unpledged, qualifying
mortgage-backed securities are pledged to secure advances from the FHLB-NY (see
note 10). Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties. As of September 30, 1997, December 31,
1996 and 1995, there were $7.1 million, $8.1 million and $10.9 million,
respectively, in Collateralized Mortgage Obligations that are private-label
issuances, all of which were held to maturity, and all rated AAA/Aaa by S&P and
Moody's. The market value of the private label Collateralized Mortgage
Obligations at September 30, 1997, December 31, 1996 and 1995 was $7.0 million,
$8.0 million and $10.7 million, respectively.
________________________________________________________________________________
(6) LOANS RECEIVABLE, NET
A summary of loans receivable at September 30, 1997, December 31, 1996 and 1995,
is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------------
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
LOANS RECEIVABLE
Real estate mortgages:
One- to four-family........................... $466,257 $425,175 $386,458
Multi-family and commercial................... 37,794 29,085 26,997
Home equity................................... 41,895 39,139 33,456
FHA-insured and VA-guaranteed................. 2,572 3,002 3,759
AID housing loan.............................. -- -- 165
-------- -------- --------
548,518 496,401 450,835
Real estate construction........................ 44,469 25,124 11,412
Consumer........................................ 6,208 5,772 5,055
-------- -------- --------
Total Loans............................ 599,195 527,297 467,302
-------- -------- --------
Loans in process................................ (26,214) (12,253) (3,800)
Deferred (fees) expenses........................ 255 19 (265)
Net unearned discount........................... (57) (114) (234)
Allowance for loan losses....................... (5,982) (5,322) (5,247)
-------- -------- --------
(31,998) (17,670) (9,546)
-------- -------- --------
Loans receivable, net.................. $567,197 $509,627 $457,756
======== ======== ========
LOANS AVAILABLE FOR SALE
Real estate mortgages - one-to-four family....... $ -- $ 287 $ 424
======== ======== ========
</TABLE>
F-17
<PAGE>
The Bank serviced loans for others in the amount of $94.5 million and $103.4
million at September 30, 1997 and 1996, respectively, and $101.2 million, $106.9
million and $112.4 million at December 31, 1996, 1995 and 1994, respectively.
Related servicing income earned on loans serviced for others totaled $218,000
and $246,000 for the nine months ended September 30, 1997 and 1996,
respectively, and $325,000, $350,000 and $386,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
Loans in the amount of $1.7 million, $1.9 million and $2.1 million were
outstanding to directors and executive officers of the Bank at September 30,
1997, and December 31, 1996 and 1995, respectively. The loans consist primarily
of loans secured by mortgages on residential properties.
The Bank has pledged, under a blanket assignment, its unpledged and qualifying
mortgage portfolio to secure advances from the FHLB-NY (see note 10).
A summary of nonperforming assets at September 30, 1997, December 31, 1996 and
1995, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------
1997 1996 1995
-------------- -------- --------
<S> <C> <C> <C>
Nonaccrual loans..................................... $3,561 $4,720 $5,838
Loans 90 days or more delinquent and still accruing.. 379 93 200
Total nonperforming loans........................ 3,940 4,813 6,038
Real estate owned (included in other assets)......... 1,398 1,517 3,131
------ ------ ------
Total nonperforming assets....................... $5,338 $6,330 $9,169
====== ====== ======
</TABLE>
If interest income on nonaccrual loans had been current in accordance with their
original terms, approximately $253,000 and $274,000 of interest income for the
nine months ended September 30, 1997 and 1996, respectively, and $364,000,
$579,000 and $805,000 of interest income for the years ended December 31, 1996,
1995, and 1994, respectively, would have been recorded. Interest income
recognized on non-accrual loans totaled $55,000 and $84,000 for the nine months
ended September 30, 1997 and 1996, respectively, and $105,000, $114,000 and
$71,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At
September 30, 1997, there were no commitments to lend additional funds to
borrowers whose loans are classified as nonperforming.
An analysis of the allowance for loan losses for the nine months ended September
30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994, is
as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------- ---------------------------
1997 1996 1996 1995 1994
------------ ---------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....... $5,322 $5,247 $5,247 $5,745 $5,899
Provision charged to operations...... 900 375 550 310 300
------ ------ ------ ------ -----
6,222 5,622 5,797 6,055 6,199
Charge-offs.......................... (240) (534) (585) (1,044) (490)
Recoveries........................... - 3 110 236 36
------ ------ ------ ------ -----
Balance at end of period............. $5,982 $5,091 $5,322 $5,247 $5,745
====== ====== ====== ====== =====
</TABLE>
F-18
<PAGE>
________________________________________________________________________________
(7) INTEREST AND DIVIDENDS RECEIVABLE, NET
A summary of interest and dividends receivable, net of allowance for uncollected
interest of $407,000, $440,000, and $1.1 million at September 30, 1997, December
31, 1996 and 1995, respectively, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------
1997 1996 1995
------------- --------- ----------
<S> <C> <C> <C>
Loans.................................................. $3,339 $2,868 $2,841
Investment securities.................................. 851 908 810
Mortgage-backed securities............................. 3,529 3,639 3,142
------ ------ ------
$7,719 $7,415 $6,793
====== ====== ======
</TABLE>
________________________________________________________________________________
(8) PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30, 1997, December 31, 1996 and 1995, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------------
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Land................................................... $ 2,235 $ 1,423 $ 1,423
Buildings and improvements............................. 10,902 7,977 7,670
Leasehold improvements................................. 2,127 1,967 1,915
Furnishings, equipment and automobiles................. 4,705 3,265 4,953
Construction in progress............................... 120 1,788 1,043
------- ------- -------
Total............................................. 20,089 16,420 17,004
Accumulated depreciation and amortization............. (6,806) (6,064) (7,657)
------- ------- -------
$13,283 $ 10,356 $ 9,347
======= ======= =======
</TABLE>
________________________________________________________________________________
(9) DEPOSITS
Deposits at September 30, 1997, December 31, 1996 and 1995, are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------------------------------ -----------------------------------------
INTEREST WEIGHTED INTEREST WEIGHTED
RATE AVERAGE RATE AVERAGE
RANGES RATE RANGES RATE
AMOUNT (%) (%) AMOUNT (%) (%)
----------- ------------ ---------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand........ $ 26,410 -- -- $ 19,888 -- --
NOW and money market............... 195,003 0-3.39 2.93 181,499 0-5.43 2.90
Savings............................ 123,384 0-5.84 2.54 131,427 0-2.50 2.50
Certificates of deposit............ 464,652 3.45-9.34 5.54 461,781 3.69-9.34 5.38
-------- ---- -------- ----
$809,449 4.27 $794,595 4.20
======== ==== ======== ====
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
INTEREST WEIGHTED
RATE AVERAGE
RANGES RATE
Amount (%) (%)
---------- ---------- ------------
<S> <C> <C> <C>
Non-interest bearing demand........ $ 18,515 -- --
NOW and money market............... 173,597 0-3.70 2.88
Savings............................ 140,919 0-4.11 2.50
Certificate of deposit............. 473,307 3.69-9.34 5.60
-------- ----
$806,338 4.34
======== ====
</TABLE>
F-19
<PAGE>
The scheduled maturities of certificates of deposit at September 30, 1997 and as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
One year or less..................................... $348,304 $358,098
After one to two years............................... 44,579 39,366
After two to three years............................. 22,886 17,533
After three to four years............................ 11,035 15,889
After four to five years............................. 15,186 11,738
After five years..................................... 22,662 19,157
-------- --------
$464,652 $461,781
======== ========
</TABLE>
Included in deposits at September 30, 1997, December 31, 1996 and 1995, are
$76.5 million, $62.5 million and $60.3 million of deposits of $100,000 and over,
and $342,000, $331,000 and $357,000, respectively, of accrued interest payable
on deposits.
________________________________________________________________________________
(10) BORROWED FUNDS
FEDERAL HOME LOAN BANK-NEW YORK ADVANCES
Advances from the FHLB-NY at September 30, 1997, December 31, 1996 and 1995, are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
1996.......... $ -- --% $ -- --% $ 4,000 5.18%
1997.......... 5,000 6.09 12,000 5.80 7,000 5.94
1998.......... 15,000 6.26 10,000 6.56 5,000 7.42
1999.......... 6,000 5.87 6,000 5.87 1,000 5.58
2000.......... 2,000 5.76 2,000 5.76 2,000 5.76
2002.......... 5,000 5.76 -- -- -- --
------- ------- -------
$33,000 6.06% $30,000 6.06% $19,000 6.13%
======= ==== ======= ==== ======= ====
</TABLE>
The Bank has entered into FHLB-NY advances that have call features that may be
exercised by the FHLB-NY at predetermined dates. The total of such advances at
September 30, 1997 and December 31, 1996, totaled $10.0 million for both
periods. The maximum amount of FHLB-NY advances outstanding at any month-end
during the nine months ended September 30, 1997 and for the years ended December
31, 1996 and 1995 was $40.0 million, $30.0 million and $34.0 million,
respectively. At September 30, 1997 and December 31, 1996, $10.0 million and
$5.0 million of FHLB-NY advances had adjustable rates.
Advances from the FHLB-NY are secured by pledges of FHLB-NY stock of $8.0
million, $7.4 million and $6.3 million at September 30, 1997, December 31, 1996
and 1995, respectively, and a blanket assignment of the Bank's unpledged,
qualifying mortgage loans, mortgage-backed securities and investment securities.
The Bank has an available overnight line of credit with the FHLB-NY for a
maximum of $48.9 million at September 30, 1997.
F-20
<PAGE>
OTHER BORROWINGS
The following is a summary of Other Borrowings at September 30, 1997, December
31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
CONTRACTUAL MATURITY AMOUNT INTEREST AMOUNT INTEREST AMOUNT INTEREST
- -------------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
1996.............................. $ -- --% $ -- --% $ 1,000 5.95%
1997.............................. 15,000 5.62 13,750 5.93 8,750 6.12
1998.............................. 25,894 6.32 24,244 6.35 10,000 6.15
1999.............................. 15,000 5.71 15,000 5.71 -- --
2000.............................. 20,000 6.07 -- -- -- --
2001.............................. 5,000 5.55 5,000 5.55 -- --
2002.............................. 10,000 5.75 -- -- -- --
------- ------- --------
$90,894 5.94% $57,994 6.02% $19,750 6.13%
======= ==== ======= ==== ======== ====
</TABLE>
The maximum amount of other borrowings outstanding at any month-end during the
nine months ended September 30, 1997 and for the years ended December 31, 1996
and 1995 was $90.9 million, $58.0 million and $24.9 million, respectively.
Securities underlying other borrowings included mortgage-backed and investment
securities, which had an amortized cost of $103.3 million, $63.7 million and
$21.8 million, and market values of $103.7 million, $63.8 million and $22.0
million at September 30, 1997, December 31, 1996 and 1995, respectively. At
September 30, 1997 and December 31, 1996, $50.0 million and $20.0 million,
respectively, of other borrowings are callable at defined dates and at the
lender's discretion prior to the contractual maturity of the borrowings.
________________________________________________________________________________
(11) EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") DEBT
The ESOP debt as of September 30, 1997, December 31, 1996 and 1995, was
$571,000, $646,000 and $746,000, respectively, and bears an interest rate equal
to the prime rate less 1.50%, as published in the Wall Street Journal, with
---- ------ -------
principal and interest payable in quarterly installments over a ten-year period.
During the nine months ended September 30, 1997, and the year ended December 31,
1996, $25,000 and $25,000 of dividends paid on ESOP shares were used to pay down
ESOP debt. Total interest paid on ESOP debt for the nine months ended September
30, 1997 and 1996, was $33,000 and $37,000, respectively, and for the years
ended December 31, 1996, 1995 and 1994 was $48,000, $41,000, and $26,000,
respectively. In July, 1995, the Bank completed a secondary stock offering,
whereby the ESOP purchased an additional 42,000 shares of common stock at $13
per share, totaling $546,000. The funds to purchase the shares were obtained
from the parent company. The maturity date of the loan is September 30, 2005.
The borrowing is secured by 80,102 shares of the Bank's common stock (as
restated for the 10% stock dividend declared on September 24, 1997).
F-21
<PAGE>
________________________________________________________________________________
(12) INCOME TAXES
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. The percentage of taxable income method
was used in preparing the income tax returns for 1995 and 1994. Legislation was
enacted in August 1996, which repealed for tax purposes the percentage of
taxable income bad debt reserve method. 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 the tax bad
debt reserves. The Bank has previously provided for this liability in the
financial statements. The Bank's federal tax returns have been audited through
December 31, 1984.
Retained earnings at September 30, 1997 and December 31, 1996 includes
approximately $12.7 million for which no provision for income tax has been made.
This amount represents an allocation of income to bad debt deductions for tax
purposes only. Events that would result in taxation of these reserves include
failure to qualify as a bank for tax purposes, distributions in complete or
partial liquidation, stock redemptions and excess distributions to shareholders.
At September 30, 1997 and December 31, 1996, the Bank had an unrecognized tax
liability of $4.6 million with respect to this reserve.
Income tax expense applicable to income for the periods ended September 30, 1997
and 1996, and for the years ended December 31, 1996, 1995 and 1994, consists of
the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ -------------------------------------
1997 1996 1996 1995 1994
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FEDERAL:
Current..................... $4,159 $ 3,854 $3,183 $3,671 $4,624
Deferred.................... (501) (2,595) (603) 545 (114)
------ ------- ------ ------ ------
3,658 1,259 2,580 4,216 4,510
STATE:
Current..................... 376 346 282 365 409
Deferred.................... (44) (229) (53) 30 (7)
------ ------- ------ ------ ------
332 117 229 395 402
------ ------- ------ ------ ------
$3,990 $ 1,376 $2,809 $4,611 $4,912
====== ======= ====== ====== ======
</TABLE>
F-22
<PAGE>
A reconciliation between the effective income tax expense and the amount
computed by multiplying the applicable statutory federal income tax rate for the
periods ended September 30, 1997 and 1996, and for the years ended December 31,
1996, 1995 and 1994, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------------- -----------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income before income taxes............ $10,750 $3,740 $7,519 $12,913 $13,187
Applicable statutory federal tax 35% 35% 35% 35% 35%
rate.................................. ------- ------ ------ ------- -------
Computed "expected" federal income tax
expense............................... 3,763 1,309 2,632 4,520 4,615
Increase in federal income tax expense
resulting from:
State income taxes, net of federal
benefit............................... 216 76 151 257 261
Other items, net ..................... 11 (9) 26 (166) 36
------- ------ ------ ------- -------
$ 3,990 $1,376 $2,809 $ 4,611 $ 4,912
======= ====== ====== ======= =======
Effective tax rate...................... 37.1% 36.8% 37.4% 35.7% 37.2%
======= ====== ====== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to a significant portion
of deferred tax assets and liabilities at September 30, 1997, December 31, 1996
and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
------------ ----------- -----------
DEFERRED TAX ASSETS:
<S> <C> <C> <C>
Provision for loan losses - book.............................. $2,231 $1,980 $1,984
Postretirement benefits....................................... 376 350 293
Cash to accrual adjustment.................................... -- 1 164
Excess pension expense........................................ 448 670 204
Deferred directors' fees...................................... 87 63 20
Unrealized loss on securities available for sale.............. -- 2 --
Excess of cost over fair value of net assets acquired......... 479 -- --
Other......................................................... 87 2 8
------ ------ ------
Total gross deferred tax assets (included in Other Assets). 3,708 3,068 2,673
----- ------ ------
DEFERRED TAX LIABILITIES:
Provision for loan losses - tax............................... 1,161 1,161 1,136
Unrealized gain on securities available for sale.............. 109 -- 94
Tax depreciation less than book depreciation.................. 2 179 148
Excess sum-of-year discount over straight line................ 215 90 181
Amortization of core deposit premium ......................... -- 55 93
Net mortgage premium accretion................................ 66 66 85
Prepaid expense............................................... 16 -- 171
Deferred points............................................... 152 -- --
Other......................................................... 36 -- --
------ ------ ------
Total gross deferred tax liabilities (included in
Other Liabilities)....................................... 1,757 1,551 1,908
------ ------ ------
Net deferred tax asset........................................ $1,951 $1,517 $ 765
====== ====== ======
</TABLE>
Management has determined that it is more likely than not that it will realize
the deferred tax assets based upon the nature and timing of the items listed
above. There can be no assurances, however, that there will be no significant
differences in the future between taxable income and pre-tax book income if
circumstances change. In order to fully realize the net deferred tax asset, the
Bank will need to generate future taxable income. Management has projected that
the Bank will generate sufficient taxable income to utilize the net deferred tax
asset, however, there can be no assurance as to such levels of taxable income
generated.
F-23
<PAGE>
Included in Stockholders' Equity are income tax expenses (benefits) attributable
to net unrealized gains (losses) on securities available for sale in the amounts
of $109,000 for the nine months ended September 30, 1997 and $(2,000) and
$94,000 for the years ended December 31, 1996 and 1995, respectively.
________________________________________________________________________________
(13) EMPLOYEE BENEFIT PLANS
The Bank is a participant in the Financial Institutions Retirement Fund, a
multi-employer defined benefit plan. All employees who attain the age of 21
years and complete one year of service are eligible to participate in this plan.
Retirement benefits are based upon a formula utilizing years of service and
average compensation, as defined. Participants are vested 100% upon the
completion of five years of service. Pension expense was $143,000, $240,000,
$320,000, $330,000 and $330,000 for the nine months ended September 30, 1997 and
1996, and for the years ended December 31, 1996, 1995 and 1994, respectively.
Financial Institutions Retirement Fund does not segregate its assets,
liabilities or costs by participating employer. Therefore, disclosure of the
accumulated benefit obligations, plan assets and the components of annual
pension expense attributable to the Bank cannot be ascertained.
The Bank has a Supplemental Executive Retirement Plan ("SERP"), which provides a
post-employment supplemental retirement benefit equal to seventy-five percent of
the participant's base salary during the twelve months prior to retirement less
the amount of the participant's Pension Plan Annual Benefit and primary Social
Security Benefit due at the participant's normal retirement age. The SERP is
non-qualified employee benefit plan. SERP expenses due to normal accruals were
$635,000 and $488,000 for the periods ended September 30, 1997 and 1996,
respectively, and $550,000, $200,000, and $72,000 for the years ended December
31, 1996, 1995 and 1994, respectively. Due to the sudden death of the Bank's
President, an additional one-time expense of $600,000 was incurred in 1996 to
fund the related SERP liability.
The Bank also maintains an incentive savings plan for eligible employees.
Employees may make contributions to the plan of 2% to 12% of their compensation.
For the first 6% of the employee's contribution, the Bank will contribute 50% of
that amount to the employee's account. At the end of the plan year, the Bank
may make an additional contribution to the plan. The contributions under this
plan were $98,000 and $106,000 for the periods ended September 30, 1997 and
1996, respectively, and $135,000, $119,000 and $107,000, for the years ended
December 31, 1996, 1995 and 1994, respectively.
POSTRETIREMENT BENEFITS
The Bank accounts for postretirement benefits in accordance with SFAS 106. The
expense for the periods ended September 30, 1997 and 1996 were $70,000 and
$63,000, respectively, and for the years ended December 31, 1996 and 1994 was
$157,000 and $3,000, respectively. There was no expense for the year ended
December 31, 1995. The accumulated postretirement benefit obligation for fully
eligible active plan participants and retirees was $1.0 million, $948,000 and
$791,000 as of September 30, 1997, December 31, 1996 and 1995, respectively.
The plan is unfunded as of September 30, 1997, and the obligation is included in
Other liabilities as an accrued postretirement benefit cost.
The following assumptions were used in determining the accumulated
postretirement benefit obligation for 1997, 1996 and 1995, respectively: a
discount rate of 8.0% and a health care cost rate of 5.0% per year for 1997, a
discount rate of 8.0% and a health care cost trend rate of 5.0% grading down to
0.0% per year for 1996, and a discount rate of 8.0% and a health care cost trend
rate of 7.5% grading down to 5.0% at 0.5% per year for 1995. As the plan is
currently unfunded, no assumption was needed as to the long-term rate of return
on assets.
F-24
<PAGE>
BANK RECOGNITION AND RETENTION PLAN AND TRUST
In 1992, the Bank adopted a Recognition and Retention Plan and Trust (RRP) for
the benefit of directors, officers and key employees of the Bank. During 1995,
the Board of Directors amended the RRP in order to increase the number of shares
available for grants under the plan by 21,780 shares (adjusted for the 10% stock
dividend declared on September 24, 1997), as approved by the OTS and
stockholders.
Under the RRP, awards are granted in the form of shares of common stock held by
the RRP, and are payable over a three year period at a rate of 33.3% per year,
commencing on the date of the award grant. The market value of shares issued
and granted under the RRP in August and November, 1996 was $310,000.
Amortization of the RRP for the nine month period ended September 30, 1997 and
for the year ended December 31, 1996 was $78,000 and $24,000, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
On July 10, 1992, the Bank established an ESOP for eligible employees who have
completed a twelve-month period of employment with the Bank. The ESOP acquired
70,000 shares of common stock. On July 11, 1995, the Bank completed a secondary
offering of common stock, and the ESOP purchased 42,000 shares of common stock
at $13.00 per share. Funds for the purchase of the additional shares were
borrowed from the Bank's parent. Shares purchased by the ESOP are held by a
trustee for allocation among participants as the loan is repaid. The Bank, at
its discretion, contributes funds, in cash, to pay principal and interest on the
ESOP loan. The number of shares of common stock released each year is
proportional to the amount of principal and interest repaid on the loan for the
year. The Bank recognizes compensation expense when debt payments are made.
