<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1997
Commission File No.: 000-23809
FIRST SOURCE BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NEW JERSEY 07095
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes No X .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting common stock held by non-
affiliates of the registrant, i.e., persons other than directors and executive
officers of the registrant, was $__________ and is based upon the last sales
price as quoted on The Nasdaq Stock Market for March ___, 1998.
As of March ___, 1998, the Registrant had 8,016,352 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
1. None.
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INDEX
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PART I PAGE
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Item 1. Business................................................ 1
Additional Item. Executive Officers of the Registrant 1
Item 2. Properties.............................................. 1
Item 3. Legal Proceedings....................................... 1
Item 4. Submission of Matters to a Vote of Security Holders..... 1
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 1
Item 6. Selected Financial Data................................. 1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 1
Item 7A. Quantitive and Qualitative Disclosures About Market Risk 2
Item 8. Financial Statements and Supplementary Data............. 2
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 2
PART III
Item 10. Directors and Executive Officers of the Registrant...... 2
Item 11. Executive Compensation.................................. 3
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 3
Item 13. Certain Relationships and Related Transactions.......... 3
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 4
SIGNATURES
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
- - -----------------
GENERAL
First Source Bancorp, Inc. (also referred to as the "Company") was
incorporated under Delaware law on December 15, 1997 at the direction of the
Board of Directors of First Savings Bank, SLA (the "Bank") and the Bank's mutual
holding company, First Savings Bancshares, MHC (the "MHC"). The Company was
formed in connection with the conversion and reorganization of the Bank and the
MHC into the stock holding company form of organization. As part of the
conversion and reorganization, the Company filed an application with the Office
of Thrift Supervision ("OTS") to become a savings and loan holding company and
acquire all of the assets and liabilities of the Bank. That application was
conditionally approved by the OTS on February 12, 1998. The Company also filed
a Registration Statement on Form S-1 with the Securities and Exchange Commission
("SEC") to register the Company's common stock, par value $.01, which was
declared effective by the SEC on February 11, 1998. The Company's common stock
will be exchanged for the Bank's outstanding common stock in an exchange
offering, and will be offered for sale to certain members of the public in a
subscription and community offering (collectively referred to as the
"Offerings").
The Offerings expire on March 30, 1998, and, assuming receipt of
stockholder and member approvals, the conversion and reorganization is expected
to be completed in April, 1998. Upon consummation of the transaction, the
Company will, through a series of steps, become the parent holding company of
the Bank, holding all of the Bank's issued and outstanding common stock.
Prior to completion of the conversion and reorganization, and as of
December 31, 1997, the Company was a shell corporation, with no assets, no
liabilities, no common stock outstanding and no operations. Therefore, the
Company has no information to report pursuant to Parts I or II hereof. The
Company's Board of Directors and executive officers are set forth under Part
III. Under Part IV, the Company has filed as an exhibit the Annual Report on
Form 10-K of First Savings Bank, SLA, which will become the Company's
significant subsidiary upon completion of the conversion and reorganization.
ITEM 2. PROPERTIES.
- - -------------------
The Company is located and will conduct its business at the Bank's main
office, located at 1000 Woodbridge Center Drive, Woodbridge, New Jersey. It
owns no properties. See Exhibit 99.0 for a discussion of the Bank's properties.
ITEM 3. LEGAL PROCEEDINGS.
- - --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- - ------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- - ------------------------------------------------------------------------------
None.
ITEM 6. SELECTED FINANCIAL DATA.
- - --------------------------------
None.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS.
--------------
None.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- - --------------------------------------------------------------------
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- - ----------------------------------------------------
None.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- - ------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- - --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- - ------------------------------------------------------------
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 Mr. Timpson and Dr. Akey, has a term of office expiring at the
first annual meeting of stockholders following consummation of the conversion
and reorganization. A second class, consisting of Messrs. Martin, McLaughlin
and Ruegger, has a term of office expiring at the second annual meeting of
stockholders, and a third class, consisting of Messrs. Mulkerin, Shein and
Burke, has a term of office expiring at the third annual meeting of
stockholders.
The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
NAME POSITIONS HELD WITH COMPANY
-------------------------- -------------------------------------
John P. Mulkerin President and Chief Executitve
Officer of the Bank and Company,
General Counsel of the Bank
Christopher P. Martin Executive Vice President, Chief
Operating and Financial Officer,
Corporate Secretary
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 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 below.