The Bank accounts for the allocation of ESOP shares purchased prior to 1995 at
their original issue price. The Bank accounts for the shares purchased in the
secondary offering in accordance with American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 93-6. Those shares have a
fair value of $1.8 million at September 30, 1997. The ESOP allocated 21,962,
29,282, 26,620 and 26,620 shares for the period ended September 30, 1997 and the
years ended December 31, 1996, 1995 and 1994, respectively, inclusive of four
10% stock dividends, and a 2-for-1 stock split. The compensation expense for
payments made to the ESOP totaled $50,000 and $50,000 for the periods ended
September 30, 1997 and 1996, respectively, and $75,000, $75,000 and $100,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
STOCK OPTION PLANS
The Bank maintains stock option plans ("the Plans") for the benefit of
directors, officers, and other key employees of the Bank. Options granted under
the Plans are exercisable over a period not to exceed ten years from the date of
grant. Under the Plans, the exercise price of each option equals the market
price of the Bank's stock on the date of grant. During 1995, the Board of
Directors amended the Plans, in conjunction with the secondary offering, to
increase the number of shares available for grants by 60,000 shares, as approved
by the OTS and stockholders. The following table summarizes the options granted
and exercised under the Plans during the periods indicated and their respective
weighted average exercise price (rounded to the nearest tenth decimal place),
reflective of four 10% stock dividends and a 2-for-1 stock split:
F-25
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31,1996 DECEMBER 31, 1995 DECEMBER 31,1994
---------------------- ------------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ------------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period...................... 271,958 $6.306 209,627 $ 3.413 218,451 $3.413 247,366 $3.413
Granted..................... -- -- 72,600 14.245 -- -- -- --
Exercised.................... (119,774) 3.413 (10,269) 3.413 (8,824) 3.413 (28,915) 3.413
------- ------ ------- ------- ------- ------ ------- ------
Outstanding at end of period. 152,184 $8.582 271,958 $ 6.306 209,627 $3.413 218,451 $3.413
======= ====== ======= ======= ======= ====== ======= ======
Options exercisable at end of
period....................... 86,844 199,356 180,343 159,884
======= ======= ======= =======
Weighted average fair value
of options granted during
the period.................. -- $14.103 -- --
====== ======= ====== ======
</TABLE>
The following table summarizes information about the stock options outstanding
at September 30, 1997, and December 31, 1996, as adjusted for the effect of
stock dividends:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
- ---------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER OF WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE SHARES AVERAGE
EXERCISE OF SHARES CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES OUTSTANDING LIFE IN YEARS PRICE AT PERIOD PRICE
END
- ------------------ ------------- ----------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.413 79,584 4.6 $ 3.413 79,584 $ 3.413
13.017-14.773 72,600 9.0 14.245 7,260 13.017
- --------------- ------- --- ------- ------ -------
$ 3.413-14.773 152,184 6.7 $ 8.582 86,844 $ 4.216
=============== ======= === ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER OF WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE SHARES AVERAGE
EXERCISE OF SHARES CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES OUTSTANDING LIFE IN YEARS PRICE AT PERIOD PRICE
END
- ------------------ ------------- ----------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.413 199,358 5.5 $ 3.413 199,356 $3.413
13.017-14.773 72,600 9.8 14.245 -- --
- ------------------ ------- --- ------- ------- -------
$ 3.413-14.773 271,958 6.7 $ 6,305 199,356 $3,413
================== ======= === ======= ======= =======
</TABLE>
F-26
<PAGE>
The Bank applies APB 25 in accounting for the Plans. Consistent with SFAS 123,
if compensation cost for the Plans was included, the Bank's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (as restated for the 10% stock dividend declared on September 24, 1997).
There were no options granted in 1997. (in thousands, except per share data) :
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------ --------------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Income:
As Reported......................... $6,760 $2,364 $4,710 $8,302 $8,275
Pro forma........................... 6,760 2,364 4,649 8,302 8,275
Earnings per share:
Basic earnings per share............ $ 0.86 $ 0.31 $ 0.60 $ 1.06 $ 1.06
Diluted earnings per share.......... $ 0.83 $ 0.30 $ 0.59 $ 1.04 $ 1.03
Pro forma basic earnings per share.. $ 0.86 $ 0.31 $ 0.60 $ 1.06 $ 1.06
Weighted average fair value
of options granted during the year -- -- $ 4.38 -- --
</TABLE>
The fair value of stock options (or their equivalents) granted by the Bank was
estimated through the use of the Black-Scholes option-pricing model that takes
into account the following factors as of the grant dates: the exercise price and
expected life of the option, the market price of the underlying stock at the
grant date and its expected volatility, and the risk-free interest rate for the
expected term of the option. In deriving the fair value of a stock option, the
stock price at the grant date is reduced by the value of the dividends to be
paid during the life of the option. The following assumptions were used for
grants in 1996: dividend yield of 2.50%, an expected volatility of 28.6% and a
risk-free interest rate of 6.05%. There were no options granted in 1997, 1995
and 1994 that required disclosure in accordance with SFAS 123. The effects of
applying SFAS 123 on the pro forma net income may not be representative of the
effects on pro forma net income for future years.
_______________________________________________________________________________
(14) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
FINANCIAL TRANSACTIONS WITH OFF-BALANCE-SHEET RISK
AND CONCENTRATIONS OF CREDIT
The Bank, in the normal course of conducting its business, extends credit to
meet the financing needs of its customers through commitments and letters of
credit.
The following commitments and contingent liabilities existed at September 30,
1997, December 31, 1996 and 1995, which are not reflected in the accompanying
consolidated financial statements (in thousands):
F-27
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
ORIGINATION OF MORTGAGE LOANS:
Fixed rate................................... $ 8,809 $ 6,477 $ 6,168
Variable rate................................ 14,505 22,813 3,583
Purchase of mortgage loans - variable rate..... 2,428 2,773 6,393
Undisbursed home equity credit lines........... 14,333 15,210 14,575
Purchase of investment and mortgage-backed..... 16,936 21,268 4,000
Undisbursed construction credit lines.......... 26,214 12,243 3,800
Undisbursed consumer lines of credit........... 1,544 -- --
Participations in Thrift Institutions
Community Investment Corp..................... 100 650 2,300
of New Jersey
Unused credit card lines....................... 911 964 966
Standby letters of credit...................... 2,143 1,322 977
Sale of mortgage-backed securities............. $ -- $(21,364) $ --
========= ======== ==========
</TABLE>
These instruments involve elements of credit and interest rate risk in excess of
the amount recognized in the consolidated financial statements. The Bank uses
the same credit policies and collateral requirements in making commitments and
conditional obligations as it does for on-balance-sheet loans. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the commitments may 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. The amount of collateral obtained is based on management's credit
evaluation of the borrower.
The Bank grants one- to four-family first mortgage real estate loans, multi-
family, and nonresidential first mortgage real estate loans to borrowers
throughout New Jersey. Its borrowers' abilities to repay their obligations are
dependent upon various factors, including the borrowers' income and net worth,
cash flows generated by the underlying collateral, value of the underlying
collateral and priority of the Bank's lien on the property. Such factors are
dependent upon various economic conditions and individual circumstances beyond
the Bank's control; the Bank is therefore subject to risk of loss. The Bank
believes its lending policies and procedures adequately minimize the potential
exposure to such risks and that adequate provisions for loan losses are provided
for all known and inherent risks. Collateral and/or guarantees are required for
virtually all loans. Interest rates on the $8.8 million of fixed-rate mortgage
loans committed as of September 30, 1997 ranged from 6.375% to 7.875%.
LEASE OBLIGATIONS
At September 30, 1997, and December 31, 1996, the Bank was obligated under
noncancellable operating leases for premises and equipment. Rental expense
under these leases aggregated approximately $518,000 and $536,000 for the nine
months ended September 30, 1997 and 1996, respectively, and $711,000, $714,000
and $644,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
F-28
<PAGE>
The projected minimum rental commitments are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
1997.......................... $ 115 $ 420
1998.......................... 336 273
1999.......................... 336 273
2000.......................... 197 140
2001.......................... 123 70
Thereafter.................... 205 155
------ ------
$1,312 $1,331
====== ======
</TABLE>
CONTINGENCIES
The Bank is a defendant in certain claims and legal actions arising in the
ordinary course of business. Management is of the opinion that the ultimate
disposition of these matters will not have a material adverse effect on the
Bank's consolidated financial condition or results of operations.
________________________________________________________________________________
(15) SPECIAL SAIF ASSESSMENT
The Deposit Insurance Funds Act of 1996 (the "Act") was signed into law on
September 30, 1996. Among other things, the Act required depository
institutions to pay a one-time special assessment of 65.7 basis points on their
SAIF (Savings Association Insurance Fund)-assessable deposits, in order to
recapitalize the SAIF to the reserve level required by law. The Bank's
financial statements for the period ended September 30, 1996 and year ended
December 31, 1996 reflect a charge of $5.2 million for this special SAIF
assessment. As a result of the Act, the Bank's annual SAIF insurance premium
has been reduced to 6.4 basis points. In addition to this special SAIF
assessment, the Bank paid federal deposit insurance premiums of $285,000 and
$1.4 million in for the nine months ended September 30, 1997, and 1996,
respectively and $1.9 million, $1.7 million and $1.6 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
________________________________________________________________________________
(16) RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1996, the FASB issued SFAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments 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 a
consistent application of a financial components approach that 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 is effective for
transfers that occur after December 31, 1996 and will be applied prospectively
except for certain provisions that were deferred until January 1, 1998, by
Statement 127 "Deferral of the Effective date of Certain Provisions of FASB No.
125" issued in December 1996. The adoption of SFAS 125 did not have a material
effect on the Bank's financial position or results of operations.
F-29
<PAGE>
In February 1997, the FASB issued Statement 128, "Earnings Per Share." SFAS 128
supersedes APB Opinion No. 15, "Earnings per Share" and specifies the
computation, presentation and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
SFAS 128 replaces Primary EPS and Fully Diluted EPS with Basic EPS and Diluted
EPS, respectively. SFAS 128 requires dual presentation of Basic and Diluted EPS
on the face of the income statement for entities with complex capital structures
and a reconciliation of information utilized to calculate Basic EPS to that used
to calculate Fully Diluted EPS. SFAS 128 is effective for financial statement
periods ending after December 15, 1997. Earlier application is not permitted.
The Bank adopted FASB 128 on December 31, 1997. All earnings per share data for
prior periods have been restated to conform to the provisions of FASB 128.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." SFAS
130 established standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. Under
SFAS 130, comprehensive income is divided into net income and other
comprehensive income. Other comprehensive income includes items previously
recorded directly in equity, such as unrealized gains or losses on securities
available for sale. SFAS 130 is effective for interim periods and annual
periods beginning after December 15, 1997. Comparative financial statements for
earlier period are required to be reclassified to reflect application of the
provisions of SFAS 130. The Bank has not determined the impact, if any, SFAS
130 will have on the Bank's financial statement presentation.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the way
public business enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report selected
financial information about operating segments in interim financial reports to
shareholders. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. The Bank has not determined the impact, if
any, SFAS 131 will have on the Bank's financial statement presentation.
F-30
<PAGE>
________________________________________________________________________________
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value estimates, methods and assumptions were used to measure
the fair value of each class of financial instrument for which it is practical
to estimate that value.
CASH AND CASH EQUIVALENTS
For such short-term investments, the carrying amount was considered to be a
reasonable estimate of fair value.
FEDERAL HOME LOAN BANK-NY STOCK
Federal Home Loan Bank-NY stock is valued at cost.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
For investment and mortgage-backed securities, fair values were based on quoted
market prices or dealer quotes. If a quoted market price was not available,
fair values were estimated using quoted market prices for similar securities.
LOANS RECEIVABLE, NET
Fair values were estimated for portfolios of performing and nonperforming loans
with similar financial characteristics. For certain analogous categories of
loans, such as residential mortgages, home equity loans, non-residential
mortgages, and consumer loans, fair value was estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other performing loan types was estimated by
discounting the future cash flows using market discount rates that reflect the
credit, collateral, and interest rate risk inherent in the loan.
DEPOSITS
The fair value of demand deposits, savings deposits and money market accounts
were the amounts payable on demand at September 30, 1997, December 31, 1996 and
1995. The fair values of certificates of deposit were based on the discounted
value of contractual cash flows. The discount rate was estimated utilizing the
rate currently offered for deposits of similar remaining maturities.
BORROWED FUNDS
For short-term borrowings, the carrying amount was considered to be a reasonable
estimate of fair value. For long-term borrowings, the fair value was based upon
the discounted value of the cash flows. The discount rates utilized were based
on rates currently available with similar terms and maturities.
OFF-BALANCE SHEET INSTRUMENTS
For commitments to extend credit and letters of credit, the fair value would
approximate fees currently charged to enter into similar agreements.
F-31
<PAGE>
The estimated fair values of the Bank's financial instruments at September 30,
1997, December 31, 1996 and December 31, 1995, were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- ------------------------- -------------------------
BOOK FAIR BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents.............. $ 23,798 $ 23,798 $ 9,042 $ 9,042 $ 26,549 $ 26,549
FHLB-NY stock.......................... 8,045 8,045 7,428 7,428 6,276 6,276
Investment securities.................. 40,959 41,108 38,955 38,980 39,003 39,617
Investment securities available for.... 18,024 18,024 14,831 14,831 2,058 2,058
sale
Mortgage-backed securities............. 228,158 231,667 252,383 255,052 288,143 291,689
Mortgage-backed securities............. 122,371 122,371 120,797 120,797 89,339 89,339
available for sale
Loans receivable, net.................. 567,197 586,475 509,627 514,084 457,756 470,269
Loans available for sale............... -- -- 287 290 424 428
FINANCIAL LIABILITIES:
Deposits............................... 809,449 810,060 794,595 795,545 806,338 808,639
Borrowed funds......................... 124,465 124,172 88,640 88,648 39,496 39,671
OFF-BALANCE SHEET INSTRUMENTS:
Loan commitments....................... 138 -- 393 -- 39
Standby letters of credit.............. -- 21 -- 13 -- 10
======== ======== ======== ======== ======== ========
</TABLE>
LIMITATIONS:
The foregoing fair value estimates were made at September 30, 1997, December 31,
1996 and 1995, based on pertinent market data and relevant information on the
financial instrument. These estimates do not include any premium or discount
that could result from an offer to sell, at one time, the Bank's entire holdings
of a particular financial instrument or category thereof. Since no market
exists for a substantial portion of the Bank's financial instruments, fair value
estimates were necessarily based on judgments with respect to future expected
loss experience, current economic conditions, risk assessments of various
financial instruments involving a myriad of individual borrowers, and other
factors. Given the innately subjective nature of these estimates, the
uncertainties surrounding them and the matters of significant judgment that must
be applied, these fair value estimations cannot be calculated with precision.
Modifications in such assumptions could meaningfully alter these estimates.
Since these fair value approximations were made solely for on- and off-balance
sheet financial instruments at September 30, 1997, December 31, 1996 and 1995,
no attempt was made to estimate the value of anticipated future business of the
value of nonfinancial statement assets and liabilities. Other important
elements which are not deemed to be financial assets or liabilities include the
value of the Bank's retail branch delivery system, its existing core deposit
base, premises and equipment, and goodwill. Further, certain tax implications
related to the realization of the unrealized gains and losses could have a
substantial impact on these fair value estimates and have not been incorporated
into any of the estimates.
F-32
<PAGE>
________________________________________________________________________________
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data for the nine months ended
September 30, 1997 and years ended December 31, 1996 and 1995 (dollars in
thousands, except per share data, which includes four 10% stock dividends and a
2-for-1 stock split):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 FIRST SECOND THIRD
QUARTER QUARTER QUARTER
-------- ------- -------
<S> <C> <C> <C>
Interest income............................................... $17,791 $18,263 $18,582
Interest expense.............................................. 9,828 10,262 10,501
------- ------- -------
Net interest income before provision for loan losses.......... 7,963 8,001 8,081
Provision for loan losses..................................... 300 300 300
------- ------- -------
Net interest income after provision for loan losses........... 7,663 7,701 7,781
Other operating income........................................ 525 526 1,135
Operating expenses............................................ 4,124 4,417 6,040
------- ------- -------
Income before income tax expense.............................. 4,064 3,810 2,876
Income tax expense............................................ 1,563 1,356 1,071
------- ------- -------
Net income.................................................... $ 2,501 $ 2,454 $ 1,805
======= ======= =======
Basic earnings per share...................................... $0.32 $0.31 $0.23
======= ======= =======
Diluted earning per share..................................... $0.31 $0.30 $0.22
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income............................................... $16,788 $16,811 $16,900 $17,540
Interest expense.............................................. 9,227 9,168 9,249 9,620
------- ------- ------- -------
Net interest income before provision for losses............... 7,561 7,643 7,651 7,920
Provision for loan losses..................................... 100 125 150 175
------- ------- ------- -------
Net interest income after provision for loan losses........... 7,461 7,518 7,501 7,745
Other operating income........................................ 485 395 502 613
Operating expenses............................................ 4,510 5,218 10,394 4,579
------- ------- ------- -------
Income (loss) before income tax expense (benefit)............. 3,436 2,695 (2,391) 3,779
Income tax expense (benefit).................................. 1,244 1,005 (873) 1,433
------- ------- ------- -------
Net income (loss)............................................. $ 2,192 $ 1,690 $(1,518) $ 2,346
======= ======= ======= =======
Basic earnings (loss) per share............................... $0.28 $0.22 $(0.19) $0.30
======= ======= ======= =======
Diluted earnings per share.................................... $0.31 $0.27 $(0.19) $0.29
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income............................................... $15,111 $15,983 $16,635 $16,844
Interest expense.............................................. 7,865 8,970 9,407 9,449
------- ------- ------- -------
Net interest income before provision for loan losses.......... 7,246 7,013 7,228 7,395
Provision for loan losses..................................... 75 75 75 85
------- ------- ------- -------
Net interest income after provision for loan losses........... 7,171 6,938 7,153 7,310
Other operating income........................................ 713 652 286 520
Operating expenses............................................ 4,397 4,589 4,422 4,422
------- ------- ------- -------
Income before income tax expense.............................. 3,487 3,001 3,017 3,408
Income tax expense............................................ 1,098 1,252 1,003 1,258
------- ------- ------- -------
Net income.................................................... $ 2,389 $ 1,749 $ 2,014 $ 2,150
======= ======= ======= =======
Basic earnings per share...................................... $0.31 $0.22 $0.26 $0.27
======= ======= ======= =======
Diluted earnings per share.................................... $0.30 $0.22 $0.25 $0.27
======= ======= ======= =======
</TABLE>
(10) SUBSEQUENT EVENT
The Bank adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("FASB 128") on December 31, 1997. All earnings per
share data for prior periods have been restated to conform to the
provision of FASB 128.
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 First Source Bancorp, Inc., the Bank or Sandler O'Neill. 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 First Source Bancorp, Inc. or the Bank since any of the dates as of
which information is furnished herein or since the date hereof.
______________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary...................................................................
Selected Financial and Other Data.........................................
Risk Factors..............................................................
First Source Bancorp, Inc.................................................
First Savings Bancshares, MHC.............................................
First Savings Bank, SLA...................................................
Regulatory Capital Compliance.............................................
Use of Proceeds...........................................................
Dividend Policy...........................................................
Market for the Common Stock...............................................
Capitalization............................................................
Pro Forma Data............................................................
First Savings Bank, 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................................
</TABLE>
______________________________
UNTIL _________, 1998 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.
14,391,900 Shares
FIRST SOURCE BANCORP, INC.
(Proposed Holding Company for
First Savings Bank, SLA)
COMMON STOCK
__________
PROSPECTUS
__________
________, 1998
SANDLER O'NEILL & PARTNERS, L.P.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
<TABLE>
<S> <C>
OTS filing fee............................................ $ 8,400
SEC filing fee(1)......................................... 93,633
NASD filing fee(1)........................................ 30,500
Exchange listing fee(1)................................... 36,740
Printing, postage and mailing............................. 75,000
Legal fees and expenses................................... 100,000
Accounting fees and expenses.............................. 100,000
Appraiser's fees and expenses (including
business plan).......................................... 25,000
Marketing fees and selling commissions (1)................ 1,726,000
Underwriter's expenses (including underwriter's
counsel fees)(1)....................................... --
Proxy solicitation and record management
fees and expenses...................................... 10,000
Transfer agent fees and expenses.......................... 15,000
Certificate printing...................................... 5,000
Telephone, temporary help and other
equipment............................................... 25,000
Blue Sky fees and expenses................................ 10,000
Miscellaneous............................................. 65,727
----------
TOTAL..................................................... $2,326,000
==========
</TABLE>
____________________
(1) Actual expenses based upon the registration of 31,740,000 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
<PAGE>
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 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.
<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.
<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)
<TABLE>
<CAPTION>
<S> <C>
1.1 Engagement Letter between First Savings Bank, 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 First Source Bancorp, Inc.*
3.2 Bylaws of First Source Bancorp, Inc.*
3.3 Certificate of Incorporation and Bylaws of First Savings Bank, SLA*
4.0 Draft Stock Certificate of First Source Bancorp, Inc.*
5.0 Opinion of Patton Boggs, L.L.P. re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.1 Opinion of Patton Boggs, L.L.P. re: Federal Tax Matters
8.2 Opinion of KPMG Peat Marwick LLP re: State Tax Matters
10.1 First Savings Bank, SLA 1992 Incentive Stock Option Plan*
10.2 First Savings Bank, SLA 1992 Stock Option Plan for Outside Directors*
10.3 First Savings Bank, SLA 1996 Omnibus Incentive Plan*
10.4 First Savings Bank, SLA 1992 Employee Stock Ownership Plan*
10.5 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.6 First Savings Bank, SLA Directors' Deferred Fee Stock Unit Plan*
10.7 First Savings Bank, SLA Supplemental Executive Retirement Plan*
10.8 Draft First Savings Bank, SLA Supplemental Executive Retirement Plan II*
10.9 First Savings Bank, SLA Director Retirement Plan*
10.10 Employment Agreements between First Savings Bank, SLA and certain executive officers*
10.11 Form of Employment Agreement between First Source Bancorp, Inc. and certain executive officers
10.12 Form of Change in Control Agreement between First Savings Bank, SLA and certain executive officers
10.13 Form of Change in Control Agreement between First Source Bancorp, Inc. and certain executive officers*
10.14 Form of First Savings Bank, SLA Employee Severance Compensation Plan*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Patton Boggs, L.L.P.
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 Appraisal Report of FinPro, Inc. (P)
99.2 Agreement regarding Listing on a Securities Exchange
99.3 Proxy Materials and Form of Revocable Proxy for First Savings Bank, SLA Stockholders*
</TABLE>
__________________________________
*Previously filed
** To be filed by amendment
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 end 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 a 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.
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.
<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 Woodbridge,
State of New Jersey, on February 9, 1998.
FIRST SOURCE BANCORP, INC.
By: /s/ John P. Mulkerin
---------------------------------------
John P. Mulkerin
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.
<TABLE>
<CAPTION>
Name Date
---- ----
<S> <C>
*
- ----------------------------------------
Walter K. Timpson
Chairman of the Board
/s/ John P. Mulkerin February 9, 1998
- ----------------------------------------
President, Chief Executive Officer and
Director (principal executive officer)
/s/ Christopher P. Martin February 9, 1998
- ----------------------------------------
Christopher P. Martin
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
(principal accounting and financial officer)
*
- ----------------------------------------
Donald T. Akey, M.D.
Director
*
- ----------------------------------------
Harry F. Burke
Director
*
- ----------------------------------------
Keith H. McLaughlin
Director
*
- ----------------------------------------
Philip T. Ruegger, Jr.
Director
*
- ----------------------------------------
Jeffries Shein
Director
</TABLE>
- ----------------------
* Signed pursuant to powers of attorney filed as Exhibit 24.1 to the Form S-1
filed with the Commission on December 19, 1997.
<PAGE>
Exhibit 1.2
27,600,000 Shares
(subject to increase up to 31,740,000 Shares
in the event of an oversubscription)
First Source Bancorp, Inc.
(a Delaware corporation)
Common Stock
(par value $0.01 per share)
AGENCY AGREEMENT
February __, 1998
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
First Source Bancorp, Inc., a Delaware corporation (the "Company"), First
Savings Bancshares, MHC, a mutual holding company organized under the laws of
the United States of America (the "MHC") and First Savings Bank, 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 14,242,072 shares
(subject to increase up to 16,378,421 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 canceled; (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>
-2-
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,
including the Bank's employee stock ownership plan (the "ESOP") (collectively,
the "Employee Plans"), 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. 333-42757) including a
related prospectus for the registration of the Securities and the Exchange
Shares under the Securities Act of 1933, as amended (the "Securities 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 Securities Act, as from time to time
amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities 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
<PAGE>
-3-
Community Offering or the Syndicated Community Offering which 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 by the Company pursuant to Rule 424(b) of the Securities 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
Securities Act and the Securities 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 the 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
<PAGE>
-4-
the date of such approval and at the Closing Time referred to in Section 2,
the Holding Company Application complied and will comply 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 _______, 1998, relating to the
Conversion and Reorganization (the "Members' Proxy Statement"), (B) the
Bank's Proxy Statement, to be dated on or about _______, 1998, 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
______, 1998, 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 and at the
Closing Time referred to in Section 2, the New Jersey Application complied
and will comply 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
<PAGE>
-5-
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) Neither the Commission nor the OTS has, 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) At the Closing time referred to in Section 2, the
Company, the MHC and the Bank will have completed the conditions precedent
to the Conversion and Reorganization in accordance with the Plan, the
applicable Conversion Regulations and all other applicable laws,
regulations, decisions and orders, including all material terms,
conditions, requirements and provisions precedent to the Conversion and
Reorganization imposed upon the Company, the MHC or the Bank by the
Commission, the OTS, the New Jersey Department of Banking, the Federal
Deposit Insurance Corporation (the "FDIC"), or any other regulatory
authority, other than those which the regulatory authority permits to be
completed after the Conversion and Reorganization.
(viii) Finpro, Inc., which prepared the valuation of the
Company and the Bank as part of the Conversion and Reorganization, has
advised the Company, the MHC and the Bank in writing 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.
(ix) KPMG Peat Marwick LLP, the accountants who certified the
consolidated financial statements of the Bank included in the Registration
Statement, have advised the Company, the MHC and the Bank in writing 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 Securities Act and the Securities Act Regulations.
(x) The only direct subsidiary of the MHC is the Bank. The
only subsidiaries of the Bank are FSB Financial Corp. and 1000 Woodbridge
Center Drive, Inc. (the "Subsidiaries").
(xi) The consolidated financial statements and the related
notes thereto included in the Registration Statement and the Prospectus
present fairly the financial position of the MHC, the Bank and the
Subsidiaries as of the dates indicated and the results of operations,
stockholders' equity and cash flows for the periods specified and comply as
to form in all material respects with the applicable accounting
requirements of the Securities 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.
<PAGE>
-6-
(xii) 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 affairs of the
Company, the MHC, the Bank and the Subsidiaries considered as one
enterprise, 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 Subsidiaries, other than those in the ordinary
course of business which are material with respect to the Company, the MHC,
the Bank and the Subsidiaries considered as one enterprise.
(xiii) 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 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 each jurisdiction 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 affairs of the Company, the
MHC, the Bank and the Subsidiaries considered as one enterprise.
(xiv) Upon consummation of the Conversion and Reorganization
as described in the Prospectus, the authorized, issued and outstanding
capital stock of the Company will be 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
conform to the requirements of Delaware law; and the issuance of the
Securities and the Exchange Shares is not subject to preemptive or other
similar rights.
(xv) 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 each jurisdiction in which the failure to so qualify would have
a material adverse effect on the financial condition, results of operations
or business
<PAGE>
-7-
affairs of the Company, the MHC, the Bank and the Subsidiaries considered
as one enterprise; 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.
(xvi) 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 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 affairs of the Company, the
MHC, the Bank and the Subsidiaries considered as one enterprise.
(xvii) 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. The Bank is
a "qualified thrift lender" within the meaning of 12 U.S.C. Section
1467a(m).
(xviii) The authorized capital stock of the Bank consists of
10,000,000 shares of common stock, par value $0.01 per share (the "Bank
Common Stock") and 1,000,000 shares of preferred stock, (the "Bank
Preferred Stock"), of which [8,016,351] 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 [4,134,812] 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; the terms
and provisions of the Bank Common Stock and the Bank Preferred Stock
conform to all statements relating thereto contained in the Prospectus, and
the certificates representing the shares of the Bank Common Stock conform
with the requirements of applicable laws and regulations.
<PAGE>
-8-
(xix) The Subsidiaries have been duly incorporated and are
validly existing as corporations in good standing under the laws of the
jurisdiction of their incorporation, have full corporate power and
authority to own, lease and operate their properties and to conduct their
business as described in the Registration Statement and Prospectus, and are
duly qualified to transact business and are in good standing in each
jurisdiction 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 affairs of the
Company, the MHC, the Bank and the Subsidiaries considered as one
enterprise; the activities of the Subsidiaries 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 Subsidiaries 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.
(xx) The Company, the MHC, the Bank and the Subsidiaries have
obtained all licenses, permits and other governmental authorizations
currently required for the conduct of their respective businesses or
required for the conduct of their respective businesses as contemplated by
the Holding Company Application and the Conversion Application, except
where the failure to obtain such licenses, permits or other governmental
authorizations would not have a material adverse effect on the financial
condition, results of operations or business affairs of the Company, the
MHC, the Bank and the Subsidiaries considered as one enterprise; all such
licenses, permits and other governmental authorizations are in full force
and effect and the Company, the MHC, the Bank and the Subsidiaries are in
all material respects in compliance therewith; neither the Company, the
MHC, the Bank nor the Subsidiaries 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 affairs of the Company, the MHC, the Bank and the
Subsidiaries considered as one enterprise.
(xxi) From the date of their 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 than in connection with organizational matters and actions taken in
connection with the consummation of the Conversion and Reorganization.
(xxii) 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
<PAGE>
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performance and except as the enforceability of indemnification and
contribution provisions may be limited by applicable securities laws.
(xxiii) 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 Subsidiaries 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 Subsidiaries considered as one
enterprise, 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.
(xxiv) 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 and the Exchange 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.
(xxv) Neither the Company, the MHC, the Bank nor any of the
Subsidiaries is in violation of its certificate of incorporation, articles
of incorporation, or charter, as the case may be, or bylaws; and neither
the Company, the MHC, the Bank nor any of the Subsidiaries is 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 any of the Subsidiaries 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 any of the Subsidiaries 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 affairs of the Company, the MHC, the Bank
and the Subsidiaries considered as one enterprise; and there are no
contracts or documents of the Company, the MHC, the Bank or any of the
Subsidiaries which are required to be filed as exhibits to the Registration
Statement or the Conversion Application which have not been so filed.
(xxvi) 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 any of the
Subsidiaries pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company, the MHC,
the Bank or any of the Subsidiaries 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 any of the Subsidiaries is subject, except
for such defaults that would not, individually or in the
<PAGE>
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aggregate, have a material adverse effect on the financial condition,
results of operations or business affairs of the Company, the MHC, the Bank
and the Subsidiaries considered as one enterprise, 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 any
of the Subsidiaries, or any applicable law, regulation or administrative or
court decree.
(xxvii) No labor dispute with the employees of the Company, the
MHC, the Bank or the Subsidiaries exists or, to the knowledge of the
Company, the MHC, or the Bank, is imminent or 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 affairs of
the Company, the MHC, the Bank and the Subsidiaries considered as one
enterprise.
(xxviii) Each of the Company, the MHC, the Bank and the
Subsidiaries 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 Subsidiaries 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 as are described in the
Prospectus or are not material in relation to the business of the Company,
the MHC, the Bank and the Subsidiaries considered as one enterprise; and
all of the leases and subleases material to the business of the Company,
the MHC, the Bank and the Subsidiaries considered as one enterprise under
which the Company, the MHC, the Bank and the Subsidiaries hold properties,
including those described in the Prospectus, are valid and binding
agreements of the Company, the MHC, the Bank or the Subsidiaries,
enforceable in accordance with their terms.
(xxix) Neither the Company, the MHC, the Bank nor any of the
Subsidiaries 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
Subsidiaries have conducted and are conducting their businesses so as to
comply in all material respects 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).
(xxx) 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, or the Bank, threatened, against
or affecting the Company, the MHC, the Bank or any of the Subsidiaries
which is required to be disclosed in the Registration Statement (other than
as disclosed therein) or which might result in any material adverse change
in the financial condition, results of operations or business affairs of
the Company, the MHC, the Bank and the Subsidiaries considered as one
enterprise, 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
<PAGE>
-11-
Reorganization; all pending legal or governmental proceedings to which the
Company, the MHC, the Bank or any of the Subsidiaries 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 considered in the aggregate, not
material.
(xxxi) The Bank has obtained the opinions of its counsel,
Patton Boggs, L.L.P., with respect to the legality of the Securities and
the Exchange Shares to be issued and the Federal and New Jersey 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.
(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 consolidated financial statements or consolidated 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 Subsidiaries considered as one enterprise.
(xxxiv) To the knowledge of the Company, the MHC and the Bank,
(with the exception of the intended loan to the ESOP for the purchase of
the Common Stock to be sold in the Conversion and Reorganization) none of
the Company, the MHC, the Bank or the Subsidiaries, or any of their
respective employees has made any payment of funds of the Company, the MHC,
the Bank or the Subsidiaries 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 Subsidiaries 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 any of the
Subsidiaries, nor any properties owned or operated by the Company, the MHC,
the Bank or any of the Subsidiaries, is in violation of or is liable under
any Environmental Law (as defined
<PAGE>
-12-
below), except for such violations or liabilities that, individually or in
the aggregate, would not have a material adverse effect on the financial
condition, results of operations or business affairs of the Company, the
MHC, the Bank and the Subsidiaries considered as one enterprise. 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 any of the Subsidiaries 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 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 Subsidiaries have
filed all federal, state and local tax returns required to be filed and
have 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.
(xxxix) The Company has filed a registration statement for the
Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and has requested that such registration
statement be effective concurrent with the effectiveness of the
Registration Statement.
(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 with the 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.
<PAGE>
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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 the
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 with the Board of Directors the independent appraiser's appraisal
of the Common Stock; (iii) reviewing all offering documents, including the
Prospectus, stock order form 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); (iv) assisting in the design and
implementation of a marketing strategy for the Offerings; (v) assisting the
Company and the Bank in obtaining all requisite regulatory approvals; (vi)
assisting Bank management in preparing for meetings with potential investors and
broker-dealers; and (vii) 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.
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 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 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, 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
the Securities, as set forth on the cover of the Prospectus, within the period
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
<PAGE>
-14-
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 set forth 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 Patton Boggs, L.L.P., 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, is herein called the "Closing
Time."
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:
(a) one and fifteen-hundredths percent (1.15%) of the aggregate actual
purchase price of the Securities sold in the Subscription Offering and Community
Offering, excluding in each case shares purchased by (i) any 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) whether or not
living in the same household; and
(b) 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, (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 one and fifteen-hundredths percent (1.15%).
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 one and fifteen-
hundredths percent (1.15%) of the actual purchase price of such Securities.
<PAGE>
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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 for all of its reasonable out-of-pocket expenses incurred in
connection with its engagement prior to termination, including the reasonable
fees and disbursements of counsel for the Agent in accordance with the
provisions of 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 Securities Act Regulations or the Conversion
Regulations or as may hereafter be 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 information with respect to the proposed plan of distribution and
any revised pricing information or (ii) if no such post-effective amendment is
required, will file with 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 of the Securities Act
Regulations, in either case in a form reasonably 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.
<PAGE>
-16-
(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 Securities 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 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 Securities Act, the
Securities 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.
(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
<PAGE>
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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
receive subscription rights and other persons to be offered Securities 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 form complying with the
provisions of Rule 158 of the Securities 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 Subsidiaries, 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), will make available to its stockholders
consolidated summary financial information of the Company, the Bank and the
Subsidiaries for such quarter in reasonable detail. 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 publicly 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, including all applicable terms, requirements and conditions precedent to
the Conversion and Reorganization imposed upon the Company or the Bank by the
OTS.
<PAGE>
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(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 Securities Act Regulations.
(n) The Company will maintain the effectiveness of the registration of the
common stock under the Exchange Act 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) 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 National Association of Securities Dealers, Inc.'s
("NASD") "Interpretation Relating to Free-Riding and Withholding."
(p) 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.
(q) Other than in connection with any employee benefit plan or arrangement
described in the Prospectus, the Company will not, without the prior written
consent of the Agent, sell or issue, contract to sell or otherwise dispose of,
any shares of Common Stock other than the Securities or the Exchange Shares for
a period of 180 days after the Closing Time.
(r) 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.
(s) During the period ending on the first anniversary of the Closing Time,
the Bank will comply with all applicable law and regulation necessary for the
Bank to continue to be a "qualified thrift lender" within the meaning of 12
U.S.C. Section 1467a(m).
(t) The Company shall not deliver the Securities until the Company and the
Bank have satisfied each condition set forth in Section 5 hereof, unless such
condition is waived by the Agent.
<PAGE>
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(u) The Company or the Bank will furnish to Sandler O'Neill as early as
practicable prior to the Closing Date, but no later than two (2) full business
days prior thereto, a copy of the latest available unaudited interim
consolidated financial statements of the Bank and the Subsidiaries which have
been read by KPMG Peat Marwick LLP as stated in their letters to be furnished
pursuant to subsections (e) and (f) of Section 5 hereof.
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, including any required
NASD filing fees (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, appraisers, 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 Common Stock 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.
Sandler O'Neill shall bear all of its out-of-pocket expenses incurred in
connection with the Offerings, including, without limitation, advertising,
promotional, syndication and travel expenses and fees and expenses of the
Agent's counsel.
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 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 Securities Act or proceedings
therefor initiated or threatened by the Commission, no order suspending the
Offerings or authorization for final use of the Prospectus
<PAGE>
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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 Patton Boggs,
L.L.P., 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, lease and operate 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 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 upon the financial condition,
results of operations or business of the Company, the Bank and the
Subsidiaries considered as one enterprise.
(iv) Upon consummation of the Conversion and Reorganization,
the authorized, issued and outstanding capital stock of the Company
will be as set forth in the Prospectus under "Capitalization," and no
shares of Common Stock have been issued and remain outstanding prior
to the Closing Time other than the shares issued to the Bank to
effectuate the Conversion and Reorganization, which shares will be
canceled at 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 in consideration for shares of the Bank's
Common Stock pursuant to the Exchange Ratio, 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 the best of such counsel's knowledge,
otherwise.
(vii) The MHC is validly existing and in good standing under
the laws of the United States of America as a mutual holding company,
with full corporate
<PAGE>
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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 affairs of
the MHC.
(viii) The Bank has been at all times since _________________
and prior to the Closing Time duly organized, and is validly existing
and in good standing 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 affairs of the Bank.
(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, validly issued and fully paid and nonassessable,
and 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 Subsidiaries have been duly incorporated and are
validly existing as corporations in good standing under the laws of
the state of New Jersey, have full corporate power and authority to
own, lease and operate their properties and to conduct their business
as described in the Prospectus and are duly qualified as foreign
corporations to transact business and are 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 upon
the financial condition, results of operations or business of the
Company, the Bank and the Subsidiaries considered as one enterprise;
the activities of the Subsidiaries 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 Subsidiaries has been duly
authorized and validly issued, is fully paid and nonassessable and is
owned directly by the Bank, free and clear of any security interest,
mortgage, pledge, lien, encumbrance or claim.
<PAGE>
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(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 beneficially and 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 the best of 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, include all documents required to
be filed as exhibits thereto, and is, to the best of such counsel's
knowledge, truthful, accurate and complete; 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 the best of 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 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) 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, the MHC, the Bank or any of the
Subsidiaries pursuant to any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company, the
MHC, the Bank or any of the Subsidiaries 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 any of the Subsidiaries is subject that,
individually or in the aggregate,
<PAGE>
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would have a material adverse effect on the financial condition,
results of operations or business affairs of the Company, the Bank and
the Subsidiaries considered as one enterprise 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 Subsidiaries.
(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 the best of such counsel's knowledge,
is threatened, by the OTS to revoke such authorization.
(xvii) The Registration Statement is effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement has been issued under the Securities Act nor
have proceedings therefor been initiated or, to the best of 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 and 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 Securities Act, the Securities Act
Regulations, and the Conversion 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) There are no legal or governmental proceedings pending
or threatened against or affecting the Company, the MHC, the Bank or
the Subsidiaries 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 any of the
Subsidiaries is a party or to which any of their property is subject
which are not described in the Registration Statement, 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
<PAGE>
-24-
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," "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, has been reviewed by such counsel
and is complete and accurate in all material respects.
(xxiii) To the best of 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,
the descriptions thereof or references thereto are correct, and no
default exists, and no event has occurred which, with notice or lapse
of time or both, would constitute a default, in the due performance or
observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument so described, referred to
or filed.
(xxiv) The Plan has been duly authorized by the Boards of
Directors of the Company, the MHC and the Bank and the OTS' approval
of the Plan remains in full force and effect; to the best of 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 Conversion
and Reorganization or the Offerings and no action for such purpose has
been instituted or threatened by the OTS; and, to the best of such
counsel's knowledge, no person has sought to obtain review of the
final action of the OTS in approving the Conversion Application or the
Holding Company Application.
(xxv) To the best of such counsel's knowledge, each of the
Company, the MHC, the Bank and the Subsidiaries 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, 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
Subsidiaries is in all material respects complying therewith.
<PAGE>
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(xxvi) Neither the Company, the MHC, the Bank nor any of the
Subsidiaries is in violation of its certificate or articles of
incorporation or charter, as the case may be, or bylaws nor, to the
best of such counsel's knowledge, is 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 any of the Subsidiaries is a party or by
which the Company, the MHC, the Bank or any of the Subsidiaries or any
of their respective property may be bound.
(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.
(xxviii) The Company is not required to be registered as an
investment company under the Investment Company Act of 1940.
(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), (xv)(A), (xix) and (xx) 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, Patton Boggs, L.L.P. 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, Patton Boggs, L.L.P. 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 Patton Boggs, L.L.P.
<PAGE>
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(c) At the Closing Time referred to in Section 2, the Company, the MHC and
the Bank shall 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 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 or any other regulatory authority, other than those permitted 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 affairs of the Company, the MHC,
the Bank and the Subsidiaries considered as one enterprise, 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 the Bank and the chief financial or chief accounting officer of the Company,
the MHC and the Bank, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) there has 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 affairs of the
Company, the MHC and the Bank (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 nor has any
person sought to obtain regulatory or judicial review of the action of the OTS
in approving the Holding Company Application.
(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 Subsidiaries within the meaning of the Securities Act, the
Securities Act Regulations and the Conversion Regulations; (ii) it is their
opinion that the consolidated financial statements 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 Securities Act, the
Securities Act Regulations and the OTS Regulations; (iii) based upon limited
procedures as agreed upon by the Agent and KPMG Peat Marwick LLP and
<PAGE>
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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 Subsidiaries included in the
Registration Statement do not comply as to form in all material respects with
the applicable accounting requirements of the Securities Act, the Securities Act
Regulations 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 borrowings of the Bank and the Subsidiaries or any decrease
in consolidated total assets, allowance for loan losses, total deposits or
stockholders' equity exclusive of the unrealized gain in investment securities
available for sale of the Bank and the Subsidiaries, in each case as compared
with the amounts shown in the December 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 total interest income, net interest income, or net income of
the Bank and the Subsidiaries, 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 Subsidiaries 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 and the Exchange Shares
as herein contemplated shall be satisfactory in form and substance to the Agent
and counsel for the Agent.
<PAGE>
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(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) 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
Exchanges 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 Securities 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 in 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
<PAGE>
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(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;
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 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 statements therein, in light of the circumstances under which they were
made, not misleading which was 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 Securities 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 omissions, or alleged untrue statements or omissions, of
a material fact, made in 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.
<PAGE>
-30-
(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 Securities 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 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 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 Securities 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 Securities 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
Securities 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.
<PAGE>
-31-
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 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 affairs of the Company, the MHC or
the Bank, or the Company, the MHC, the Bank and the Subsidiaries considered as
one enterprise, 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
Exchanges 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 September 30, 1998.
(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 hereof 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 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095, attention Mr.
John P. Mulkerin, President, with a copy to Joseph G. Passaic, Jr., Esq., Patton
Boggs, L.L.P., 2550 M Street, N.W., Washington, D.C. 20037.
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
<PAGE>
-32-
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
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. Unless otherwise noted, 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.
<PAGE>
-33-
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,
FIRST SOURCE BANCORP, INC.
By:_______________________________________________
President and Chief Executive Officer
FIRST SAVINGS BANCSHARES, MHC
By:_______________________________________________
President and Chief Executive Officer
FIRST SAVINGS BANK, SLA
By:_______________________________________________
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:_______________________________________________
<PAGE>
EXHIBIT A
FIRST SOURCE BANCORP, INC.
______________ Shares
(Maximum Offered in Conversion)
Common Stock
(Par Value $.01 Per Share)
SELECTED DEALER'S AGREEMENT
_______________, 1998
We have agreed to assist First Source Bancorp, Inc. (the "Company") in
connection with the offer and sale of shares (the "Shares") of Common Stock, par
value $.01 per share, of the Company, to be issued in connection with the
conversion and reorganization of First Savings Bank, SLA, a New Jersey-chartered
savings and loan association (the "Bank"), and First Savings Bancshares, MHC, a
mutual holding company organized under the laws of the United States of America,
from the mutual holding company to the stock holding company form. The Company,
in connection with its plan to effect such conversion, offered _________ Shares
for subscription by depositors of the Bank as of December 31, 1995, the Bank's
employee stock ownership plan and certain of the Bank's depositors and
borrowers, in a subscription offering, and certain members of the general public
in a concurrent direct community offering. The Shares which were not subscribed
for pursuant to such subscription and direct community offerings are being
offered to the public in a syndicated community offering (the "Syndicated
Community Offering") in accordance with the rules of the Office of Thrift
Supervision ("OTS"). The Shares, the bases on which the number of Shares to be
issued may change, and certain of the terms on which they are being offered are
more fully described in the enclosed Prospectus (the "Prospectus").
We are offering to Selected Dealers (of which you are one) the
opportunity to participate in the solicitation of offers to buy the Shares in
the Syndicated Community Offering and we will pay you a fee in the amount of
___________ percent (______%) of the dollar amount of the Shares sold on behalf
of the Company by you. The number of Shares sold by you shall be determined
based on the authorized designation of your firm on the order form or forms for
such Shares accompanying the funds transmitted for payment therefor (whether in
the form of a check payable to the Bank or a withdrawal from an existing account
at the Bank) to the special account established by the Company for the purpose
of holding such funds. It is understood, of course, that payment of your fee
will be made only out of compensation received by us for the Shares sold on
behalf of the Company by you, as evidenced in accordance with the preceding
sentence. The Company and the Bank have requested us to invite you to become a
"Sponsoring Dealer," that is, a Selected Dealer who solicits offers which result
in the sale on behalf of the Bank of at least ________ Shares. You may become a
Sponsoring Dealer (subject to your fulfillment of the requirement in the
preceding sentence) by checking the box on the confirmation at the end of this
letter. If you become a Sponsoring Dealer, you shall be entitled to an
additional fee in the amount of ______ percent (_____%) of the dollar amount of
the Shares sold on behalf of the Company by you as evidenced in the manner set
forth above.
<PAGE>
-2-
Each order form for the purchase of Shares must set forth the
----
identity, address and tax identification number of each person ordering Shares
- -------- ------- --- -------------- ------
regardless of whether the Shares will be registered in street name or in the
purchaser's name. Such order form should clearly identify your firm.
As soon as practicable after all the Shares are sold, we will remit to
you, out of our compensation as provided above, the fees to which you are
entitled hereunder, including your Sponsoring Dealer fee.