BIOGRAPHICAL INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
John P. Mulkerin is the President, Chief Executive Officer and a director
of the Company. He was named President and Chief Executive Officer and a member
of the Board of Directors of First Savings Bank, SLA 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 a director of
FSB Financial Corp., a wholly-owned subsidiary of the Bank. Mr. Mulkerin
<PAGE>
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, Corporate Secretary and a director of both the Company and
First Savings Bank, SLA. 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
Treasurer and a director of FSB Financial Corp.
Donald T. Akey, M.D. is a member of the Board of Directors of the Company
and First Savings Bank, SLA. He joined the Board of First Savings Bank, SLA 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 is a member of the Board of Directors of the Company and
First Savings Bank, SLA. He joined the Board of First Savings Bank, SLA 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 is a member of the Board of Directors of the Company
and First Savings Bank, SLA. He joined the Board of First Savings Bank, SLA 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 director of the Princeton Insurance
Company.
Philip T. Ruegger, Jr. is a member of the Board of Directors of the
Company and First Savings Bank, SLA. He joined the Board of First Savings Bank,
SLA 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.
Jeffries Shein is a member of the Board of Directors of the Company and
First Savings Bank, SLA. He joined the Board of First Savings Bank, SLA 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 is Chairman of the Company's Board of Directors. He was
appointed Chairman of the Board of Directors of First Savings Bank, SLA 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.
MEETINGS OF THE BOARD AND COMMITTEES OF THE BOARD
The Board of Directors conducts its business through meetings of the Board
and through activities of its committees. Since the Company's formation in
December 1997, the Board met once in 1997 for organizational purposes. The
Board of Directors of the Company maintains Audit, Nominating and Compensation
committees, none of which have met since December 1997.
ITEM 11. EXECUTIVE COMPENSATION.
- - --------------------------------
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- - ------------------------------------------------------------------------
None. The Company has not yet issued any stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- - --------------------------------------------------------
None.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- - --------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. All financial statements of the Company.
None
2. Financial Statements required by Item 8.
None
3. Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of First Source Bancorp, Inc.*
3.2 Bylaws of First Source Bancorp, Inc.*
4.0 Stock Certificate of First Source Bancorp, Inc.*
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 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 Supplement 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 between First Savings Bank, SLA and
certain executive officers*
10.13 Form of Change in Control between First Source Bancorp, Inc. and
certain executive officers*
10.14 Form of First Savings Bank, SLA Employee Severance Compensation
Plan*
11.0 Statement regarding computation of per share earnings**
12.0 Statements regarding computation of ratios**
21.0 Subsidiaries**
23.0 Consents of experts and counsel**
27.0 Financial Data Schedule**
99.0 Form 10-K of First Savings Bank, SLA (filed herewith)
(b) Reports on Form 8-K
None.
* Statement, and Pre-Effective Amendment No. 1, filed on December 19, 1997
and February 9, 1998, respectively, Registration No. 333-42757.
** Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FIRST SOURCE BANCORP, INC.
By: /s/ John P. Mulkerin
------------------------------------
John P. Mulkerin
DATED: March 25, 1998 President, Chief Executive
Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
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Name Title Date
- - ---- ----- ----
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/s/ John P. Mulkerin President, Chief Executive March 25, 1998
- - ---------------------------- Officer and Director
John P. Mulkerin (Principal Executive Officer)
/s/ Walter K. Timpson Chairman of the Board of March 25, 1998
- - ---------------------------- Directors
Walter K. Timpson
/s/ Harry F. Burke Director March 25, 1998
- - ----------------------------
Harry F. Burke
/s/ Jeffries Shein Director March 25, 1998
- - ----------------------------
Jeffries Shein
/s/ Donald T. Akey, M.D. Director March 25, 1998
- - ----------------------------
Donald T. Akey, M.D.
/s/ Keith H. McLaughlin Director March 25, 1998
- - ----------------------------
Keith H. McLaughlin
/s/ Philip T. Ruegger, Jr. Director March 25, 1998
- - ----------------------------
Philip T. Ruegger, Jr.
/s/ Christopher P. Martin Executive Vice President, March 25, 1998
- - ---------------------------- Chief Operating and
Christopher P. Martin Financial Officer and
Director
</TABLE>
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EXHIBIT 11
First Savings Bank, SLA
Computation of Earnings Per Share
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Year Ended December 31,
-----------------------
1997 1996
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Net income applicable to common stock
and common stock equivalents (in thousands) $ 9,295 $ 4,710
========== ==========
Basic Earnings Per Share
- - ------------------------
Average shares of common stock outstanding 7,916,932 7,828,399
========== ==========
Basic Earnings Per Share $1.17 $0.60
========== ==========
Diluted Earnings Per Share
- - --------------------------
Average shares of common stock outstanding 7,916,932 7,828,399
Common stock equivalents of stock options 90,383 155,400
========== ==========
8,007,315 7,983,799
========== ==========
Diluted Earnings Per Share $1.16 $0.59
========== ==========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
First Savings Bank, SLA:
We consent to incorporation by reference in the Registration Statements on Form
S-8 relating to the First Savings Bank, SLA 1992 Incentive Stock Option Plan and
the First Savings Bank, SLA 1992 Stock Option Plan for Outside Directors of our
report dated February 6, 1998, relating to the consolidated statements of
financial condition of First Savings Bank, SLA and Subsidiaries as of December
31, 1997 and 1996 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, 1997, which report is incorporated by reference in the
December 31, 1997 Annual Report on Form 10-K of First Savings Bank, SLA.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 26, 1998
<PAGE>
EXHIBIT 99.0
FORM 10-K OF FIRST SAVINGS BANK, SLA
FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE>
OFFICE OF THRIFT SUPERVISION
WASHINGTON, D.C. 20552
FORM 10-K
Annual Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act Of 1934
For the fiscal year ended DECEMBER 31, 1997
Office of Thrift Supervision File Number 05056
FIRST SAVINGS BANK, SLA
- - -------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
NEW JERSEY 22-3188940
- - -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NJ, 07095
- - -------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) had been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
issuer, based on the closing price of its Common Stock on March 19, 1998, as
quoted by the Nasdaq Stock Market, was approximately $134.9 million. Solely for
the purposes of this calculation, the shares held by directors and officers of
the registrant are deemed to be shares held by affiliates.
As of March 19, 1998, there were issued and outstanding 8,016,352 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
I. PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997. (PARTS I AND II).
<PAGE>
INDEX
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PAGE
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PART I
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Item 1. Business................................................................... 3
Item 2. Properties................................................................. 42
Item 3. Legal Proceedings.......................................................... 44
Item 4. Submission of Matters to a Vote of Security Holders ........................ 44
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 44
Item 6. Selected Financial Data..................................................... 44
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................. 44
Item 8. Financial Statements and Supplementary Data ................................ 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 44
PART III
Item 10. Directors and Executive Officers of the Registrant ......................... 45
Item 11. Executive Compensation...................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 52
Item 13. Certain Relationships and Related Transactions ............................. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and reports on Form 8-K............. 54
SIGNATURES
</TABLE>
2
<PAGE>
PART I
Item 1. Description of Business
- - -------------------------------
THE BANK
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, substantially all of the assets and 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 Public Stockholders'
ownership interest in the Bank increasing to 47.5% at that time. As of December
31, 1997, there were 8,016,352 shares of the Bank's Common Stock outstanding, of
which 3,881,539 shares, or 48.4%, were held by Minority Shareholders, and
4,134,813 shares, or 51.6%, were held by the Mutual Holding Company
On October 27, 1997, the Boards of Directors of the Bank and the Mutual Holding
Company adopted a Plan of Conversion and Reorganization (the "Plan"), which was
subsequently amended on December 16, 1997, January 28, 1998 and February 9,
1998. In December 1997, First Source Bancorp, Inc. (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 shares of the
Company's Common Stock 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 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. 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
February 4, 1998 (the "Members' 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 February 18, 1998, (the "Stockholders' Voting Record Date") at a special
meeting of stockholders called for the purpose of considering the Plan (the
"Stockholders' Meeting") to be held on April 2, 1998. 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 Bank's executive offices are currently located at 1000 Woodbridge Center
Drive, Woodbridge, New Jersey 07095. Its telephone number is (732) 726-9700.
THE MUTUAL HOLDING COMPANY
The Mutual Holding Company is a federally-chartered mutual holding company that
was formed as a result of the 1992 MHC Reorganization of the Bank.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
1992 MHC 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 funds
retained at the Mutual Holding Company, and to finance a loan to the Bank's
ESOP. At December 31, 1997, the Mutual Holding Company's assets consisted of a
51.6% ownership interest in the Bank, $520,000 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 totaling $546,000.
The Mutual Holding Company had liabilities of $22,000 at December 31, 1997, and
had net income for the year ended December 31,
3
<PAGE>
1997 of $14,000. 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.