This offer is made subject to the terms and conditions herein set
forth and is made only to Selected Dealers that are (i) members in good standing
of the National Association of Securities Dealers, Inc. ("NASD") which agree to
comply with all applicable rules of the NASD, including, without limitation, the
NASD's Interpretation With Respect to Free-Riding and Withholding and NASD Rule
2110 or (ii) foreign dealers not eligible for membership in the NASD which agree
(A) not to sell any Shares within the United States, its territories or
possessions or to persons who are citizens thereof or resident therein and (B)
in making other sales to comply with the above-mentioned NASD Interpretation and
NASD Rules 2110, 2730 and 2750 as if they were NASD members and NASD Rule 2420
as it applies to non-member brokers or dealers in a foreign country.
Orders for Shares will be strictly subject to confirmation and we,
acting on behalf of the Company, reserve the right in our absolute discretion to
reject any order in whole or in part, to accept or reject orders in the order of
their receipt or otherwise, and to allot. Neither you nor any other person is
authorized by the Company, the Bank or by us to give any information or make any
representations other than those contained in the Prospectus in connection with
the sale of any of the Shares. No Selected Dealer is authorized to act as agent
for us when soliciting offers to buy the Shares from the public or otherwise.
No Selected Dealer shall engage in any stabilizing (as defined in Rule 100 of
Regulation M promulgated under the Securities Exchange Act of 1934) with respect
to the Company's Common Stock during the offering.
We and each Selected Dealer assisting in selling Shares pursuant
hereto agree to comply with the applicable requirements of the Securities
Exchange Act of 1934 and applicable rules and regulations issued by the Federal
Reserve Board and the OTS. In addition, we and each Selected Dealer confirm
that the Securities and Exchange Commission interprets Rule 15c2-8 promulgated
under the Securities Exchange Act of 1934 as requiring that a prospectus be
supplied to each person who is expected to receive a confirmation of sale 48
hours prior to delivery of such person's order form.
We and each Selected Dealer further agree to the extent that our
customers desire to pay for Shares with funds held by or to be deposited with
us, in accordance with the interpretation of the Securities and Exchange
Commission of Rule 15c2-4 promulgated under the Securities Exchange Act of 1934
either (a) upon receipt of an executed order form or direction to execute an
order form on behalf of a customer to forward the syndicated community offering
price for the Shares ordered on or before 12:00 p.m. on the business day
following receipt or execution of an order form by us to the Bank for deposit in
a segregated account or (b) to solicit indications of interest in which event
(i) we will subsequently contact any customers indicating interest to confirm
the interest and give instructions to execute and return an order form or to
receive authorization to execute an order form on their behalf, (ii) we will
mail
<PAGE>
-3-
acknowledgements of receipt of orders to each customer confirming interest on
the business day following such confirmation, (iii) we will debit accounts of
such customers on the fifth business day (the "debit date") following receipt of
the confirmation referred to herein and we will forward completed order forms
together with such funds to the Bank on or before 12:00 p.m. on the next
business day following the debit date for deposit in a segregated account. We
acknowledge that if the procedure in (b) is adopted, our customer's funds are
not required to be in their accounts until the debit date. We and each Selected
Dealer further acknowledge that, in order to use the foregoing "sweep
arrangements," we comply with the net capital requirements for broker/dealers
under Rule 15c3-1(a)(1) of the Securities Exchange Act of 1934.
Unless earlier terminated by us, this Agreement shall terminate 45
full business days after the date hereof, but may be extended by us for an
additional period or periods not exceeding 30 full business days in the
aggregate. We may terminate this Agreement or any provisions hereof at any time
by written or telegraphic notice to you. Of course, our obligations hereunder
are subject to the successful completion of the offering, including the sale of
all of the Shares.
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of Shares sold on
behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem
advisable in respect to all matters pertaining to the offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which
we believe the Shares have been qualified for sale under, or are exempt from the
requirements of, the respective blue sky laws of such states, but we assume no
responsibility or obligation as to your rights to sell Shares in any state.
Additional copies of the Prospectus and any supplements thereto will
be supplied in reasonable quantities upon request.
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of New
York.
<PAGE>
-4-
Please confirm your agreement hereto by signing and returning the
confirmation accompanying this letter at once to us at Sandler O'Neill &
Partners, L.P., Two World Trade Center, 104th Floor, New York, New York 10048.
The enclosed duplicate copy will evidence the agreement between us.
Very truly yours,
SANDLER O'NEILL & PARTNERS, L.P.
By:_____________________________________
<PAGE>
Sandler O'Neill & Partners, L.P.
Two World Trade Center - 104th Floor
New York, New York 10048
Re: First Source Bancorp
We hereby confirm our agreement to all the terms and conditions stated
in the foregoing letter. We acknowledge receipt of the Prospectus relating to
the Shares and we further state that in agreeing thereto we have relied upon the
Prospectus and no other statement whatsoever, written or oral. We confirm that
we are (i) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"), which agrees to comply with all applicable rules of the
NASD, including, without limitation, the NASD's Interpretation With Respect to
Free-Riding and Withholding and NASD Rule 2110, or (ii) a foreign dealer not
eligible for membership in the NASD which agrees (A) not to sell any Shares
within the United States, its territories or possessions or to persons who are
citizens thereof or resident therein and (B) in making other sales to comply
with the above-mentioned NASD Interpretation and NASD Rules 2110, 2730 and 2750
as if they were NASD members and NASD Rule 2420 as it applies to a non-member
broker or dealer in a foreign country.
[ ] We wish to become a "Sponsoring Dealer."
________________________________________
(Please print or type name of firm)
________________________________________
(Authorized Representative)
Dated:______________________
<PAGE>
Exhibit 2.1
AMENDED PLAN OF CONVERSION
OF
FIRST SAVINGS BANCSHARES, MHC
AND
AGREEMENT AND PLAN OF REORGANIZATION
OF
FIRST SAVINGS BANK, SLA
WOODBRIDGE, NEW JERSEY
AS ADOPTED ON:
OCTOBER 24, 1997
and amended on:
December 16, 1997
and January 28, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Introduction........................................................ 1
2. Definitions......................................................... 3
3. General Procedure for Conversion and Reorganization................. 12
4. Holding Company Applications and Approvals.......................... 15
5. Sale of Conversion Stock............................................ 16
6. Number of Shares and Purchase Price of Conversion Stock............. 17
7. Retention of Proceeds by Holding Company............................ 19
8. Subscription Rights of Eligible Account Holders..................... 20
9. Subscription Rights of Employee Plans............................... 21
10. Subscription Rights of Supplemental Eligible Account Holders........ 22
11. Subscription Rights of Other Members................................ 24
12. Community Offering.................................................. 25
13. Syndicated Community Offering....................................... 27
14. Limitation on Purchases............................................. 28
15. Payment for Conversion Stock........................................ 32
16. Manner of Exercising Subscription Rights Through Order Forms........ 34
17. Undelivered, Defective or Late Order Forms; Insufficient Payment.... 36
18. Restrictions on Resale or Subsequent Disposition.................... 37
19. Voting Rights of Stockholders....................................... 38
20. Establishment of Liquidation Account................................ 39
21. Transfer of Savings Accounts and Continuity of the Institution...... 41
22. Restrictions on Acquisition of the Institution and Holding Company.. 42
23. Payment of Dividends and Repurchase of Stock........................ 43
24. Amendment of Plan................................................... 44
25. Effective Date...................................................... 44
26. Registration and Marketing.......................................... 45
27. Residents of Foreign Countries and Certain States................... 45
28. Expenses............................................................ 46
29. Conditions to Conversion............................................ 46
30. Interpretation...................................................... 46
</TABLE>
Annex A Plan of Merger between the Mutual Holding Company and the Bank
Annex B Plan of Reorganization between the Bank, First Interim Savings
Bank, FSB and the Holding Company
<PAGE>
AMENDED PLAN OF CONVERSION AND AGREEMENT
AND PLAN OF REORGANIZATION OF
FIRST SAVINGS BANCSHARES, MHC
AND
FIRST SAVINGS BANK, SLA
1. INTRODUCTION
For purposes of this section, all capitalized terms have the meanings
ascribed to them in Section 2.
This Plan of Conversion and Agreement and Plan of Reorganization ("Plan")
provides for the conversion ("Conversion") of First Savings Bancshares, MHC,
Woodbridge, New Jersey ("Mutual Holding Company") to the stock form of
organization. Mutual Holding Company was formed on July 10, 1992 and is
currently a mutual holding company duly organized and validly existing under the
laws of the United States, and as of October 24, 1997 owns beneficially and of
record 3,758,920 shares of common stock, par value $0.01 per share ("INSTITUTION
Common Stock") representing approximately fifty one and six-tenths percent
(51.6%) of the voting stock of First Savings Bank, SLA (the "INSTITUTION"), a
New Jersey capital stock savings association. As of October 24, 1997, the
remaining 3,528,866 shares of INSTITUTION Common Stock or forty eight and four-
tenths percent (48.4%) are owned by the Public Stockholders. The principal
office of the Mutual Holding Company is located at 1000 Woodbridge Center Drive,
Woodbridge, New Jersey.
The Boards of Directors of the Mutual Holding Company and the INSTITUTION
believe that a conversion of the Mutual Holding Company to stock form pursuant
to the Plan is in their best interests, as well as the best interests of their
respective Members and Stockholders. The Conversion will result in the
INSTITUTION being wholly owned by a stock holding company, which is a more
common structure and form of ownership than a mutual holding company. The
<PAGE>
Boards of Directors determined that the Plan equitably provides for the
interests of Members through the granting of subscription rights and the
establishment of a liquidation account and that consummation of the Conversion
would not adversely impact the net worth of the INSTITUTION.
The Conversion will provide the INSTITUTION with a larger capital base
which will enhance the INSTITUTION's ability to pursue lending and investment
opportunities, as well as opportunities for growth and expansion. The Conversion
also will provide a more flexible operating structure and possible
diversification, which will enable the INSTITUTION to compete more effectively
with other financial institutions. In addition, the Conversion will result in
the raising of additional capital for the INSTITUTION and the Holding Company
and should result in a more active and liquid market for the Holding Company
Common Stock than currently exists for the INSTITUTION Common Stock, although
there can be no assurances that this will be the case. Finally, the Conversion
has been structured to reunite the accumulated earnings and profits tax
attribute retained by the Mutual Holding Company with the retained earnings of
the INSTITUTION through a tax-free reorganization.
In connection with the Conversion and Reorganization, the INSTITUTION will
form a new first-tier subsidiary which will be incorporated under Delaware law
as a stock corporation (the "Holding Company"). The Holding Company will in turn
form an interim capital stock savings association, First Interim Savings Bank,
FSB ("Interim B") as a wholly owned subsidiary. As is described in more detail
herein, simultaneously with the conversion of Mutual Holding Company to an
interim Federal stock savings bank, MHC Interim Savings Bank, FSB ("Interim A"),
the INSTITUTION, Mutual Holding Company and Holding Company will undergo a
reorganization
2
<PAGE>
in which Interim A will merge with the INSTITUTION, Interim B will merge with
and into the INSTITUTION, the Holding Company will become the parent company of
the INSTITUTION and the Holding Company will issue and sell its capital stock
pursuant to this Plan (the "Reorganization" and, together with the conversion of
Mutual Holding Company to stock form, the "Conversion").
This Plan, which has been unanimously approved by the Boards of Directors
of the Mutual Holding Company and the INSTITUTION, must also be approved by the
affirmative vote of a majority of the total number of votes eligible to be cast
by Voting Members of the Mutual Holding Company at a special meeting to be
called for that purpose. Prior to the submission of this Plan to the Voting
Members for consideration, the Plan must be approved by the Office of Thrift
Supervision (the "OTS"). The Plan also must be approved by holders of at least
two-thirds of the shares of the INSTITUTION's outstanding common stock
("INSTITUTION Common Stock") eligible to be voted and by a majority of the votes
cast, in person or by proxy, by the Public Stockholders at the special meeting
of the INSTITUTION's stockholders called for the purpose of submitting the Plan
for approval.
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a Savings
--------------
Account in the INSTITUTION.
Acting in Concert - The term "Acting in Concert" means (i) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (ii) a
combination or pooling of voting or other interests in the
3
<PAGE>
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise; or (iii) a person or company which acts in concert with another
person or company ("other party") shall also be deemed to be acting in concert
with any person or company who is also acting in concert with that other party,
except that any tax-qualified employee stock benefit plan will not be deemed to
be acting in concert with its trustee or a person who serves in a similar
capacity solely for the purpose of determining whether stock held by the trustee
and stock held by the plan will be aggregated.
Actual Purchase Price - The term Actual Purchase Price means the per share
---------------------
price at which the Conversion Stock is ultimately sold in accordance with the
terms hereof.
Affiliate - The term Affiliate means a Person who, directly or indirectly,
---------
through one or more intermediaries, controls or is controlled by or is under
common control with the Person specified.
Associate - The term Associate when used to indicate a relationship with
---------
any person, means (i) any corporation or organization (other than the Mutual
Holding Company, INSTITUTION or a majority-owned subsidiary of the Mutual
Holding Company or INSTITUTION) of which such person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10 percent or more of any
class of equity securities, (ii) any trust or other estate in which such person
has a substantial beneficial interest or as to which such person serves as
trustee or in a similar fiduciary capacity except that for the purposes of
Sections 9 and 14 hereof, the term "Associate" does not include any Non-Tax-
Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee Stock
Benefit Plan in which a person has a substantial
4
<PAGE>
beneficial interest or serves as a trustee or in a similar fiduciary capacity,
and except that, for purposes of aggregating total shares that may be held by
Officers and Directors the term "Associate" does not include any Tax-Qualified
Employee Stock Benefit Plan, and (iii) any relative or spouse of such person, or
any relative of such spouse, who has the same home as such person or who is a
Director or Officer of the INSTITUTION, the Mutual Holding Company or the
Holding Company, or any of their parents or subsidiaries.
Community Offering - The term Community Offering means the offering for
------------------
sale to certain members of the general public directly by the Holding Company of
any shares of Conversion Stock not subscribed for in the Subscription Offering.
Conversion and Reorganization - The term Conversion and Reorganization
-----------------------------
shall mean (a) the conversion of the Mutual Holding Company into a stock form
interim Federal savings bank ("Interim A") and its simultaneous merger with and
into the INSTITUTION, with the INSTITUTION being the surviving institution; (b)
the merger of an interim savings association subsidiary of the Holding Company
("Interim B") with and into the INSTITUTION, with the INSTITUTION being the
surviving institution and becoming a wholly owned subsidiary of the Holding
Company; (c) the exchange of shares of INSTITUTION Common Stock (other than
those held by the Mutual Holding Company which shall be extinguished) for shares
of Holding Company Common Stock; and (d) the issuance of Conversion Stock by the
Holding Company in the Offerings as provided in this Plan.
Conversion Stock - The term Conversion Stock means the $.01 par value
----------------
common stock offered and issued by the Holding Company in the Offerings pursuant
to this Plan.
5
<PAGE>
Director - The term Director means a member of the Board of Directors of
--------
the INSTITUTION and, where applicable, a member of the Board of Directors of the
Mutual Holding Company or the Holding Company.
Eligible Account Holder - The term Eligible Account Holder means any person
-----------------------
holding a Qualifying Deposit on the Eligibility Record Date.
Eligibility Record Date - The term Eligibility Record Date means the date
-----------------------
for determining Eligible Account Holders in the INSTITUTION and is December 31,
1995.
Employees - The term Employees means all Persons who are employed by the
---------
Mutual Holding Company or the INSTITUTION, but does not include an Officer or
Director.
Employee Plans - The term Employee Plans means the Tax Qualified Employee
--------------
Stock Benefit Plans approved by the Board of Directors of the Mutual Holding
Company or INSTITUTION, including any plan adopted by the Holding Company.
Estimated Price Range - The term Estimated Price Range means the range of
---------------------
minimum and maximum aggregate values determined by the Board of Directors of the
Mutual Holding Company and the INSTITUTION within which the aggregate amount of
Common Stock sold in the Conversion will fall. The Estimated Price Range will be
within the estimated pro forma market value of the Conversion Stock as
determined by the Independent Appraiser prior to the Subscription Offering and
as it may be amended from time to time thereafter.
Exchange Ratio - The term Exchange Ratio shall mean the rate at which
--------------
shares of Holding Company Common Stock will be exchanged for shares of
INSTITUTION Common Stock held by the Public Stockholders upon consummation of
the Conversion. The exact rate shall be determined by the Mutual Holding
Company and the INSTITUTION at the time the
6
<PAGE>
Actual Purchase Price is determined and shall equal the rate that will result in
the Public Stockholders owning in the aggregate approximately the same
percentage of shares of common stock of the Holding Company to be outstanding
upon completion of the Conversion as the percentage of INSTITUTION Common Stock
owned by them in the aggregate immediately prior to consummation of the
Conversion, before giving effect to (a) the payment of cash in lieu of issuing
fractional shares of Holding Company Common Stock, and (b) any shares of
Conversion Stock purchased by Public Stockholders in the Offerings or by tax-
qualified employee stock benefit plans of the Holding Company or the INSTITUTION
thereafter.
Exchange Stock - The term Exchange Stock shall mean Holding Company Common
--------------
Stock issued to the Public Stockholders in exchange for INSTITUTION Common
Stock.
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
----
Holding Company - The term Holding Company means the Delaware corporation
---------------
to be organized initially as a first tier, wholly owned subsidiary of the
INSTITUTION. Upon completion of the Conversion, the Holding Company shall hold
all of the outstanding capital stock of the INSTITUTION.
Holding Company Common Stock - The term Holding Company Common Stock means
----------------------------
the common stock of the Holding Company, par value $.01 per share.
Independent Appraiser - The term Independent Appraiser means an appraiser
---------------------
retained by the Mutual Holding Company and the INSTITUTION to prepare an
appraisal of the pro forma market value of the Conversion Stock.
7
<PAGE>
Interim A - shall mean MHC Interim Savings Bank, which will be the
---------
stock form interim Federal savings bank resulting from the conversion of First
Savings Bancshares, MHC to stock form immediately prior to the merger of Interim
B into the INSTITUTION.
Interim B - shall mean First Interim Savings Bank, FSB, which will be
---------
formed as a wholly owned stock form interim savings association subsidiary of
the Holding Company, which will merge with and into the INSTITUTION immediately
after the merger of Interim A into the INSTITUTION.
Institution - The term INSTITUTION means First Savings Bank, SLA,
-----------
Woodbridge, New Jersey.
Institution Common Stock - The term Institution Common Stock means the
------------------------
common stock of the INSTITUTION, par value $.01 per share.
Local Community - The term Local Community means Middlesex, Monmouth and
---------------
Union Counties in the State of New Jersey.
Member - The term Member means any Person or entity who qualifies as a
------
member of the Mutual Holding Company pursuant to its charter and bylaws.
Mutual Holding Company - The term Mutual Holding Company means First
----------------------
Savings Bancshares, MHC.
NJDB - The term NJDB means the State of New Jersey Department of Banking.
----
Offerings - The term Offerings means the Subscription Offering, the
---------
Community Offering and the Syndicated Community Offering.
OTS - The term OTS means Office of Thrift Supervision of the Department of
---
the Treasury.
8
<PAGE>
Officer - The term Officer means an executive officer of the Mutual Holding
-------
Company or the INSTITUTION which includes the Chief Executive Officer,
President, Executive Vice President, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Controller and any Person
performing functions similar to those performed by the foregoing persons.
Order Form - The term Order Form means any form together with attached
----------
cover letter, sent by the Mutual Holding Company and the INSTITUTION to any
Participant or Person containing among other things a description of the
alternatives available to such Person under the Plan and by which any such
Person may make elections regarding subscriptions for Conversion Stock in the
Subscription and Community Offerings.
Other Member - The term Other Member means any person who is a Member of
------------
the Mutual Holding Company (other than an Eligible Account Holder or
Supplemental Eligible Account Holder) at the close of business on the Voting
Record Date.
Participants - The term Participants means the Eligible Account Holders,
------------
Employee Plans, Supplemental Eligible Account Holders and Other Members.
Person - The term Person means an individual, a corporation, a partnership,
------
an association, a joint-stock company, a trust (including Individual Retirement
Accounts and KEOGH Accounts), any unincorporated organization, a government or
political subdivision thereof or any other entity.
Plan - The term Plan means this Plan of Conversion and Agreement and Plan
----
of Reorganization as it exists on the date hereof and as it may hereafter be
amended in accordance with its terms.
9
<PAGE>
Preferred Subscribers - The term Preferred Subscribers means those members
---------------------
of the general public which are natural persons residing in the INSTITUTION'S
Local Community.
Primary Parties - The term Primary Parties means the Mutual Holding
---------------
Company, the INSTITUTION and the Holding Company.
Public Stockholder - The term Public Stockholder shall mean any person who
------------------
owns INSTITUTION Common Stock, excluding the Mutual Holding Company, as of the
Voting Record Date.
Qualifying Deposit - The term Qualifying Deposit means the balance of each
------------------
Savings Account of $50 or more in the INSTITUTION at the close of business on
the Eligibility Record Date or the Supplemental Eligibility Record Date,
whichever may be the case. Savings Accounts with total deposit balances of less
than $50 shall not constitute a Qualifying Deposit.
Reorganization - The term Reorganization shall mean the issuance and sale
--------------
of the Common Stock and the purchase by the Holding Company of all of the
capital stock of the INSTITUTION.
SEC - The term SEC refers to the U.S. Securities and Exchange Commission.
---
Savings Account - The term Savings Account includes savings accounts, as
---------------
that term is defined in Section 561.42 of the Rules and Regulations of the OTS,
withdrawable accounts, including certificates of deposit, and demand accounts
which are defined in Section 561.16 of the Rules and Regulations of the OTS.
Special Meeting of Members - The term Special Meeting of Members means the
--------------------------
special meeting and any adjournments thereof held to consider and vote upon this
Plan.
Special Meeting of INSTITUTION Stockholders - The term Special Meeting of
-------------------------------------------
INSTITUTION Stockholders shall mean the special meeting of INSTITUTION
Stockholders,
10
<PAGE>
and any adjournments thereof, to be called and held for the purpose of
submitting the Plan to the INSTITUTION Stockholders for their approval.
Subscription Offering - The term Subscription Offering means the offering
---------------------
of Conversion Stock for purchase through Order Forms to Participants.
Subscription Price - The term Subscription Price means the amount per share
------------------
of Conversion Stock to be paid initially by Participants in the Subscription
Offering and persons in the Community Offering.
Supplemental Eligibility Record Date - The term Supplemental Eligibility
------------------------------------
Record Date means the supplemental record date for determining Supplemental
Eligible Account Holders of the Mutual Holding Company. The Supplemental
Eligibility Record Date shall be the last day of the calendar quarter preceding
the OTS' approval of the application for conversion.
Supplemental Eligible Account Holder - The term Supplemental Eligible
------------------------------------
Account Holder means any person (other than an Eligible Account Holder) holding
a Qualifying Deposit, except officers, directors and their associates, as of the
Supplemental Eligibility Record Date.
Syndicated Community Offering - The term Syndicated Community Offering
-----------------------------
means the offering of Conversion Stock following the Subscription and Community
Offerings through a syndicate of broker-dealers.