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, 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 processing, overdraft sweep
accounts and express teller services. The Bank has hired an additional lending
officer 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,
1997 was $114.6 million, as compared to $55.2 million for the year ended
December 31, 1996. 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
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 are to attract low-cost
deposit accounts, primarily non-interest bearing checking, and also to maintain
its current core customers 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 RTC. The Bank has opened a new branch in its corporate headquarters,
and will actively seek opportunities as they present themselves.
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
4
<PAGE>
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
December 31, 1997, had total deposits of $27.6 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 closed in February 1998,
resulting in a decrease of $25.2 million in deposits.
MARKET AREA AND COMPETITION
The Bank has 16 branch offices in central New Jersey, after the sale discussed
above, 13 of which are located in Middlesex County, two 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-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, 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 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.
5
<PAGE>
The following selected financial and operating data are derived in part from and
should be read in conjunction with the consolidated financial statements of the
Bank and accompanying notes thereto presented in the Annual Report to
Stockholders.
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL HIGHLIGHTS
December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets........................................... $1,049,316 $987,115 $945,012 $798,350 $783,846
Loans receivable, net.................................. 588,500 509,627 457,756 415,902 415,010
Loans available for sale............................... -- 287 424 148 1,595
Investment securities.................................. 31,031 38,955 39,003 23,997 19,019
Investment securities available for sale............... 17,701 14,831 2,058 13,206 41,064
Other income-earning assets(1)......................... 14,095 9,278 24,151 10,066 9,967
Mortgage-backed securities, net........................ 207,157 252,383 288,143 283,263 244,187
Mortgage-backed securities available for sale.......... 147,137 120,797 89,339 24,367 28,314
Deposits............................................... 816,283 794,595 806,338 681,613 678,961
Borrowed funds......................................... 118,990 88,640 39,496 34,300 26,400
Stockholders' equity................................... 101,686 92,863 89,713 74,064 68,809
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income........................................ $73,222 $68,039 $64,573 $52,909 $54,665
Interest expense....................................... 41,183 37,264 35,691 25,135 26,448
------- ------- ------- ------- -------
Net interest income before provision for loan
losses.............................................. 32,039 30,775 28,882 27,774 28,217
Provision for loan losses............................... 1,200 550 310 300 1,200
------- ------- -------- -------- -------
Net interest income after provision for loan losses.. 30,839 30,225 28,572 27,474 27,017
Other operating income................................. 2,801 1,995 2,171 1,734 2,791
Operating expenses (2)................................. 18,863 24,701 17,830 16,021 15,551
------- ------- -------- -------- -------
Income before income taxes and accounting change....... 14,777 7,519 12,913 13,187 14,257
Income taxes........................................... 5,482 2,809 4,611 4,912 5,352
------- ------- -------- -------- -------
Income before accounting changes....................... 9,295 4,710 8,302 8,275 8,905
Cumulative effect of accounting changes(3)............. -- -- -- -- 398
------- ------- -------- -------- -------
Net income.......................................... $ 9,295 $ 4,710 $ 8,302 $ 8,275 $ 9,303
======= ======= ======== ======== =======
Basic earnings per share before cumulative effec
accounting changes (4)(5)........................... $ 1.17 $ 0.60 $ 1.06 $ 1.06 $ 1.14
Cumulative effect of accounting changes (3) (4)........ -- -- -- -- 0.05
------- ------- -------- -------- -------
Basic earnings per share after cumulative effect of
accounting changes (4)(5).............................. $ 1.17 $ 0.60 $ 1.06 $ 1.06 $ 1.19
======= ======= ======== ======== =======
Diluted earnings per share (4) (5)..................... $ 1.16 $ 0.59 $ 1.04 $ 1.03 $ 1.17
======= ======= ======== ======== =======
Dividends per share, as adjusted (4) (6) ............... $ 0.43 $ 0.33 $ 0.30 $ 0.27 $ 0.27
======= ======= ======== ======== =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS (4):
Return on average assets (2)(3)........................ 0.90% 0.49% 0.91% 1.04% 1.20%
Return on average stockholders' equity (2) (3)......... 9.58 5.12 10.14 11.63 14.70
Average stockholders' equity to average assets......... 9.34 9.52 8.95 8.92 8.19
Stockholders' equity to total assets................... 9.69 9.41 9.49 9.28 8.78
Interest rate spread................................... 2.80 2.88 2.77 3.26 3.40
Net interest margin (7)................................ 3.23 3.30 3.22 3.58 3.74
Operating expenses to average assets (8)............... 1.61 2.42 1.83 1.98 1.99
Net interest income before provision for loan
losses to operating expenses (8).................... 1.92x 1.32x 1.72x 1.76x 1.84x
Non-performing loans to loans receivable, net ......... 0.74% 0.94% 1.32% 2.17% 2.77%
Non-performing assets to total assets.................. 0.54 0.64 0.97 1.34 1.73
Allowance for loan losses to non-performing loans...... 140.74 110.58 86.90 63.52 51.09
Allowance for loan losses to non-performing assets .... 106.74 84.08 57.23 53.81 43.42
Allowance for loan losses to loans receivable, net..... 1.04 1.04 1.15 1.38 1.42
Dividend payout ratio (6).............................. 17.81 26.29 12.09 9.51 7.36
Average interest-earning assets to average
interest-bearing liabilities........................ 1.10x 1.11x 1.11% 1.10x 1.10x
Full service offices................................... 17(9) 16 17 15 15
================================================================================================================
</TABLE>
(1) Includes federal funds sold and investment in the stock of HLB-NY.
(2) Includes the effect of non-recurring items in 1997 and 1996. The non-
recurring item for 1997 was an impairment writedown of core deposit
goodwill totaling $1.3 million, or $867,000 net of tax. Non-recurring
items for 1996 included the Savings Association Insurance Fund ("SAIF")
assessment of $5.2 million, or $3.3 million net of tax, a writedown of
$334,000 of core deposit goodwill, and a provision for benefits payable as
a result of the passing of the Bank's long-time President.
(3) Reflects the implementation of Statement of Financial Accounting Standards
("SFAS") No. 106 Accounting for Postretirement Benefits and FAS No. 109 -
Accounting for Income Taxes.
(4) Per share data reflects a 10% stock dividend 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.
(5) Earnings per share amounts have been adjusted to reflect the adoption of
SFAS No. 128 "Earnings Per Share."
(6) Excludes shares owned by the MHC, for which cash dividends were waived with
regulatory approval, after giving effect to prior stock dividends and
split.
(7) Calculation is based upon the net interest income before provision for loan
losses divided by average interest-earning assets.
(8) For purposes of calculating these ratios, operating expenses is equal to
total operating expenses less amortization of intangibles.
(9) On February 26, 1998, the Bank sold the branch deposits of its Eatontown
location. These deposits totaled $25.2 million.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income also
depends on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
7
<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>
Years Ended December 31,
At December 31, --------------------------------------
1997 1997
----------------------- --------------------------------------
Yield/ Average Average
Balance Cost Balance Interest Yield/ Cost
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Loans receivable, net (1)......................... $ 588,500 7.78 $ 551,114 $43,622 7.92%
Mortgage-backed securities, net................... 207,157 7.32 236,372 16,333 6.91
Investment securities ............................ 31,031 7.13 39,788 3,009 7.56
Investment and mortgage-backed securities,
and loans available for sale (5).............. 164,838 6.70 149,507 9,299 6.22
Other interest-earning investments (2)............ 14,095 6.26 16,417 959 5.84
---------- ---------- -------
Total interest-earning assets 1,005,621 7.47 993,198 73,222 7.37
---------- ---------- -------
Non-interest earning assets ......................... 43,695 45,325
---------- ----------
Total assets ......................................... $1,049,316 $1,038,523
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW and money market accounts .................... 201,559 2.91 193,763 5,579 2.88
Passbook and statement savings ................... 122,546 2.51 127,744 3,253 2.55
Certificate accounts ............................. 465,738 5.54 464,151 25,329 5.46
Borrowed funds ................................... 118,990 6.03 114,574 7,022 6.13
---------- ---------- -------
Total interest-bearing liabilities............ 908,833 4.61 900,232 41,183 4.57
---------- ---------- -------
Non-interest bearing deposits........................ 26,440 21,864
Other liabilities ................................... 12,357 19,125
---------- ----------
Total liabilities ................................... 947,630 941,221
---------- ----------
Stockholders' equity ................................ 101,686 97,302
---------- ----------
Total liabilities and stockholders' equity........... $1,049,316 $1,038,523
========== ==========
Net interest income/interest rate spread (3)......... 2.85% 32,039 2.80%
==== ======= ====
Net interest-earning assets/net interest rate
margin(4)...................................... $ 92,966 3.23%
========== ====
Ratio of interest-earning assets to 1.10x
interest-bearing liabilities...................