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified Employee
-----------------------------------------
Stock Benefit Plan means any defined benefit plan or defined contribution plan,
including the INSTITUTION Employee Stock Ownership Plan, stock bonus plan,
profit-sharing plan or other plan, which, with its related trust, meets the
requirements to be "qualified" under Section 401 of
11
<PAGE>
the Internal Revenue Code. A "Non-Tax-Qualified Employee Stock Benefit Plan" is
any defined benefit plan or defined contribution plan which is not so qualified.
Voting Members - The term Voting Members means those persons qualifying as
--------------
voting members of the Mutual Holding Company pursuant to its charter and bylaws.
Voting Record Date - The term Voting Record Date means the date fixed by
------------------
the Directors in accordance with OTS regulations and the laws of the State of
New Jersey, if applicable, for determining eligibility to vote at the Special
Meeting of Members and the Special Meeting of INSTITUTION Stockholders.
3. GENERAL PROCEDURE FOR CONVERSION AND REORGANIZATION
(A) CONVERSION OF MUTUAL HOLDING COMPANY TO STOCK FORM INTERIM AND MERGER
OF INTERIM INTO THE INSTITUTION. The Mutual Holding Company will convert into a
stock form interim Federal savings bank under the name MHC Interim Savings Bank,
FSB ("Interim A") and Interim A will simultaneously merge with and into the
INSTITUTION, with the INSTITUTION as the surviving entity ("Mutual Holding
Company Merger"). As a result of the Mutual Holding Company Merger, the
INSTITUTION Common Stock held by the Mutual Holding Company will be cancelled
and Eligible Account Holders and Supplemental Eligible Account Holders will be
granted ratable interests in a liquidation account, to be established in
accordance with the procedures set forth in this Plan.
(B) MERGER OF SECOND INTERIM INTO INSTITUTION AND EXCHANGE OF SHARES.
Immediately after the conversion of Mutual Holding Company into Interim A and
the merger of Interim A with and into the INSTITUTION pursuant to this Section
3, Interim B will merge with and into the INSTITUTION, and the separate
existence of Interim B will cease. As part of the
12
<PAGE>
Reorganization, the shares of the Holding Company Common Stock held by the Bank
will be cancelled. The Holding Company's shares of Interim B will be converted,
on a one-to-one basis, into shares of INSTITUTION Common Stock, which will
result in the INSTITUTION becoming a wholly-owned subsidiary of the Holding
Company. The Public Stockholders will exchange their shares of INSTITUTION
Common Stock for shares of Holding Company Common Stock based upon the Exchange
Ratio. In addition, options to purchase shares of INSTITUTION Common Stock which
are outstanding immediately prior to consummation of the Conversion and
Reorganization shall be converted to options to purchase shares of Holding
Company 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. Upon consummation of the Conversion and
Reorganization, all of the INSTITUTION Common Stock will be owned by the Holding
Company and the Public Stockholders will own the same percentage of the Holding
Company Common Stock as the percentage of the INSTITUTION Common Stock owned by
them prior to the Conversion and Reorganization, before giving effect to cash
paid in lieu of any fractional interests of Common Stock and any shares of
Conversion Stock purchased by the Public Stockholders in the Offering or tax-
qualified employee stock benefit plans of the Holding Company or INSTITUTION
thereafter. The Holding Company will then sell the Conversion Stock in the
Offerings in accordance with this Plan.
Following consummation of the Conversion and Reorganization, voting rights
with respect to the INSTITUTION shall be held and exercised exclusively by the
Holding Company as holder of the INSTITUTION Common Stock. Voting rights with
respect to the Holding
13
<PAGE>
Company shall be held and exercised exclusively by holders of the Holding
Company Common Stock.
(C) REGULATORY APPLICATIONS AND NOTICE. After approval of the Plan by the
Boards of Directors of the Mutual Holding Company and the INSTITUTION, the Plan
shall be submitted together with all other requisite material to the OTS and the
NJDB for approval. Notice of the adoption of the Plan by the Boards of
Directors of the Mutual Holding Company and the INSTITUTION and the submission
of the Plan to the OTS and the NJDB for approval will be published in a
newspaper having general circulation in each community in which an office of the
Mutual Holding Company and the INSTITUTION is located and copies of the Plan
will be made available at each office of the Mutual Holding Company and the
INSTITUTION for inspection by the Members and INSTITUTION Stockholders.
Immediately upon filing of an application for conversion with the OTS, the
Mutual Holding Company and the INSTITUTION also will cause to be published a
notice of the filing with the OTS of an application to convert and notice of the
filing with the NJDB of an application for merger in accordance with the
provisions of the Plan.
(D) APPROVAL OF PLAN BY MEMBERS AND INSTITUTION STOCKHOLDERS; THE SPECIAL
MEETINGS. Following approval by the OTS, the Plan will be submitted to a vote
of the Voting Members of the Mutual Holding Company at the Special Meeting of
Members called for that purpose. The INSTITUTION shall file preliminary proxy
materials with the OTS and if applicable, the NJDB, in order to seek the
approval of the Plan by the INSTITUTION Stockholders. Promptly following
clearance of such proxy materials (and of the Application of Conversion) by the
OTS and if applicable, the NJDB, this Plan will be submitted to the INSTITUTION
Stockholders for their consideration and approval at the Special Meeting of
14
<PAGE>
INSTITUTION Stockholders. The Plan must be approved by the holders of at least
two-thirds of the outstanding INSTITUTION Common Stock. In addition, in
accordance with current OTS policy, the Plan must be approved by at least a
majority of the votes cast, in person or by proxy, by the Public Stockholders at
the Special Meeting.
Upon approval of the Plan by a majority of the total outstanding votes of
the Voting Members, the Mutual Holding Company will take all other necessary
steps pursuant to applicable laws and regulations to convert the Mutual Holding
Company to stock form. The conversion must be completed within 24 months of the
approval of the Plan by the Voting Members, unless a longer time period is
permitted by governing laws and regulations.
The Conversion Stock will not be insured by the FDIC. The INSTITUTION will
not knowingly lend funds or otherwise extend credit to any Person to purchase
shares of the Conversion Stock.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and the NJDB, if
required, and a Registration Statement on Form S-1 to be filed with the SEC. In
addition, an application to merge the Mutual Holding Company (following its
conversion into an interim federal stock savings bank) and the INSTITUTION and
an application to merge Interim B and the INSTITUTION shall be filed with the
OTS, either as exhibits to the Application H-(e)1 or H-(e)1-S, or separately and
with the NJDB. Upon completion of the Conversion and Reorganization, the
INSTITUTION shall be a wholly-owned subsidiary of the Holding Company.
15
<PAGE>
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the Subscription
Offering to the Eligible Account Holders, Employee Plans, Supplemental Eligible
Account Holders and Other Members in the respective priorities set forth in
Sections 8 through 11 of this Plan. The Subscription Offering may be commenced
as early as the mailing of the Proxy Statement for the Special Meeting of
Members and must be commenced in time to complete the Conversion within the time
period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering will be offered for sale in the Community Offering as provided in
Section 12 of this Plan. The Subscription Offering may be commenced prior to
the Special Meeting of Members and, in that event, the Community Offering may
also be commenced prior to the Special Meeting of Members. The offer and sale
of Conversion Stock prior to the Special Meetings of Members and INSTITUTION
Stockholders shall, however, be conditioned upon approval of the Plan by the
Voting Members.
If feasible, any shares of Conversion Stock remaining after the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, as provided in Section 13 of this Plan in a manner that will achieve
the widest distribution of the Conversion Stock as determined by the Primary
Parties. The sale of all Conversion Stock subscribed for in the Subscription
and Community Offerings will be consummated simultaneously on the date the sale
of Conversion Stock in the Syndicated Community Offering is consummated and only
if all unsubscribed for Conversion Stock is sold.
16
<PAGE>
The Primary Parties may elect to offer to pay fees on a per share basis to
brokers who assist Persons in determining to purchase shares in the Subscription
and Community Offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to be
issued and offered for sale will be determined by the Boards of Directors of the
Primary Parties immediately prior to the commencement of the Subscription and
Community Offerings, subject to adjustment thereafter if necessitated by market
or financial conditions, with the approval of the OTS, if necessary. In
particular, the total number of shares may be increased by up to 15% of the
number of shares offered in the Subscription and Community Offering if the
Estimated Price Range is increased subsequent to the commencement of the
Subscription and Community Offering to reflect changes in market and financial
conditions.
All shares sold in the Conversion will be sold at a uniform price per share
referred to in this Plan as the Actual Purchase Price. The aggregate purchase
price for all shares of Conversion Stock will not be inconsistent with the
estimated consolidated pro forma market value of the Holding Company. The
Primary Parties shall cause the Independent Appraiser to prepare a pro forma
valuation of the aggregate market value of the Common Stock and of the aggregate
market value of the Conversion Stock. The valuation shall be prepared in
accordance with Section 563b.7 of the Conversion Regulations. Prior to the
commencement of the Subscription and Community Offerings, an Estimated Price
Range will be established, which range will vary within 15% above to 15% below
the midpoint of such range. The number of shares of Conversion Stock to be
issued and the purchase price per share may be increased or decreased by the
Primary Parties. In the event that the aggregate purchase price of the
Conversion Stock is
17
<PAGE>
below the minimum of the Estimated Price Range, or materially above the maximum
of the Estimated Price Range, resolicitation of purchasers may be required,
provided that up to a 15% increase above the maximum of the Estimated Price
Range will not be deemed material so as to require a resolicitation. Any such
resolicitation shall be effected in such manner and within such time as the
Primary Parties shall establish, with the approval of the OTS, if required. Up
to a 15% increase in the number of shares to be issued which is supported by an
appropriate change in the estimated pro forma market value of the Holding
Company will not be deemed to be material so as to require a resolicitation of
subscriptions.
Based upon the independent valuation as updated prior to the commencement
of the Subscription and Community Offerings, the Boards of Directors of the
Primary Parties will fix the Subscription Price and the range of the number of
shares to be offered. If upon completion of the Subscription and Community
Offerings all of the Conversion Stock is subscribed for, or if because of a
limited number of unsubscribed shares or otherwise a Syndicated Community
Offering cannot be effected, the total number of shares of Conversion Stock to
be issued and sold will be determined by the Primary Parties as follows: (a)
the estimated aggregate pro forma market value of the Holding Company,
immediately after conversion as determined by the Independent Appraiser,
expressed in terms of a specific aggregate dollar amount rather than as a range,
upon completion of the Subscription and Community Offerings or other sale of all
of the Conversion Stock shall be divided by (b) the Actual Purchase Price.
If there is a Syndicated Community Offering of shares of Conversion Stock
not subscribed for in the Subscription and Community Offerings, the price per
share at which the
18
<PAGE>
Conversion Stock is sold in such Syndicated Community Offering shall be the
Subscription Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Primary Parties and to the OTS that, to the best knowledge of
the Independent Appraiser, nothing of a material nature has occurred which,
taking into account all relevant factors including those which would be involved
in a change in the maximum subscription price, would cause the Independent
Appraiser to conclude that the aggregate value of the Conversion Stock at the
Actual Purchase Price is incompatible with its estimate of the aggregate
consolidated pro forma market value of the Holding Company. If such
confirmation is not received, the Primary Parties may cancel the Subscription
and Community Offerings and/or the Syndicated Community Offering, extend the
Conversion, establish a new Subscription Price Range and/or Estimated Price
Range, extend, reopen or hold new Subscription and Community Offerings and/or
Syndicated Community Offering or take such other action as the OTS may permit.
The Conversion Stock to be issued in the Conversion shall be fully paid and
nonassessable.
19
<PAGE>
7. RETENTION OF PROCEEDS BY THE HOLDING COMPANY
The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. The Mutual Holding Company and the INSTITUTION
believe that the Conversion proceeds will provide economic strength to the
Holding Company and the INSTITUTION for the future in a highly competitive and
regulated environment and would facilitate expansion through acquisitions,
diversification into other related businesses and for other business and
investment purposes, including the payment of dividends and future repurchases
of Holding Company Common Stock as permitted by the OTS.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, as first priority and
without payment, nontransferable subscription rights to subscribe for shares of
Conversion Stock equal to an amount up to the greater of: the amount permitted
to be subscribed for in the Community Offering which amount, pursuant to Section
12, currently is $750,000 of the Conversion Stock offered, but which may be
increased to five percent (5%) of the total offering of shares of Conversion
Stock offered or decreased to less than $750,000, subject to such approvals as
may be required by the OTS; 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 Maximum
Overall
20
<PAGE>
Purchase Limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C 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%.
B. In the event that Eligible Account Holders exercise subscription
rights for a number of shares of Conversion Stock in excess of the total number
of shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holders. Any shares remaining after that allocation will
be allocated among the remaining subscribing Eligible Account Holders whose
subscriptions remain unsatisfied in the proportion that the amount of the
Qualifying Deposit of each remaining Eligible Account Holder whose subscription
remains unsatisfied bears to the total amount of the Qualifying Deposits of all
remaining Eligible Account Holders whose subscriptions remain unsatisfied. If
the amount so allocated exceeds the amount subscribed for by any one or more
remaining Eligible Account Holders, the excess shall be reallocated (one or more
times as necessary) among those remaining Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
C. Subscription rights as Eligible Account Holders received by Directors
and Officers and their Associates which are based on deposits made by such
persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
21
<PAGE>
9. SUBSCRIPTION RIGHTS OF THE EMPLOYEE PLANS (SECOND PRIORITY)
The Employee Plans shall receive, without payment, as a second priority
after the filling of subscriptions of Eligible Account Holders, nontransferable
subscription rights to purchase in the Subscription Offering the number of
shares of Conversion Stock requested by such Plan, subject to the purchase
limitations set forth in Section 14. If, after the filling of subscriptions of
Eligible Account Holders, a sufficient number of shares is not available to fill
the subscriptions by such plan, the subscription by such plan shall be filled to
the maximum extent possible, provided however that in the event of an increase
in the total number of shares issued due to an increase in the Estimated Price
Range of up to 15%, the additional shares shall be sold to the Employee Plans,
subject to the purchase limitations set forth in Section 14.
The Employee Plans shall not be deemed to be an associate or affiliate of
or Person Acting in Concert with any Director or Officer of the Holding Company
or the INSTITUTION.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD
PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, as third
priority and without payment, nontransferable subscription rights to subscribe
for shares of Conversion Stock equal to an amount up to the greater of: the
amount permitted to be subscribed for in the Community Offering which amount,
pursuant to Section 12, currently is $750,000 of the Conversion Stock offered,
but which may be increased to five percent (5%) of the total offering of shares
of Conversion Stock offered or decreased to less than $750,000, subject to such
approvals as may be required by the OTS; one-tenth of one percent (.10%) of the
total offering of Conversion Stock; or fifteen times the product (rounded down
to the next whole
22
<PAGE>
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 the Qualifying Deposits of all Supplemental
Eligible Account Holders in the INSTITUTION on the Supplemental Eligibility
Record Date, subject to the Maximum Overall Purchase Limitation specified in
Section 14A and the minimum purchase limitation specified in Section 14C 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%.
B. In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of shares eligible for subscription, the shares of Conversion Stock
shall be allocated among the subscribing Supplemental Eligible Account Holders
so as to permit each subscribing Supplemental Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
total allocation of Conversion Stock equal to the lesser of 100 shares or the
number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the remaining
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
remaining Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
remaining Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied. If the amount so allocated exceeds the amount subscribed for by
any one or more remaining Supplemental Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary)
23
<PAGE>
among those remaining Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
C. Subscription rights received by an Eligible Account Holder pursuant to
Section 8 shall be applied in partial satisfaction of the subscription rights to
be received as a Supplemental Eligible Account Holder pursuant to this Section
10.
11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, as a fourth priority
after the filling of subscriptions of the Eligible Account Holders, the Employee
Plans, and the Supplemental Eligible Account Holders, nontransferable
subscription rights to subscribe for shares of Conversion Stock equal to an
amount up to the greater of: the amount permitted to be subscribed for in the
Community Offering which amount, pursuant to Section 12, currently is $750,000
of the Conversion Stock offered, but which may be increased to five percent (5%)
of the total offering of shares of Conversion Stock offered or decreased to less
than $750,000, subject to such approvals as may be required by the OTS; or one-
tenth of one percent (.10%) of the total offering of shares of Conversion Stock,
subject to the Maximum Overall Purchase Limitation specified in Section 14A and
the minimum purchase limitation specified in Section 14C 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%.
B. In the event that Other Members exercise subscription rights for a
number of shares of Conversion Stock in excess of the total number of shares
eligible for subscription, the shares of Conversion Stock shall be allocated
among the subscribing Other Members so as to
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permit each subscribing Other Member, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Other Member. Any shares remaining after that allocation will be
allocated among the subscribing Other Members whose subscriptions remain
unsatisfied pro rata in the same proportion that the number of votes of a
subscribing Other Member on the Voting Record Date bears to the total votes on
the Voting Record Date of all subscribing Other Members. If the amount so
allocated exceeds the amount subscribed for by any one or more remaining Other
Members, the excess shall be reallocated (one or more times as necessary) among
those remaining Other Members whose subscriptions are still not fully satisfied
on the same principle until all available shares have been allocated or all
subscriptions satisfied.
12. COMMUNITY OFFERING (FIFTH PRIORITY)
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, it is
expected that shares remaining unsubscribed for will be made available for
purchase in the Community Offering to certain members of the general public,
with a first preference given to the Public Stockholders and a second preference
to natural persons whose primary residence is in the INSTITUTION's Local
Community (such natural persons are hereinafter referred to as "Preferred
Subscribers"), which may subscribe together with any Associate or group of
persons Acting in Concert for up to $750,000 of the Conversion Stock offered,
subject to the Maximum Overall Purchase Limitation specified in Section 14A and
the minimum purchase limitation specified in Section 14C and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated
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Price Range of up to 15%; provided, however, that the amount permitted to be
purchased in the Community Offering may be increased to five percent (5%) of the
total offering of shares of Conversion Stock offered or decreased to less than
$750,000, without the further approval of members or resolicitation of
subscribers. The shares may be made available in the Community Offering through
a direct community marketing program which may provide for utilization of a
broker, dealer, consultant or investment banking firm, experienced and expert in
the sale of savings institution securities. Such entities may be compensated on
a fixed fee basis or on a commission basis, or a combination thereof. The
Primary Parties shall make distribution of the Conversion Stock to be sold in
the Community Offering in such a manner as to promote a wide distribution of
Conversion Stock. The Primary Parties reserves the right to reject any or all
orders, in whole or in part, which are received in the Community Offering.
If the Public Stockholders in the Community Offering, whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among the Public
Stockholders in the manner which permits each such person to the extent
possible, to purchase the number of shares necessary to make his total
allocation of Conversion Stock equal to the lesser of 100 shares or the number
of shares subscribed for by such persons with preference given to Public
Stockholders. Thereafter, unallocated shares will be allocated among the Public
Stockholders whose subscriptions remain 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, any remaining shares will be allocated
among Preferred Subscribers using the foregoing allocation as applied to Public
Stockholders. The Primary Parties may establish all
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other terms and conditions of such offer. It is expected that the Community
Offering will commence concurrently with the Subscription Offering. The
Community Offering must be completed within 45 days after the completion of the
Subscription Offering unless otherwise extended by the OTS.
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13. SYNDICATED COMMUNITY OFFERING
If feasible, all shares of Conversion Stock not subscribed for in the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be determined
by the Primary Parties in a manner that will achieve the widest distribution of
the Conversion Stock subject to the right of the Primary Parties to accept or
reject in whole or in part all subscriptions in the Syndicated Community
Offering. In the Syndicated Community Offering, any person together with any
Associate or group of persons Acting in Concert may purchase up to $750,000 of
the Conversion Stock offered subject to the maximum purchase limitation
specified in Section 14A and the minimum purchase limitation specified in
Section 14C 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%; provided, however,
that this amount may be increased to five percent (5%) of the total offering of
shares of Conversion Stock offered or decreased to less than $750,000 subject to
such approvals as may be required by the OTS. The shares purchased by any Person
together with any Associate or group of persons Acting in Concert pursuant to
Section 12 shall be counted toward meeting the maximum percentage of shares
permitted to be purchased pursuant to this Section. Provided that the
Subscription Offering has commenced, the Primary Parties may commence the
Syndicated Community Offering at any time after the mailing to the Members of
the Proxy Statement to be used in connection with the Special Meeting of
Members, provided that the completion of the offer and sale of the Conversion
Stock shall be conditioned upon the approval of this Plan by the Voting Members.
If the Syndicated Community Offering is not sooner commenced pursuant to the
provisions of the preceding sentence, the Syndicated Community Offering will be
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commenced as soon as practicable following the date upon which the Subscription
and Community Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the Primary
Parties shall have the right to sell any shares of Conversion Stock remaining
following the Subscription and Community Offerings in an underwritten firm
commitment public offering. The provisions of Section 14 hereof shall not be
applicable to sales to underwriters for purposes of such an offering but shall
be applicable to the sales by the underwriters to the public. The price to be
paid by the underwriters in such an offering shall be equal to the Actual
Purchase Price less an underwriting discount to be negotiated among such
underwriters, the Primary Parties, which will in no event exceed an amount
deemed to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Conversion Stock not sold in the
Subscription and Community Offerings can not be effected, or in the event that
any insignificant residue of shares of Conversion Stock is not sold in the
Subscription and Community Offerings or in the Syndicated Community Offering or
an underwritten firm commitment public offering, other purchase arrangements
will be made for the sale of unsubscribed shares by the Primary Parties, if
possible. Such other purchase arrangements will be subject to the approval of
the OTS.
14. LIMITATION ON PURCHASES
In addition to the maximum amount of Conversion Stock that may be
subscribed for as set forth in Sections 8, 10, 11, 12 and 13 the following
limitations shall apply to all purchases of shares of Conversion Stock:
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A. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the Conversion by any Person or
Participant together with any Associate or group or persons Acting in Concert
when combined with any Exchange Stock received shall not exceed 2.1% of the
Conversion Stock offered (the "Maximum Overall Purchase Limitation"), except for
the Employee Plans which may subscribe for up to 10% of the Conversion Stock
issued in addition to any Exchange Stock to which it may be entitled and except
for certain Eligible Account Holders and Supplemental Eligible Account Holders
which may subscribe for or purchase shares in accordance with Sections 8 and 10
herein.
B. The maximum number of shares of Conversion Stock which may be
purchased in all categories in the Conversion by Officers and Directors of the
INSTITUTION and their Associates in the aggregate when combined with any
Exchange Stock received shall not exceed 25.0% of the total number of shares of
Conversion Stock issued.
C. A minimum of 25 shares of Conversion Stock must be purchased by each
Person purchasing shares in the Conversion to the extent those shares are
available; provided, however, that in the event the minimum number of shares of
Conversion Stock purchased times the price per share exceeds $500, then such
minimum purchase requirement shall be reduced to such number of shares of
Conversion Stock which when multiplied by the price per share shall not exceed
$500, as determined by the Boards of Directors of the Primary Parties.
If the number of shares of Conversion Stock otherwise allocable pursuant to
Sections 8 through 13, inclusive, to any Person or that Person's Associates
would be in excess of the maximum number of shares permitted as set forth above,
the number of shares of Conversion Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that
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Person, and then the number of shares allocated to each group consisting of a
Person and that Person's Associates shall be reduced so that the aggregate
allocation to that Person and his or her Associates complies with the above
maximums, and such maximum number of shares shall be reallocated among that
Person and his or her Associates as they may agree, or in the absence of an
agreement, in proportion to the shares subscribed by each (after first applying
the maximums applicable to each Person, separately).
Depending upon market or financial conditions, the Boards of Directors of
the Primary Parties, subject to such approvals as may be required by the OTS,
may decrease or increase the maximum purchase limitation in this Plan, provided
that the maximum purchase limitation may not be increased to a percentage in
excess of 5%. Notwithstanding the foregoing, the maximum purchase limitation may
be increased up to 9.99% provided that orders for Conversion Stock exceeding 5%
of the shares being offered shall not exceed, in the aggregate, 10% of the total
offering. If the Primary Parties increase the maximum purchase limitations, the
Primary Parties are only required to resolicit Persons who subscribed for the
maximum purchase amount and may, in the sole discretion of the Primary Parties
resolicit certain other large subscribers.
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 of priority: (i) to fill the Employee Plans' subscription to the Adjusted
Maximum; (ii) in the event that there is an oversubscription at the Eligible
Account Holder level, to fill unfulfilled subscriptions of Eligible Account
Holders exclusive of the Adjusted Maximum in accordance with Section 8; (iii) in
the event there is an oversubscription at the Supplemental Eligible Account
Holder level, to fill unfulfilled
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subscriptions of Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum in accordance with Section 10; (iv) in the event that there is an
oversubscription at the Other Member level, to fill unfulfilled subscriptions of
Other Members exclusive of the Adjusted Maximum in accordance with Section 11;
and (v) to fill unfulfilled Subscriptions in the Community Offering exclusive of
the Adjusted Maximum in accordance with Section 12.
For purposes of this Section 14, the Boards of Directors of the Primary
Parties shall not be deemed to be Associates or a group affiliated with each
other or otherwise Acting in Concert solely as a result of their being Directors
of the Primary Parties.
Notwithstanding anything to the contrary contained in this Plan, except as
otherwise may be required by the OTS, the Public Stockholders will not have to
sell any Holding Company Common Stock or be limited in receiving Exchange Stock
even if their ownership of INSTITUTION Common Stock when converted into Exchange
Stock pursuant to the Conversion would exceed an applicable purchase limitation.
Public Stockholders may be precluded from purchasing new shares of Conversion
Stock in the Offering, however, in the event that such persons receive Exchange
Shares in excess of an applicable purchase limitation.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the Conversion, no Officer, Director
or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares of common stock of the Holding Company except from a
broker-dealer registered with the SEC. This provision shall not apply to
negotiated transactions involving more than one percent of the outstanding
shares of common stock of the Holding Company the exercise of any options
pursuant to a stock option plan or purchases of common stock of the Holding
Company made by or held by any Tax-Qualified Employee Stock Benefit Plan or Non-
Tax-Qualified Employee Stock Benefit Plan of the Primary Parties (including the
Employee Plans) which may be
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attributable to any Officer or Director. As used herein, the term "negotiated
transaction" means a transaction in which the securities are offered and the
terms and arrangements relating to any sale are arrived at through direct
communications between the seller or any person acting on its behalf and the
purchaser or his investment representative. The term "investment representative"
shall mean a professional investment advisor acting as agent for the purchaser
and independent of the seller and not acting on behalf of the seller in
connection with the transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Syndicated Community Offerings must be delivered in full to the
INSTITUTION, together with a properly completed and executed Order Form, or
purchase order in the case of the Syndicated Community Offering, on or prior to
the expiration date specified on the Order Form or purchase order, as the case
may be, unless such date is extended by the Primary Parties; provided, however,
that if the Employee Plans subscribe for shares during the Subscription
Offering, such plans will not be required to pay for the shares at the time they
subscribe but rather may pay for such shares of Conversion Stock subscribed for
by such plans at the Actual Purchase Price upon consummation of the Conversion,
provided that, in the case of the employee stock ownership plan ("ESOP") there
is in force from the time of its subscription until the consummation of the
Conversion, a loan commitment from the Holding Company or an unrelated financial
institution to lend to the ESOP, at such time, the aggregated Subscription Price
of the shares for which it subscribed. The INSTITUTION may make scheduled
discretionary contributions to an Employee Plan provided such contributions do
not cause the INSTITUTION to fail to meet its regulatory capital requirement.
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Notwithstanding the foregoing, the Primary Parties shall have the right, in
their sole discretion, to permit institutional investors to submit contractually
irrevocable orders in the Community Offering and to thereafter submit payment
for the Conversion Stock for which they are subscribing in the Community
Offering at any time prior to 48 hours before the completion of the Conversion,
unless such 48 hour period is waived by the Primary Parties, in their sole
discretion.
Payment for Conversion Stock subscribed for shall be made either in cash
(if delivered in person), check or money order. Alternatively, subscribers in
the Subscription and Community Offerings may pay for the shares subscribed for
by authorizing the INSTITUTION on the Order Form to make a withdrawal from the
subscriber's Savings Account at the INSTITUTION in an amount equal to the
purchase price of such shares. Such authorized withdrawal, whether from a
savings passbook or certificate account, shall be without penalty as to
premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be cancelled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the
subscriber's Savings Account but may not be used by the subscriber until the
Conversion Stock has been sold or the 45-day period (or such longer period as
may be approved by the OTS) following the Subscription and Community Offering
has expired, whichever occurs first. Thereafter, the withdrawal will be given
effect only to the extent necessary to satisfy the subscription (to the extent
it can be filled) at the purchase price per share. Interest will continue to be
earned on any amounts authorized for withdrawal until such withdrawal is given
effect. Interest will be paid by the INSTITUTION at
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not less than the passbook annual rate on payments for Conversion Stock received
in cash or by check or money order. Such interest will be paid from the date
payment is received by the INSTITUTION until consummation or termination of the
Conversion. If for any reason the Conversion is not consummated, all payments
made by subscribers in the Subscription, Community and Syndicated Community
Offerings will be refunded to them with interest. In case of amounts authorized
for withdrawal from Savings Accounts, refunds will be made by cancelling the
authorization for withdrawal. The INSTITUTION is prohibited by regulation from
knowingly making any loans or granting any lines of credit for the purchase of
stock in the Conversion, and therefore, will not do so.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Primary Parties
has been declared effective by the OTS and the SEC Order Forms will be
distributed to all Eligible Account Holders, the Employee Plans, the
Supplemental Eligible Account Holders and Other Members at their last known
addresses appearing on the records of the INSTITUTION for the purpose of
subscribing to shares of Conversion Stock in the Subscription Offering and will
be made available for use by those Persons entitled to purchase in the Community
Offering. Notwithstanding the foregoing, the Primary Parties may elect to send
Order Forms only to those Persons who request them after such notice as is
approved by the OTS and is adequate to apprise all Eligible Account Holders, the
Employee Plans, Supplemental Eligible Account Holders and Other Members of the
pendency of the Subscription Offering has been given. Such notice may be
included with the proxy statement for the Special Meeting of Members and may
also be
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included in a notice of the pendency of the Conversion and the Special Meeting
of Members sent to all Eligible Account Holders and Supplemental Eligible
Account Holders in accordance with regulations of the OTS.
Each Order Form will be preceded or accompanied by the Prospectus
describing the Primary Parties, the Conversion Stock and the Subscription and
Community Offerings. Each Order Form will contain, among other things, the
following:
A. A specified date by which all Order Forms must be received by the
Primary Parties, which date shall be not less than twenty (20), nor more than
forty-five (45) days, following the date on which the Order Forms are mailed by
the Primary Parties, and which date will constitute the termination of the
Subscription Offering;
B. The Subscription Price per share for shares of Conversion Stock to be
sold in the Subscription and Community Offerings;
C. A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
subscription rights or otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to indicate
thereon the number of shares of Conversion Stock for which such person elects to
subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has received a
final copy of the Prospectus or Offering Circular, as the case may be, prior to
execution of the Order Form;
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the
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subscription period such properly completed and executed Order Form, together
with cash (if delivered in person), check or money order in the full amount of
the purchase price as specified in the Order Form for the shares of Conversion
Stock for which the recipient elects to subscribe in the Subscription Offering
(or by authorizing on the Order Form that the INSTITUTION withdraw said amount
from the subscriber's Savings Account at the INSTITUTION) to the INSTITUTION;
G. A statement to the effect that the executed Order Form, once received
by the INSTITUTION, may not be modified or amended by the subscriber without the
consent of the INSTITUTION; and
H. A statement with respect to the residence of the subscriber.
Notwithstanding the above, the Primary Parties will not accept orders
received on photocopied or facsimilied order forms.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS; INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
Primary Parties by the United States Postal Service or the Primary Parties is
unable to locate the addressee, (b) are not received back by the Primary Parties
or are received by the Primary Parties after the expiration date specified
thereon, (c) are defectively filled out or executed, (d) are not accompanied by
the full required payment, or, in the case of institutional investors in the
Community Offering, by delivering irrevocable orders together with a legally
binding commitment to pay in cash, check, money order or wire transfer the full
amount of the purchase price prior to 48 hours before the completion of the
Conversion for the shares of Conversion Stock subscribed for (including cases in
which savings accounts from which withdrawals are
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authorized are insufficient to cover the amount of the required payment), or (e)
are not mailed pursuant to a "no mail" order placed in effect by the account
holder, the subscription rights of the person to whom such rights have been
granted will lapse as though such person failed to return the contemplated Order
Form within the time period specified thereon; provided, however, that the
Primary Parties may, but will not be required to, waive any immaterial
irregularity on any Order Form or require the submission of corrected Order
Forms or the remittance of full payment for subscribed shares by such date as
the Primary Parties may specify. The interpretation of the Primary Parties of
terms and conditions of the Plan and of the Order Forms will be final, subject
to the authority of the OTS.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers of
the Primary Parties in the Conversion shall be subject to the restriction that,
except as provided in Section 18B, below, or as may be approved by the OTS, no
interest in such shares may be sold or otherwise disposed of for value for a
period of one (l) year following the date of purchase.
B. The restriction on disposition of shares of Conversion Stock set forth
in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the INSTITUTION or the Holding Company, as the case may
be, which has been approved by the OTS; and
(ii) Any disposition of such shares following the death of the
person to whom such shares were initially sold under the terms of the Plan; and
(iii) Any Exchange Stock received by any Officers or Directors.
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C. With respect to all shares of Conversion Stock subject to restrictions
on resale or subsequent disposition, each of the following provisions shall
apply:
(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer agent for
the INSTITUTION or the Holding Company, as the case may be, not to recognize or
effect any transfer of any certificate or record of ownership of any such shares
in violation of the restriction on transfer; and
(iii) Any shares of capital stock of the INSTITUTION or the Holding
Company, as the case may be, issued with respect to a stock dividend, stock
split, or otherwise with respect to ownership of outstanding shares of
Conversion Stock subject to the restriction on transfer hereunder shall be
subject to the same restriction as is applicable to such Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Following consummation of the Conversion and the Reorganization, the
holders of the capital stock of the INSTITUTION shall have the exclusive voting
rights with respect to the INSTITUTION as specified in its charter. The holders
of the common stock of the Holding Company shall have the exclusive voting
rights with respect to the Holding Company.
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
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The INSTITUTION shall establish at the time of conversion a liquidation
account in an amount equal to its net worth as of the latest practicable date
prior to conversion ("Liquidation Account"). The liquidation account will be
maintained by the INSTITUTION for the benefit of the Eligible Account Holders
and Supplemental Eligible Account Holders who continue to maintain their Savings
Accounts at the INSTITUTION. Each Eligible Account Holder and Supplemental
Eligible Account Holder shall, with respect to his Savings Account, hold a
related inchoate interest in a portion of the Liquidation Account balance, in
relation to his Savings Account balance at the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as hereinafter provided.
The initial Liquidation Account balance shall be equal to the amount of the
dividends with respect to the INSTITUTION Common Stock waived by the Mutual
Holding Company plus the greater of (1) the Bank's net worth as of the latest
statement of financial condition contained in the final offering circular
utilized in the reorganization of the INSTITUTION into mutual holding company
form, or (2) 51.7% of the INSTITUTION's total stockholders' equity as reflected
in its latest statement of financial condition contained in the final offering
circular utilized in the Conversion and Reorganization. In the unlikely event
of a complete liquidation of the INSTITUTION (and only in such event), following
all liquidation payments to creditors (including those to Account Holders to the
extent of their Savings Accounts) each Eligible Account Holder and Supplemental
Eligible Account Holder shall be entitled to receive a liquidating distribution
from the Liquidation Account, in the amount of the then adjusted subaccount
balance for his Savings Account then held, before any liquidation distribution
may be made to any holders of the INSTITUTION's capital stock. No merger,
consolidation, bulk
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purchase of assets with assumption of Savings Accounts and other liabilities, or
similar transactions with an FDIC-issued institution, in which the INSTITUTION
is not the surviving institution, shall be deemed to be a complete liquidation
for this purpose. In such transactions, the Liquidation Account shall be assumed
by the surviving institution.
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's and/or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the INSTITUTION. Such
initial subaccount balance shall not be increased, but shall be subject to
downward adjustment as described below. For Savings Accounts in existence at
both dates, separate subaccounts shall be determined on the basis of the
Qualifying Deposits in such Savings Account on such record dates. Such initial
subaccount balances shall not be increased but shall be subject to downward
adjustment as described below.
If, at the close of business on any annual closing date, commencing on or
after the Eligibility Record Date and the Supplemental Eligibility Record Date,
the deposit balance in the Savings Account of an Eligible Account Holder or
Supplemental Eligible Account Holder is less than the lesser of (i) the balance
in the Savings Account at the close of business on any other annual closing date
subsequent to the Eligibility Record Date or Supplemental Eligibility Record
Date, or (ii) the amount of the Qualifying Deposit in such Savings Account, the
subaccount balance for such Savings Account shall be adjusted by reducing such
subaccount balance in an
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amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the Liquidation Account shall not operate
to restrict the use or application of any of the net worth accounts of the
INSTITUTION.
21. TRANSFER OF SAVINGS ACCOUNTS AND CONTINUITY OF THE INSTITUTION
Upon the Conversion and Reorganization, each Savings Account Holder having
a Savings Account at the INSTITUTION prior to the Conversion and Reorganization
will continue to have a Savings Account, without payment therefor, in the same
amount and subject to the same terms and conditions (except for voting and
liquidation rights) as in effect prior to the Conversion and Reorganization.
After the Conversion and Reorganization, the INSTITUTION will succeed to
all the rights, interests, duties and obligations of the INSTITUTION before the
Conversion and Reorganization, including but not limited to all rights and
interests of the INSTITUTION in and to its assets and properties, whether real,
personal or mixed. The INSTITUTION will continue to be a member of the Federal
Home Loan Bank System and all its insured savings deposits will continue to be
insured by the FDIC to the extent provided by applicable law.
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22. RESTRICTIONS ON ACQUISITION OF THE INSTITUTION AND HOLDING COMPANY
A. In accordance with OTS regulations, for a period of not less than three
years from the date of consummation of the Conversion, no Person, other than the
Holding Company shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
INSTITUTION without the prior written consent of the OTS.
B. 1. The Certificate of Incorporation of the INSTITUTION contains a
provision stipulating that for a period of not less than five years from the
date of consummation of the Conversion, no person, except the Holding Company
shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of an equity security of the
INSTITUTION, without the prior written approval of the applicable federal or
state regulatory agency. In addition, such Certificate of Incorporation also
provides that shares beneficially owned in violation of the above-described
provision shall not be entitled to vote and shall not be voted by any person or
counted as voting stock in connection with any matter submitted to stockholders
for a vote for a period of not less than five years from the date of
consummation of the Conversion. In addition, special meetings of the
stockholders relating to changes in control or amendment of the charter may only
be called by the Board of Directors, and shareholders shall not be permitted to
cumulate their votes for the election of directors for a period of not less than
five years from the date of consummation of the Conversion.
B. 2. The Certificate of Incorporation of the Holding Company will
contain a provision stipulating that in no event shall any record owner of any
outstanding shares of the Holding Company's common stock who beneficially owns
in excess of 10% of such outstanding shares be entitled or permitted to any vote
in respect to any shares held in excess of 10%. In addition, the Certificate of
Incorporation and Bylaws of the Holding Company will provide for staggered terms
of the directors, noncumulative voting for directors, limitations on the calling
of
43
<PAGE>
special meetings, a fair price provision for certain business combinations and
certain notice requirements.
C. For the purposes of this Section 22:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a "security" as
defined in 15 U.S.C. (S) 78c(a)(10).
44
<PAGE>
23. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The INSTITUTION shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its regulatory
capital to be reduced below (i) the amount required for the Liquidation Account
or (ii) the federal regulatory capital requirement set forth in Section 567.2 of
the Rules and Regulations of the OTS. Otherwise, the INSTITUTION may declare
dividends, make capital distributions or repurchase its capital stock in
accordance with applicable law and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively amended at
any time prior to solicitation of proxies from Members and Stockholders to vote
on the Plan by a two-thirds vote of the Boards of Directors of the Primary
Parties, and at any time thereafter by such vote of such Boards of Directors
with the concurrence of the OTS. Any amendment to the Plan made after approval
by the Members and INSTITUTION Stockholders with the approval of the OTS shall
not necessitate further approval by the Members and INSTITUTION Stockholders
unless otherwise required by the OTS. The Plan may be terminated by majority
vote of the Boards of Directors of the Primary Parties at any time prior to the
Special Meeting of Members or the Special Meeting of Stockholders to vote on the
Plan, and at any time thereafter with the concurrence of the OTS.
By adoption of the Plan, the Members of the Mutual Holding Company and the
INSTITUTION Stockholders authorize the Boards of Directors of the Primary
Parties to amend or terminate the Plan under the circumstances set forth in this
Section.
45
<PAGE>
25. EFFECTIVE DATE
The effective date of the Conversion and Reorganization shall be the date
upon which the last of the following actions occurs: (i) the filing of
Affidavits of Merger with the NJDB with respect to the Mergers and (ii) the
closing of the issuance of the shares of Conversion Stock in the Offerings. The
filing of Affidavits of Merger relating to the Mergers and the closing of the
issuance of shares of Conversion Stock in the Offerings shall not occur until
all requisite regulatory, Member and Stockholder approvals have been obtained,
all applicable waiting periods have expired and sufficient subscriptions and
orders for the Conversion Stock have been received. It is intended that the
closing of the Mergers and the sale of shares of Conversion Stock in the
Offerings shall occur consecutively and substantially simultaneously.
26. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
Holding Company will register the securities issued in connection with the
Conversion pursuant to the Securities Exchange Act of 1934 and will not
deregister such securities for a period of at least three years thereafter,
except that the maintenance of registration for three years requirement may be
fulfilled by any successor to the INSTITUTION or any holding company of the
INSTITUTION. In addition, the Holding Company will use its best efforts to
encourage and assist a market-maker to establish and maintain a market for the
Conversion Stock and to list those securities on a national or regional
securities exchange or the NASDAQ system.
46
<PAGE>
27. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
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 shares of Conversion Stock pursuant to the Plan reside. However,
no such Person will be issued subscription rights or be permitted to purchase
shares of Conversion Stock in the Subscription Offering if such Person resides
in a foreign country or in a state of the United States with respect to which
both of the following apply: (a) a small number of Persons otherwise eligible
to subscribe for shares under the Plan reside in such state; and (b) the
issuance of subscription rights or the offer or sale of shares of Conversion
Stock to such Persons would require the INSTITUTION or the Holding Company, as
the case may be, under the securities laws of such state, to register as a
broker, dealer, salesman or agent or to register or otherwise qualify its
securities for sale in such state and such registration or qualification would
be impracticable for reasons of cost or otherwise.
28. EXPENSES
The Primary Parties shall use their best efforts to assure that expenses
incurred by them in connection with the Conversion and Reorganization shall be
reasonable.
29. CONDITIONS TO CONVERSION
The Conversion of the Mutual Holding Company pursuant to this Plan is
expressly conditioned upon the following:
(a) Prior receipt by the Primary Parties of rulings of the United States
Internal Revenue Service and the State of New Jersey taxing authorities, or
opinions of counsel, substantially to the effect that the Conversion will not
result in any adverse federal or state tax
47
<PAGE>
consequences to Eligible Account Holders or to the Primary Parties before or
after the Conversion;
(b) The sale of all of the Conversion Stock offered in the Conversion; and
(c) The completion of the Conversion within the time period specified in
Section 3 of this Plan.
30. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Boards of Directors of the Primary
Parties shall be final, subject to the authority of the OTS.
48
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan of Conversion
and Agreement and Plan of Reorganization to be duly executed on its behalf by
its officers thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
FIRST SAVINGS BANCSHARES, MHC
Date: October 24, 1997 By: /s/ John P. Mulkerin
------------------ ---------------------------------------
John P. Mulkerin
President and Chief Executive Officer
Attest: /s/ Christopher P. Martin
----------------------------------
Christopher P. Martin
Executive Vice President, Chief
Financial Officer and Corporate
Secretary
FIRST SAVINGS BANK, SLA
Date: October 24, 1997 By: /s/ John P. Mulkerin
------------------ ---------------------------------------
John P. Mulkerin
President and Chief Executive Officer
Attest: /s/ Christopher P. Martin
----------------------------------
Christopher P. Martin
Executive Vice President, Chief
Financial Officer and Corporate
Secretary
</TABLE>
49
<PAGE>
Exhibit 5.0
[Letterhead of Patton Boggs, L.L.P.]
February 6, 1998
Board of Directors
First Source Bancorp, Inc.
1000 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Re: The offering of up to 27,600,000 shares of First Source Bancorp, Inc.
Common Stock
Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with (i) the reorganization of First Savings Bancshares, MHC (the
"Mutual Holding Company"), a federal mutual holding company that owns a majority
of the outstanding stock of First Savings Bank, SLA, a New Jersey chartered
stock savings association (the "Bank"), into the stock form of ownership (the
"Conversion"), and (ii) the subscription and community offering (the
"Offerings"), in connection with the Conversion by First Source Bancorp, Inc., a
Delaware corporation (the "Company"), of up to 27,600,000 shares of its common
stock, par value $0.01 per share (the "Common Stock") (31,740,000 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 December 15, 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
December 19, 1997 and as amended on February 4, 1998 (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
First Source Bancorp, Inc.
February 6, 1998
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 included in the
Company's Registration Statement on Form S-1 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 non-
assessable.
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 non-assessable 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,
<PAGE>
Board of Directors
First Source Bancorp, Inc.
February 6, 1998
Page 3
if any, that a court applying Delaware law were to impose
equitable limitations upon such authority; and
(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/ PATTON BOGGS, L.L.P.
PATTON BOGGS, L.L.P.
<PAGE>
Exhibit 5.1
[Morris, Nichols, Arsht & Tunnell Letterhead]
February 4, 1998
Patton Boggs, L.L.P.
2550 M Street, N.W.
Washington, DC 20037
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the reorganization of First Savings Bank, SLA, a New
Jersey state chartered savings and loan association (the "Bank"), and First
Savings Bancshares, MHC, the mutual holding company of the Bank ("MHC"), into a
stock holding company structure (the "Reorganization"), in which each share of
the Bank's common stock held by the Bank's public stockholders will be converted
into shares of common stock, par value $.01 per share ("Common Stock"), of First
Source Bancorp, Inc., a Delaware corporation (the "Company"), and the
subscription and community offering (the "Offering"), in connection with the
Reorganization, by the Company, of up to 31,740,000 shares of Common Stock.
In connection with your request for our opinion, you have provided to
us, and we have reviewed, MHC's Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan"), the Company's certificate of incorporation (the
"Certificate of Incorporation"), its by-laws, the Registration Statement filed
with the Securities and Exchange Commission in connection with the Offering (the
<PAGE>
Patton Boggs, L.L.P.
February 4, 1998
Page 2
"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>
Patton Boggs, L.L.P.
February 4, 1998
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, MHC, the Company, the Offering, or the
Reorganization, including, without limitation, those applicable to federally
insured savings and loan 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 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, 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 of the
Pricing Committee, and certificates representing
<PAGE>
Patton Boggs, L.L.P
February 4, 1998
Page 4
such shares in the form provided to us are duly and properly issued, will be
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 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.
<PAGE>
Patton Boggs, L.L.P
February 4, 1998
Page 5
(b) Article NINTH of the Certificate of Incorporation, which purports
to permit the Board to consider the effect of any offer to acquire the Company
on constituencies other than stockholders in evaluating any such offer.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
<PAGE>
[LETTERHEAD OF PATTON BOGGS, L.L.P. APPEARS HERE]
Exhibit 8.1
(202) 457-6000
February 9, 1998
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
1000 Woodbridge Center Drive
Woodbridge, NJ 07095
Gentlemen:
You have requested our opinion as to certain federal income tax consequences
of the plan of conversion and plan of reorganization of First Savings
Bancshares, MHC ("Mutual Holding Company") and First Savings Bank, SLA (the
"Bank") described herein.
The proposed transaction is described in the section of this letter entitled
"STATEMENT OF FACTS."
Our opinions are based on the STATEMENT OF FACTS, the representations
described in the section of the letter entitled "REPRESENTATIONS," and our
examination of such corporate records, certificates and other documents as we
have considered necessary or appropriate for this opinion. In such examination,
we have accepted, and not independently verified, the authenticity of all
original documents, the accuracy of all copies, and the genuineness of all
signatures. Unless otherwise noted, section references are to the Internal
Revenue Code of 1986 as amended (the "Code") as in effect as of the date of this
letter. Capitalized terms not defined in this letter have the meanings assigned
to them in the Plan (as such term is defined below).
STATEMENT OF FACTS
Mutual Holding Company is a federally chartered mutual holding company that
as of October 31, 1997, owned 4,134,812 shares, or 51.6% of the $.01 par value
common stock of the Bank (the "Institution Common Stock"). Prior to July 10,
1992, Mutual Holding Company was a New Jersey state chartered mutual savings and
loan association. On July 10, 1992, the state chartered mutual savings and loan
association changed its charter to a federally chartered Mutual Holding Company
and transferred virtually all of its assets to the Bank, a newly chartered New
Jersey stock savings and loan association, in exchange for the Bank's common
stock and
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 2
assumption of all of the transferor's liabilities (the "1992 MHC
Reorganization"). The Bank also sold its common stock for cash in a public
offering. You received a legal opinion from Muldoon, Murphy & Faucette
addressing the tax consequences of that reorganization. Certain depositors of
the Bank now hold liquidation and voting rights in Mutual Holding Company. In
the unlikely event that Mutual Holding Company in its present mutual form is
completely liquidated, each depositor holding such liquidation and voting rights
would receive a 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.
On October 24, 1997, the Board of Directors of Mutual Holding Company and
the Bank adopted the Plan of Conversion and Agreement and Plan of Reorganization
of First Savings Bancshares, MHC and First Savings Bank, SLA, which plan was
amended on December 16, 1997, amended and restated on January 28, 1998, and
amended on February 9, 1998 (the "Plan"). In accordance with the Plan, the Bank
will cause First Source Bancorp, Inc. (the "Company") to be incorporated under
Delaware law as a first-tier, wholly owned subsidiary o f the Bank. After the
parties to the Reorganization receive all requisite regulatory approvals, the
Company, in accordance with the Plan, will form a first-tier, wholly owned
federally chartered interim stock savings bank, which is referred to here as
"Interim B." The Company adopted the Plan on January 28, 1998. 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, the Bank will become a wholly owned subsidiary
of the Company. As a result of the Reorganization, each share of the
Institution Common Stock held by Mutual Holding Company will be canceled and
each share of Bank common stock held by the Bank's public stockholders (the
"Public Bank Shares"), which amounted to 3,881,539 shares or 48.4% of the
outstanding Bank common stock as of October 31, 1997, will be converted into
shares of the Company's common stock (the "Exchange Shares") pursuant to a ratio
that will result in the holders of such shares (the "Public Shareholders")
owning in the aggregate approximately the same percentage of Company stock (as
adjusted as described below) after giving effect to the offerings described in
this letter (the "Offerings"), before giving effect to (a) the payment of cash
in lieu of fractional exchange shares, or (b) any shares of common stock
purchased by Public Shareholders or the Bank's ESOP in the offerings described
in this letter or thereafter. Based upon the independent appraisal by FinPro,
the Public Shareholders' percentage ownership interest of Company stock will be
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 3
reduced by approximately one percent of their current ownership percentage of
Bank stock to reflect the portion of dividends payable by the Bank waived by
Mutual Holding Company.
Nontransferable subscription rights for up to 14,242,072 shares (which may
be increased to 16,378,421 shares) of common stock (the "Conversion Stock") of
the Company will be 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 (the
"Subscription Offering"). The Company will offer the shares of Conversion Stock
not subscribed for in the Subscription Offering for sale in a community offering
(the "Community Offering") to certain members of the general public, with a
preference given to holders of the Public Bank Shares. 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 aggregate purchase price of the Conversion Stock 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.
The Company intends to seek stockholder approval of certain stock programs
which it plans 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. Under current OTS regulations, this meeting 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 421,076 shares and 569,682 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.
In accordance with the Plan, the Reorganization will be structured as
follows:
(i) The Bank organized the Company, which will issue to the Bank 10
shares of common stock, consisting of all the issued and outstanding stock of
the Company for $.01 per share. The Company will become a wholly owned
subsidiary of the Bank. The Company will form Interim B, a federally chartered
stock savings bank, as a wholly owned subsidiary of the Company, solely to
facilitate the reorganization.
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 4
(ii) Mutual Holding Company will convert to a federally chartered
interim stock savings bank ("Inter im A") and simultaneously merge with and into
the Bank pursuant to state law. All shares of the Institution Common Stock held
by Mutual Holding Company will be canceled. The Bank will establish liquidation
accounts on behalf of depositor members of Mutual Holding Company.
(iii) Interim B will merge with and into the Bank pursuant to state law.
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 Offering, 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 Reorganization, all Public Shareholders of the Bank will
become stockholders of the Company and the Bank will become a wholly owned
subsidiary of the Company. The separate existence of Interim B will cease by
operation of law and all assets and liabilities (if any) 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 and loan association and retain its
present state charter. Directors of the Bank will continue as Directors of the
Bank during and after the Reorganization. The Bank will hold after the
Reorganization substantially all of the assets that it held before the
Reorganization.
The Plan provides for the establishment upon the completion of the
Conversion of a special liquidation account (the "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 December
31, 1991, the date of the latest statement of financial condition contained in
the final offering circular utilized in the 1992 MHC Reorganization or (2) 51.6%
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 who continues to maintain a deposit account at the Bank, will be
entitled, on a complete liquidation of the Bank after the Conversion and
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 5
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 will
have an initial interest in the Liquidation Account for each deposit account
(including regular savings accounts, demand deposit 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, 1995
and December 31, 1997, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder initially 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 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, and (with the exception of the first annual closing date) 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 will be reduced to a level that bears the same ratio to the initial
interest as the amount of such Qualifying Deposit bears to the amount of the
Qualifying Deposit used to deter mine the initial interest. An Eligible Account
Holder's or Supplemental Eligible Account Holder's interest will be reduced to
zero if the holder does its Qualifying Deposit Accounts. In addition, no
interest in the Liquidation Account would ever be increased despite any
subsequent increase to 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 the exchange.
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 6
(b) No Public Shareholder owns 5% or more of the Bank common stock. To
the best of the knowledge of management of the Bank, there is no plan or
intention on the part of 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 held by persons other than Mutual Holding Company as of the
same date. For purposes of this representation, shares of Bank common stock
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. 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 are
taken into account for purposes of the calculation described in this paragraph.
(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, if any, and at least 70% of the fair market value of Interim B's gross
assets, if any, held immediately prior to the Reorganization. For purposes of
this representation, amounts paid by the Bank or Interim B to shareholders who
receive cash for fractional shares, amounts used by the Bank or Interim B to pay
reorganization expenses and all redemptions and distributions (except for
regular, normal dividends) immediately preceding the Reorganization made by the
Bank will be included as assets of the Bank or Interim B respectively,
immediately prior to the Reorganization.
(d) Prior to the transaction, the Company will own all of the
outstanding voting shares of Interim B and Interim B will have no outstanding
shares of nonvoting stock.
(e) 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). For purposes of these representations, "control of
the Bank within the meaning of section 368(c)" means holding 80% of the total
combined voting power of all classes of stock of the Bank entitled to vote and
80% of the total number of shares of all other classes of stock of the Bank.
(f) The Company has no plan or intention to acquire any of its stock
issued in the transaction, other than possibly to repurchase up to 4% of the
total shares of Conversion Stock for benefit programs for employees, officers
and directors.
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 7
(g) The Company has no plan or intention to liquidate the Bank; to merge
the Bank with or into another corporation (except as part of the
Reorganization), or to 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 (if
any) acquire d from Interim B, except for dispositions made in the ordinary
course of business, transfers of assets to a corporation controlled by the Bank,
and the sale of one of its 17 branches, the Eatontown branch for $1.2 million in
cash.
(h) Interim B will have no liabilities.
(i) Following the transaction, the Bank will continue its historic
business and use a significant portion of its business assets in a business.
(j) Except as provided in the next sentence, 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 Rev. Rul. 73-54, 1973-1
C.B. 187.
(k) There is no intercorporate indebtedness existing between the Company
and the Bank or between Interim B and the Bank that was issued, acquired, or
will be settled at a discount.
(l) In the Reorganization, shares of Bank stock representing control of
the Bank within the meaning of section 368(c), determined by disregarding Mutual
Holding Company's stock in the Bank, will be exchanged solely for voting stock
of the Company.
(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 within the meaning of 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.
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 8
(o) 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.
(p) 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 pursuant to the Reorganization 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.
(q) The Reorganization is being effected for bona fide business reasons.
The principal purpose of the Conversion and Reorganization is to structure
Mutual Holding Company and the Bank in a form used by most other savings
institutions and commercial banks and most other business entities. The revised
structure will support future expansion of operations of the Bank and
diversification into other banking-related businesses. The new structure will
eliminate various regulatory uncertainties associated with the mutual holding
company structure, including ability to waive dividends from the Bank.
(r) No person will receive any payment, whether in money or property, in
lieu of subscription rights.
OPINION
Based solely on the foregoing representations and information and assuming
the Reorganization and Conversion occurs in accordance with the Plan, it is our
opinion that:
(1) The conversion of Mutual Holding Company from a federally chartered
mutual holding company to a federally chartered interim savings bank will
qualify as a tax-free reorganization described in section 368(a)(1)(F).
(2) Upon receipt of OTS approval and the Decision and Order of the
Commissioner for the Department of Banking and Insurance for the state of New
Jersey, and consummation of the transaction in accordance with the terms of the
Plan, the merger of Mutual Holding Company/Interim A with and into the Bank will
qualify as a statutory merger under the laws of New Jersey.
(3) The merger of Mutual Holding Company/Interim A into the Bank will
qualify as a tax-free reorganization described in section 368(a)(1)(A). The
exchange of the member's equity in Mutual Holding Company for interests in the
Liquidation Account will satisfy the continuity
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 9
of interest required by Treas. Reg. (S) 1.368-1(b) (Rev. Rul. 69-3, 1969-1 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).
(4) The Bank will not recognize any gain or loss on the receipt of the
assets of Mutual Holding Company in exchange for the Accounts (section 1032(a)).
(5) Upon receipt of OTS approval and the Decision and Order of the
Commissioner for the Department of Banking and Insurance for the state of New
Jersey, and consummation of the transaction in accordance with the terms of the
Plan, the merger of Interim B with and into the Bank will qualify as a statutory
merger under the laws of New Jersey.
(6) The merger of Interim B with and into the Bank will constitute a
reorganization described in section 368(a)(1)(A) and (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).
(7) The Company will not recognize any gain or loss upon the exchange of
Company common stock for Bank common stock (section 354(a)).
(8) 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)).
(9) 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)).
(10) 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)).
(11) 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)).
(12) Gain may be recognized by an Eligible Account Holder, Supplemental
Eligible Account Holder or other Member on the receipt of an interest in the
Liquidation Account and/or nontransferable subscription rights to purchase
shares of stock in the Company to the extent the fair market values of the
interest in the Liquidation Account and the nontransferable subscription rights
received. (You have received a letter from FinPro, Inc. indicating that the
subscription rights have no fair market value. In various private letter
rulings, the Internal Revenue Service has stated that interests similar to
interests in the Liquidation Account have no fair market value.
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 10
Neither the FinPro, Inc. letter nor private letter rulings issued to other
taxpayers are binding on the Service. We express no legal opinion on the fair
market value of the Liquidation Account or subscription rights or on whether
gain will be recognized if the interests in the Liquidation Accounts have
value.)
(13) Eligible Account Holders, Supplemental Eligible Account Holders and
other Members will not realize any taxable income as a result of the exercise by
them of the nontransferable subscription rights to purchase shares of Company
stock (Rev. Rul. 56-572, 1956-2 C.B. 182).
(14) The basis of the common stock acquired by Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members pursuant to the exercise
of subscription rights will be the amount paid therefor (plus the gain, if any,
recognized on receipt of the subscription rights). The holding period for such
common stock will commence on the date on which the right to acquire such stock
was exercised (section 1223(6)).
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 changes 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. In particular, 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.
Moreover, our opinion is based on case law, the Code, Treasury Regulations
thereunder, and Internal Revenue Service rulings and other administrative
guidance 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 and there can be no assurance, and none is
hereby given, that the Internal Revenue Service will not take a position
contrary to one or more of the positions
<PAGE>
Board of Directors
First Savings Bancshares, MHC
First Savings Bank, SLA
February 9, 1998
Page 11
reflected in the foregoing opinion, or that our opinion will be upheld by the
courts if challenged by the Internal Revenue Service.
We express no opinion as to any state or local income tax consequences of
the Reorganization and Conversion. We understand that KPMG Peat Marwick LLP
will be addressing such consequences in a separate letter.
CONSENT
We consent to the inclusion of this opinion as an exhibit to the Form AC of
First Savings Bancshares, MHC and the Form S-1 Registration Statement of First
Source Bancorp, Inc. and the references to the summary of this opinion in such
Form AC and Form S-1 Registration Statement. In addition, we consent to KPMG
Peat Marwick LLP's reliance on this letter in issuing an opinion on the New
Jersey tax consequences of the Reorganization and Conversion.
Very truly yours,
/s/ Patton Boggs, L.L.P.
PATTON BOGGS, L.L.P.
<PAGE>
Exhibit 8.2
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
February 9, 1998
Board of Directors
First Savings Bancshares, M.H.C.
First Savings Bank, SLA
1000 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Dear Gentlemen:
You have requested our opinion as to certain State of New Jersey tax
consequences under the Corporation Business Tax, Savings Institution Tax, and
the Gross Income Tax of a plan of conversion and plan of reorganization of First
Savings Bancshares, M.H.C. ("Mutual Holding Company") and First Savings Bank,
SLA (the "Bank").
On October 24, 1997, the Board of Directors of Mutual Holding Company and the
Bank adopted the Plan of Conversion and Agreement and Plan of Reorganization of
First Savings Bancshares, M.H.C. and First Savings Bank, SLA, which plan was
amended on December 16, 1997, and amended and restated on January 28, 1998 (the
"Plan"). Capitalized terms not defined in this letter have the meanings
assigned to them in the Plan. The reorganization will be accomplished by the
following steps:
(i) The Bank will establish First Source Bancorp, Inc. (the "Company"), to be
incorporated under Delaware law as a first-tier wholly owned subsidiary
of the Bank. The Company will form a first-tier, wholly owned federally
chartered interim stock savings bank, which is referred to here as
Interim B, solely to facilitate the reorganization.
(iii) Mutual Holding Company will convert into a federally chartered interim
stock savings bank ("Interim A") and simultaneously merge with and into
the Bank pursuant to state law, with the Bank as the surviving entity
("Mutual Holding Company Merger"). As a result of the Mutual Holding
Company Merger, the Bank common stock held by the Mutual Holding Company
will be canceled and each Eligible Account Holder and Supplemental
Eligible Account Holder will receive an interest in a liquidation account
of the Bank in exchange for such person's interest in the Mutual Holding
Company.
<PAGE>
KPMG Peat Marwick LLP
Page 2
Board of Directors
First Savings Bancshares, M.H.C.
First Savings Bank, SLA
February 9, 1998
(iv) Immediately after the conversion of Mutual Holding Company into Interim A
and the merger of Interim "A" with and into the Bank, Interim "B" will
merge with and into the Bank, and the separate existence of Interim B
will cease. As part of the Reorganization, the shares of the Company
common stock held by the Bank will be canceled. The Company's shares of
Interim B will be converted, on a one-to-one basis, into shares of Bank
common stock, which will result in the Bank becoming a wholly-owned
subsidiary of the Company.
(v) Public Shareholders will exchange their shares of Bank common stock for
shares of Company common stock pursuant to the Exchange Ratio.
(v) The Company will offer additional shares of its common stock for sale in
a Subscription Offering, Community Offering and possibly a Syndicated
Community Offering as set forth in the Plan.
As a result of the Reorganization, all Public Shareholders of the Bank will
become stockholders of the Company and the Bank will become a wholly owned
subsidiary of the Company.
On July 10, 1992, First Savings Bank, SLA (First Savings) reorganized into the
mutual holding company form of organization through a transfer to a wholly-owned
subsidiary, Bank, of all of its assets and liabilities in exchange for common
stock of Bank. First Savings reorganized itself into Mutual Holding Company.
At the same time Bank sold stock to the public ("Minority Shareholders") and
raised approximately $10,000,000. After the sale the Mutual Holding Company
held 62.4% of Bank's common stock and the Minority Shareholders owned 37.6%. On
July 11, 1995, the Bank completed a secondary stock offering to the public and
raised approximately $7,800,000. After the secondary sale the Mutual Holding
Company held 52.5% of Bank's common stock and the Minority Shareholders owned
47.5%.
Our views as to the New Jersey tax consequences are based upon the opinion
("Federal Opinion") of Patton Boggs, LLP (dated February 9, 1998) that the
transaction will qualify as a tax-free transaction under Sections 354(a),
357(a), 361(a), 368(a)(1)(A), 368(a)(2)(E), 368(a)(1)(F), and 1032(a) of the
Internal Revenue Code (IRC), and that
<PAGE>
KPMG Peat Marwick LLP
Page 3
Board of Directors
First Savings Bancshares, M.H.C.
First Savings Bank, SLA
February 9, 1998
the Mutual Holding Company's members will recognize no gain or loss solely by
reason of their exchange of their membership interest in the Mutual Holding
Company for an interest in the liquidation account in the Bank.
NEW JERSEY CORPORATION BUSINESS TAX ACT
While the New Jersey Corporation Business Tax Act does not address tax-free
holding company formations or reorganizations, Section 54:10A-4(k) provides, in
part, that "the amount of a taxpayer's entire net income shall be deemed prima
facie to be equal in amount to the taxable income, before net operating loss
deduction and special deductions, which the taxpayer is required to report to
the United States Treasury Department for the purposes of computing its Federal
income tax ...".
Under this Act, the Attorney General issued a formal opinion which states in
pertinent part that "... gain on liquidations of wholly-owned subsidiaries and
transfers of assets from one corporation to another ... which is not recognized
for Federal income tax purposes pursuant to Internal Revenue Code Section 332
and 368(a)(1)(C), respectively, is not included in 'entire net income' for
purposes of the New Jersey Corporation Business Tax. The starting point for
'entire net income' is always Federal taxable income" (emphasis supplied -
Formal Opinion 1960 - No. 2, February 10, 1960). The opinion does not address
tax-free holding company formations, transfers of assets in exchange for stock
or reorganizations. However, the rationale for such opinion will apply to such
transactions under the New Jersey Corporation Business Tax Act. Thus, no gain
or will be recognized by the Mutual Holding Company, Interim A, the Company,
Interim B, nor the Bank if the transaction is not a taxable transaction for
Federal income tax purposes.
NEW JERSEY SAVINGS INSTITUTION TAX ACT
While the New Jersey Savings Institution Tax Act does not address
reorganizations, the starting point in computing taxable income is as follows:
... For the purpose of this Act, the amount of a taxpayer's net income
shall be deemed prima facie to be equal in amount to the taxable income,
before net operating loss deduction and special deductions, which the
taxpayer is
<PAGE>
KPMG Peat Marwick LLP
Page 4
Board of Directors
First Savings Bancshares, M.H.C.
First Savings Bank, SLA
February 9, 1998
required to report to the United States Treasury Department for the
purposes of computing its Federal income tax ...(Sec. 54:10D-2).
The rational for Formal Opinion 1960 - No. 2, February 10, 1960 will also to
apply to such reorganizations under the New Jersey Savings Institution Tax Act.
Thus, no gain or loss will be recognized by the Bank or Interim B if the
transaction is not a taxable transaction for Federal income tax purposes.
NEW JERSEY GROSS INCOME TAX
The New Jersey Gross Income Tax Act provides, in part, as follows:
Sec. 54A:2-1. "There is hereby imposed a tax ... on the New Jersey gross
income as herein defined ..."
Sec. 54A:5-1. "... New Jersey gross income shall consist of the following
categories of income:
-
(c) ... Net gains or net income ... derived from the sale, exchange, or
other disposition of property ... determined in accordance with the method
of accounting allowed for Federal income tax purposes ... The term 'net
gain or net income' shall not include gains or income from transactions to
the extent to which nonrecognition is allowed for Federal income tax
purposes. The term 'sale, exchange, or other disposition' shall not
include the exchange of stock or securities in a corporation a party to a
reorganization ...
For purposes of this clause, the term 'reorganization' means ... (iv) A
transfer by a corporation of all or a part of its assets to another
corporation if immediately after the transfer the transferor, or one or
more of its shareholders ... is in control of the corporation to which the
assets are transferred."
The above definition of a reorganization is similar to the general rule of
Section 368 of the Internal Revenue Code. Therefore, the reorganization of Bank
will not result in the recognition of taxable gain or loss to the members, nor
to the individual shareholders of
<PAGE>
KPMG Peat Marwick LLP
Page 5
Board of Directors
First Savings Bancshares, M.H.C.
First Savings Bank, SLA
February 9, 1998
the Bank under the New Jersey Gross Income Tax Act if the transaction is not a
taxable transaction for Federal income tax purposes.
It should be noted, however, that if the opportunity to purchase stock is deemed
to have an ascertainable value, the depositors would recognize New Jersey
taxable income (dividends) equal to the amount of such value recognized for
Federal income tax purposes.
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 or
made to Patton Boggs, LLP. Any changes in the transaction could cause us to
modify our opinion.
Our opinion as expressed above is rendered only with respect to the State of New
Jersey tax consequences under the Corporation Business Tax, Savings Institution
Tax, and the Gross Income Tax of specific matters discussed herein, and we
express no opinion with respect to any other federal, state, local, or foreign
tax matters relating to the proposed transaction or legal aspect of the
offering. Our opinion is based on the facts and circumstances as stated herein,
whether directly or by reference to the Federal Opinion. It is expressly
understood and agreed to by First Savings Bancshares, M.H.C. and First Savings
Bank, SLA that KPMG is relying solely on the Federal Opinion in all respects,
including facts, representations, and assumptions, relating to the federal tax
consequences of the matters described therein. KPMG has not independently
verified the accuracy of any fact, representation, opinion or other matter
contained in the Federal Opinion and should any fact, representation, opinion or
other matter addressed therein not be correct, it could cause the New Jersey
opinion contained herein to also be incorrect. If any of the facts and
conditions are not entirely complete or accurate, it is imperative that we be
informed immediately, as the inaccuracy or incompleteness could have a material
effect on our conclusions. In rendering our opinion, we are relying upon the
relevant provisions of the Revised Statutes of New Jersey (1937), as amended,
the rules and regulations thereunder and judicial and administrative
interpretations thereof, which are subject to change or modification by
subsequent legislative, regulatory, administrative, or judicial decisions. Any
such changes could also have an effect on the validity of our opinion. We
<PAGE>
KPMG Peat Marwick LLP
Page 6
Board of Directors
First Savings Bancshares, M.H.C.
First Savings Bank, SLA
February 9, 1998
undertake no responsibility to update or supplement our opinion after its
issuance. This opinion is not binding upon any tax authority or any court and
no assurance can be given that a position contrary to that expressed herein will
not be asserted by a tax authority and ultimately sustained by a court.
CONSENT
We consent to the inclusion of this opinion as an exhibit to the Form AC and
Form S-1 Registration Statement of First Source Bancorp, 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
KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 10.5
DRAFT
FIRST SAVINGS BANK, SLA
EMPLOYEE STOCK OWNERSHIP TRUST
LOAN AND SECURITY AGREEMENT
First Source Bancorp, Inc.
1000 Woodbridge Center Drive
Woodbridge, New Jersey 07095
_________________, 1998
Gentlemen:
The undersigned, ____________________, ________________, __________________
("Trustee"), not individually but solely as Trustee under the First Savings
Bank, 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. First Source Bancorp, Inc. is hereinafter referred to
as the "Lender". The term "Bank" as used herein refers to First Savings Bank,
SLA, as the sponsoring employer of First Savings Bank, 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 First Source Bancorp, 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").
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
<PAGE>
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 __________________, 1998 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.
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
<PAGE>
_________________, 1998) 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 _____________, 1998 and each subsequent 12-month
period ending on ____________ being herein after 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
<PAGE>
all principal and interest payments made on the Note during the Plan Year and
the 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 1000
Woodbridge Center Drive, Woodbridge, New Jersey 07095, 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.
<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 or (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), or (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.
<PAGE>
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.
<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
<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.
<PAGE>
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 _______________, 1998.
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.
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.
<PAGE>
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 1000
Woodbridge Center Drive, Woodbridge, New Jersey 07095, 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, SLA Employee Stock Ownership Trust effective __________________, 199__, by
and between the undersigned and First Savings Bank, 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.
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
<PAGE>
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]
<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 ______________________, 1998.
________________________ and its successors in
trust, as Trustee under that certain First
Savings Bank, SLA Employee Stock Ownership Trust
effective _____________________, 199__ by and
between the undersigned and First Savings Bank,
SLA.
By___________________________
Accepted and agreed to at Woodbridge, New Jersey
as of the date last above written.
By___________________________
<PAGE>
DRAFT
EXHIBIT A
PROMISSORY NOTE
$ __________
Woodbridge, New Jersey
_________________, 1998
For VALUE RECEIVED, the undersigned, [TRUSTEE], not individually but solely
as Trustee under that certain First Savings Bank, SLA Employee Stock Ownership
Trust effective _________________, 199__ by and between the undersigned
("Borrower") and First Savings Bank, SLA promises to pay to the order of First
Source Bancorp, Inc. (the "Lender") at its office at 1000 Woodbridge Center
Drive, Woodbridge, New Jersey 07095, 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 _________________, 1998, 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 _________________, 1998, 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, 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.
<PAGE>
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 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, SLA Employee Stock
Ownership Trust effective ___________,
199__ by and between the undersigned and
First Savings Bank, SLA.
By: ________________________
<PAGE>
DRAFT
EXHIBIT B
SECURITY AGREEMENT
INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED
For new value contemporaneously given by First Source Bancorp, 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
First Source Bancorp, Inc., a Delaware corporation.
Borrower agrees to deliver said collateral to said Lender not later than
the close of business on ___________________, 1998, 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 Woodbridge, New Jersey the ______ day of ________________, 1998.
[TRUSTEE], and its successors in trust,
as Trustee under that certain First
Savings Bank, SLA Employee Stock
Ownership Trust effective
___________________, 199__, by and
between the undersigned and First
Savings Bank, SLA.
By: _________________________________
<PAGE>
Exhibit 10.11
FORM OF
FIRST SOURCE BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of _____________, 199_,
by and between First Source Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of Delaware, with its principal administrative office
at 1000 Woodbridge Center Drive, Woodbridge, New Jersey and ___________________
(the "Executive"). Any reference to "Institution" herein shall mean First
Savings Bank, SLA or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as __________________________ of the Holding Company. The Executive shall
render administrative and management services to the Holding Company such as are
customarily performed by persons in a similar executive capacity. During said
period, Executive also agrees to serve, if elected, as an officer and director
of any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended annually until such time as the board of directors of the Holding
Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the second anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
<PAGE>
subsidiaries ("Subsidiaries") and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, Executive's
employment with the Holding Company may be terminated by the Holding Company or
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement. Moreover, in the event the Executive is terminated or
suspended from his position with the Institution, Executive shall not perform,
in any respect, directly or indirectly, during the pendency of his temporary or
permanent suspension or termination from the Institution, duties and
responsibilities formerly performed at the Institution as part of his duties and
responsibilities as ________________________ of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding Company
or its Subsidiaries of $________ per year ("Base Salary"). Base Salary shall
include any amounts of compensation deferred by Executive under any qualified or
unqualified plan maintained by the Holding Company and its Subsidiaries. Such
Base Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by the Board or by a Committee of the Board delegated
such responsibility by the Board. The Committee or the Board may increase
Executive's Base Salary. Any increase in Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Holding Company shall also provide Executive, at no
premium cost to Executive, with all such other benefits as provided uniformly to
permanent full-time employees of the Holding Company and its Subsidiaries.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company and its
Subsidiaries will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under any employee benefit plans including, but not limited
to, retirement plans, supplemental retirement plans, pension plans, profit-
sharing plans, health-and-accident plans, medical coverage or any other employee
benefit plan or arrangement made available by the Holding Company and its
Subsidiaries in the future to its senior executives
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and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Holding Company and its Subsidiaries in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Holding Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred in the performance of Executive's
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon, any (A) failure to elect or reelect or to
appoint or reappoint Executive as _____________________________, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities with the Holding Company or its Subsidiaries, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, unless consented to by the Executive, (C) a relocation of
Executive's principal place of employment by more than 25 miles from its
location at the effective date of this Agreement, unless consented to by the
Executive, (D) a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) a liquidation or dissolution of the
Holding Company or the Institution, or (F) breach of this Agreement by the
Holding Company. Upon the occurrence of any event described in clauses (A),
(B), (C), (D) (E) or (F), above, Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within six full calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the sum of:
(i) the amount of the remaining payments that the Executive would have earned if
he had continued his employment with the Institution during the remaining term
of this Agreement at the Executive's Base Salary at the Date of Termination; and
(ii) the amount equal
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to the annual contributions that would have been made on Executive's behalf to
any employee benefit plans of the Institution or the Holding Company during the
remaining term of this Agreement based on contributions made (on an annualized
basis) at the Date of Termination. At the election of the Executive, which
election is to be made prior to an Event of Termination, such payments shall be
made in a lump sum. In the event that no election is made, payment to the
Executive will be made on a monthly basis in approximately equal installments
during the remaining term of the Agreement. Such payments shall not be reduced
in the event the Executive obtains other employment following termination of
employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Holding
Company or the Institution shall mean an event of a nature that; (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, or the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries; or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board;
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Institution or the Holding Company or
similar transaction occurs or is effectuated in which the Institution or Holding
Company is not the resulting entity; provided, however, that such an event
listed above will be deemed to have
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occurred or to have been effectuated upon the receipt of all required federal
regulatory approvals not including the lapse of any statutory waiting periods;
or (D) a proxy statement has been distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Institution
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Institution
or the Holding Company shall be distributed; or (E) a tender offer is made for
20% or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and, (d), of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or material
reduction in benefits or relocation of his principal place of employment by more
than 25 miles from its location immediately prior to the change in control,
unless such termination is because of his death or termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of:
(i) the payments due for the remaining term of the Agreement; or (ii) three (3)
times Executive's average annual compensation for the five (5) preceding taxable
years. Such annual compensation shall include Base Salary, commissions,
bonuses, contributions on behalf of Executive to any pension and profit sharing
plan, severance payments, directors or committee fees and fringe benefits paid
or to be paid to the Executive during such years. At the election of the
Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum. In the event that no election is made,
payment to the Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the Agreement. Such payments shall
not be reduced in the event Executive obtains other employment following
termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Company will cause to be continued life, medical, dental and disability
coverage substantially equivalent to the coverage maintained by the Institution
for Executive at no premium cost to Executive prior to his severance. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Change in Control.
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6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the "Non-
Triggering Amount"), the value of which is one dollar ($1.00)
less than an amount equal to three (3) times Executive's "base
amount," as determined in accordance with said Section 280G and
the Non-Triggering Amount less the product of the marginal rate
of any applicable state and federal income tax and the Non-
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount.
The allocation of the reduction required hereby among the Termination Benefits
shall be determined by the Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of a
material loss to the Holding Company or one of its Subsidiaries caused by the
Executive's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. For purposes of this Section, no act, or the
failure to act, on Executive's part shall be "willful" unless done, or omitted
to be done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its Subsidiaries.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to Executive and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. The Executive shall not have the right to
receive compensation or other
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benefits for any period after Termination for Cause. During the period beginning
on the date of the Notice of Termination for Cause pursuant to Section 8 hereof
through the Date of Termination, stock options and related limited rights
granted to Executive under any stock option plan shall not be exercisable nor
shall any unvested awards granted to Executive under any stock benefit plan of
the Holding Company or its Subsidiaries vest. At the Date of Termination, such
stock options and related limited rights and such unvested awards shall become
null and void and shall not be exercisable by or delivered to Executive at any
time subsequent to such Date of Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
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9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and
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exclusively derived from the business plans and activities of the Holding
Company. In the event of a breach or threatened breach by the Executive of the
provisions of this Section, the Holding Company will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Holding Company or its Subsidiaries or from rendering any services to any
person, firm, corporation, other entity to whom such knowledge, in whole or in
part, has been disclosed or is threatened to be disclosed. Nothing herein will
be construed as prohibiting the Holding Company from pursuing any other remedies
available to the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Holding Company subject to this Section
11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated ___________, 1998,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
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14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Institution, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any
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other cash compensation, fringe benefits and any compensation and benefits due
Executive under this Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Holding Company's obligations under this Agreement, in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, First Source Bancorp, Inc. has caused this Agreement to
be executed and its seal to be affixed hereunto by its duly authorized officer
and its directors, and Executive has signed this Agreement, on the _____ day of
_____, 199_.
ATTEST: FIRST SOURCE BANCORP, INC.
_____________________ By: __________________________________
Secretary Entire Board of Directors
[SEAL]
WITNESS:
_____________________ By: ___________________________________
Executive
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Exhibit 10.12
FORM OF
FIRST SAVINGS BANK, SLA
[ONE/TWO/THREE] YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of _____________, 199_ by and between
First Savings Bank, SLA (the "Bank"), a New Jersey chartered savings
institution, with its principal administrative office at 1000 Woodbridge Center
Drive, Woodbridge, New Jersey, _____________________ ("Executive"), and First
Source Bancorp, Inc. (the "Holding Company"), a corporation organized under the
laws of the State of Delaware which is the holding company of the Bank.
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect Executive's position therewith for the
period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Bank.
NOW, THEREFORE, in consideration of the contribution and responsibilities
of Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT.
-----------------
The term of the First Savings Bank, SLA Three Year Change in Control
Agreement (the "Agreement") shall be deemed to have commenced as of the date
first above written and shall continue for a period of [twelve/twenty-
four/thirty-six (12/24/36) full calendar months thereafter. Commencing on the
first anniversary date of this Agreement and continuing at each anniversary date
thereafter, the Board of Directors of the Bank ("Board") may extend the
Agreement for an additional year. The Board will review the Agreement and
Executive's performance annually for purposes of determining whether to extend
the Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
2. CHANGE IN CONTROL.
-----------------
(a) Upon the occurrence of a Change in Control of the Bank or the Holding
Company (as herein defined) followed at any time during the term of this
Agreement by the termination of Executive's employment, other than for Cause,
as defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon
the occurrence of a Change in Control, Executive shall have the right to elect
to voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 25 miles from its location
immediately prior to the Change in Control.
<PAGE>
(b) For purposes of this Plan, a "Change in Control" of the Bank or Holding
Company shall mean an event of a nature that: (i) would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the
Bank or the Holding Company within the meaning of the Home Owners' Loan Act of
1933, as amended, the Federal Deposit Insurance Act, or the Rules and
Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided, that in applying
the definition of change in control as set forth under the Rules and Regulations
of the OTS, the Board shall substitute its judgment for that of the OTS); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Holding Company representing 25% or more of the Bank's or the
Holding Company's outstanding voting securities or right to acquire such
securities except for any voting securities of the Bank purchased by the Holding
Company in connection with the conversion of the Bank to the stock form and any
voting securities purchased by any employee benefit plan of the Bank or the
Holding Company, or (B) individuals who constitute the Board on the date hereof
(the "Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or Holding Company is not the resulting entity; provided, however, that
such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required regulatory approvals not including
the lapse of any statutory periods.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed
to have been Terminated for Cause unless and until there shall have been
delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the Board of Directors of the Bank at a meeting of the Board called and held for
that purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive's conduct justified a finding of
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period
-2-
<PAGE>
after the Date of Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination for Cause, stock options and related limited rights granted
to Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the Bank,
the Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination for Cause, such stock options and related limited rights and any
such unvested awards shall become null and void and shall not be exercisable by
or delivered to Executive at any time subsequent to such Termination for Cause.
3. TERMINATION BENEFITS.
--------------------
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by termination of the Executive's employment due to:
(1) Executive's dismissal or (2) Executive's voluntary termination pursuant to
Section 2(a), unless such termination is due to Termination for Cause, the Bank
and the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, a
sum equal to [one/two/three (1/2/3)] times Executive's average annual
compensation for the five most recent taxable years that Executive has been
employed by the Bank or such lesser number of years in the event that Executive
shall have been employed by the Bank for less than five years. Such average
annual compensation shall include Base Salary, commissions, bonuses,
contributions on Executive's behalf to any pension and/or profit sharing plan,
severance payments, retirement payments, directors or committee fees, fringe
benefits paid or to be paid to the Executive in any such year and payment of any
expense items without accountability or business purpose or that do not meet the
Internal Revenue Service requirements for deductibility by the Bank;
provided however, that any payment under this provision and subsection 3(b)
- -------- -------
below shall not exceed [one/two/three (1/2/3)] times the Executive's average
annual compensation. At the election of Executive, which election is to be made
prior to a Change in Control, such payment shall be made in a lump sum. In the
event that no election is made, payment to Executive will be made on a monthly
basis in approximately equal installments during the remaining term of this
Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the Holding
Company followed at any time during the term of this Agreement by Executive's
voluntary or involuntary termination of employment, other than for Termination
for Cause, the Bank shall cause to be continued life, medical and disability
coverage substantially identical to the coverage maintained by the Bank or
Holding Company for Executive prior to his severance, except to the extent such
coverage may be changed in its application to all Bank or Holding Company
employees on a nondiscriminatory basis. Such coverage and payments shall cease
upon the expiration of [twelve/twenty-four/thirty-six (12/24/36)] full calendar
months from the Date of Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the
-3-
<PAGE>
Code or any successor thereto, and in order to avoid such a result Termination
Benefits will be reduced, if necessary, to an amount (the "Non-Triggering
Amount"), the value of which is one dollar ($1.00) less than an amount equal to
three (3) times Executive's "base amount," as determined in accordance with said
Section 280G. The allocation of the reduction required hereby among the
Termination Benefits provided by the preceding paragraphs of this Section 3
shall be determined by Executive.
4. NOTICE OF TERMINATION.
---------------------
(a) Any purported termination by the Bank or by Executive in connection
with a Change in Control shall be communicated by Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a written notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the instance of Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, in the event the Executive is terminated for reasons other than
Termination for Cause, the Bank will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to his annual salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the earlier of: (1)
the resolution of the dispute in accordance with this Agreement or (2) the
expiration of the remaining term of this Agreement as determined as of the Date
of Termination.
5. SOURCE OF PAYMENTS.
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
Further, the Holding Company guarantees such payment and provision of all
amounts and benefits due hereunder to Executive
-4-
<PAGE>
and, if such amounts and benefits due from the Bank are not timely paid or
provided by the Bank, such amounts and benefits shall be paid or provided by the
Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
-----------------------------------------------------
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to continue
in the employ of Bank or shall impose on the Bank any obligation to employ or
retain Executive in its employ for any period.
7. NO ATTACHMENT.
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
-----------------------
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
-5-
<PAGE>
9. REQUIRED REGULATORY PROVISIONS.
------------------------------
(a) The board of directors may terminate Executive's employment at any
time, but any termination by the board of directors, other than Termination for
Cause, shall not prejudice Executive's right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 2 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
(s)1818(e)(3) or (g)(1)), the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay Executive all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
(s)1818(c)(4) or (g)(1)), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, all obligations of the Bank under this contract shall
terminate as of the date of default, but this paragraph shall not affect any
vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to the
extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision (or his or her designee) at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act; or (ii) by the Director of the Office of Thrift
Supervision (or his or her designee) at the time the Director (or his or her
designee) approves a supervisory merger to resolve problems related to operation
of the Bank or when the Bank is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(s)1828(k) and any rules and regulations promulgated thereunder.
-6-
<PAGE>
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
--------------------------------------------
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
11. SEVERABILITY.
------------
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
13. GOVERNING LAW.
-------------
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of New Jersey but only to
the extent not preempted by Federal law.
14. ARBITRATION.
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank's main office, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement, other
than in the case of a Termination for Cause.
-7-
<PAGE>
15. PAYMENT OF COSTS AND LEGAL FEES.
-------------------------------
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank (which payments are guaranteed by the Holding
Company pursuant to Section 5 hereof) if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
---------------
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, and shall indemnify Executive (and
his heirs, executors and administrators) to the fullest extent permitted under
New Jersey law against all expenses and liabilities reasonably incurred by him
in connection with or arising out of any action, suit or proceeding in which he
may be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
17. SUCCESSOR TO THE BANK
---------------------
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
-8-
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, First Savings Bank, SLA and First Source Bancorp, Inc.
have caused this Agreement to be executed by their duly authorized officers, and
Executive has signed this Agreement, on the _____ day of __________, 199_ .
ATTEST: FIRST SAVINGS BANK, SLA
_______________________________ By: ___________________________
Secretary Officer
SEAL
ATTEST: FIRST SOURCE BANCORP, INC.
(Guarantor)
______________________________ By: ___________________________
Secretary Officer
SEAL
WITNESS:
______________________________ _______________________________
Executive
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<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
First Savings Bank, SLA:
We consent to the use of our report dated January 27, 1997, except as to Note
19, which is as of December 31, 1997, relating to the consolidated statements of
financial condition of First Savings Bank, SLA, and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, included herein, and to the reference to our
firm under the heading "Experts," "Consolidated Statements of Income,"
"Selected Financial and Other Data," "Effects of the Conversion and
Reorganization," "Tax Aspects," and "Legal and Tax Opinions" in the registration
statement/prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
February 5, 1998
<PAGE>
Exhibit 23.2
CONSENT
We hereby consent to the references to this firm and our opinions in the
Registration Statement on Form S-1 filed by First Source Bancorp, Inc., and all
amendments thereto and the Application for Conversion on the Form AC filed by
First Savings Bancshares, MHC (the "MHC") and all amendments thereto, relating
to the conversion of the MHC and the reorganization of the MHC and First Savings
Bank, SLA (the "Bank"), the concurrent sale or exchange of the Bank's
outstanding capital stock to First Source Bancorp, Inc., a holding company
formed for such purpose, and the offering of First Source Bancorp, Inc.'s common
stock.
PATTON BOGGS, L.L.P.
By: /s/ Joseph G. Passaic, Jr.
--------------------------
Joseph G. Passaic, Jr.
Dated this 9th day of
February, 1998
<PAGE>
Exhibit 23.3
[LETTERHEAD OF MORRIS, NICHOLS, ARSHT & TUNNELL]
February 4, 1998
Patton Boggs, L.L.P.
2550 M Street, N.W.
Washington, DC 20037
Ladies and Gentlemen:
We hereby consent to the filing of our opinion to you concerning
certain matters of Delaware law in connection with the subscription and
community offering (the "Offering") by First Source Bancorp, Inc., a Delaware
corporation (the "Company"), of shares of its common stock, par value $.01 per
share, in draft or final form, as an exhibit to (i) the Registration Statement
filed with the Securities and Exchange Commission by the Company in connection
with the Offering, and all amendments thereto, and (ii) the Application for
Conversion filed with the Office of Thrift Supervision in connection with the
reorganization of First Savings Bank, SLA, (the "Bank"), and First Savings
Bancshares, MHC, the mutual holding company of the Bank, into a stock holding
company structure, and all amendments thereto, and to the reference to this firm
in the "Legal Matters" section of the Prospectus relating to the Offering.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
<PAGE>
Exhibit 99.2
[LETTERHEAD OF SANDLER O'NEILL APPEARS HERE]
February 5, 1998
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006
Re: First Source Bancorp, Inc.
--------------------------
Ladies and Gentlemen:
Sandler O'Neill & Partners, L.P. intends to make a market in the common stock,
par value $.01 per share, of First Source Bancorp, Inc., a Delaware corporation
(the "Company"), which is to be listed on the NASDAQ National Market upon
completion of the Company's offering being made in connection with the
reorganization of First Savings Bank, SLA and First Savings Bancshares, MHC into
the stock holding company structure. We support the Company's application for
entry on the Nasdaq National Market.
Based on the size of the offering and the expected distribution, we recommend a
small order execution level of 500 shares.
Sincerely,
/s/ Patricia A. Murphy
- ----------------------
Patricia A. Murphy
Managing Director