</TABLE>
<TABLE>
<CAPTION>
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 $35,256 7.70%
Mortgage-backed securities, net................... 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 (5).............. 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 25,356 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 rate
margin(4)...................................... $ 89,863 3.30% $ 90,467 3.22%
========== ===== ======== ====
Ratio of interest-earning assets to
interest-bearing liabilities................... 1.11x 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 yield 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.
(5) Average assets available for sale are calculated using the average market
value of such assets.
8
<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 interet-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 indiucated.
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 the
volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Compared to
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------------------------------------ --------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------- ----------------------------
Volume Rate Net Volume Rate Net
----------- ------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net ............... $ 5,026 $ - $ 5,026 $ 2,329 $1,022 $ 3,351
Mortgage-backed securities, net..... (3,147) 333 (2,814) (3,387) 394 (2,993)
Investment securities............... 227 41 268 (558) 128 (430)
......................
Investment and mortgage-backed
securities and loans available
for sale......................... 3,004 93 3,097 3,597 88 3,685
Other interest-earning investments.. (415) 21 (394) 162 (309) (147)
------- ----- ------- ------- ------ -------
Total ............................ 4,695 488 5,183 2,143 1,323 3,466
------- ----- ------- ------- ------ -------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and money market accounts..... 439 18 457 (46) 78 32
Passbook and statement savings.... (289) 28 (261) (27) (27) (54)
Certificates accounts............. (255) 328 73 819 (560) 259
------- ----- ------- ------- ------ -------
Borrowed funds.................... 3,633 17 3,650 1,322 14 1,336
------- ----- ------- ------- ------ -------
Total ............................ 3,528 391 3,919 2,068 (495) 1,573
------- ----- ------- ------- ------ -------
Net Change interest income............ $ 1,167 $ 97 $ 1,264 $ 75 $1,818 $1,893
======= ===== ======= ======= ====== =======
</TABLE>
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,
9
<PAGE>
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.
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 December 31, 1997, as
calculated by the OTS. As the table shows, increases in 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.
10
<PAGE>
<TABLE>
<CAPTION>
NPV AS A % OF PORTFOLIO
CHANGES IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES -------------------------------------------------------------------------------------------------
IN BASIS POINTS NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
- - ------------------------------------------------------------------------------------------------------------------
(Dollars in tousands)
<S> <C> <C> <C> <C> <C>
+400 $ 62,985 $(56,560) (47)% 6.44% (479)
+300 80,222 (39,323) (33) 8.00 (323)
+200 96,383 (23,162) (19) 9.39 (183)
+100 110,100 (9,445) (8) 10.51 (72)
Static 119,545 - - 11.23 -
-100 123,826 4,281 4 11.49 27
-200 123,707 4,162 3 11.39 16
-300 124,681 5,136 4 11.37 15
-400 128,191 8,646 7 11.56 33
</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.
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 December 31, 1997, the Bank's loan portfolio
totalled $594.2 million, of which $488.9 million, or 82.3% were one- to four-
family residential mortgage loans. At that date, the Bank's loan portfolio also
included $42.2 million of home equity loans and lines of credit generally
secured by second liens on one- to four-family residential properties, $17.6
million of construction loans, $32.6 million of commercial real estate loans,
and $6.2 million of multi-family residential mortgage loans, which represented
7.1%, 3.0%, 5.5% and 1.0%, respectively, of total loans receivable. Of the
mortgage loan portfolio outstanding at that date, 36.2% were fixed-rate loans
and 63.8% 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 $6.7 million, or 1.1% of total loans outstanding at December 31,
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 December 31, 1997, the Bank's servicing portfolio was $93.7 million.
The Bank also invests in mortgage-backed securities and other mortgage-backed
products such as collateralized mortgage obligations ("CMOs"). At December 31,
1997, mortgage-backed securities aggregated $354.3 million, or 33.7% of total
assets, of which 66.7% were secured by ARM loans. The
11
<PAGE>
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 $56.4 million, or 16.0% of the Bank's total
mortgage-backed securities portfolio at December 31, 1997, the majority of which
were backed or guaranteed by federal agencies. At December 31, 1997, the Bank
had $207.2 million in mortgage-backed securities held for investment, $4.0
million of which had contractual 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
Deceember 31, 1997, mortgage-backed securities available for sale had an
amortized cost of $146.3 million and a market value of approximately $147.1
million.
12
<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,
------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------
Percent Percent Amount Percentnt
Amount of Total Amount of Total of Totalal
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Mortgage loans(1):
One-to-four family........................... $488,863 82.27% $428,463 83.14% $390,641 84.20%
Home equity loans ........................... 42,185 7.10 39,140 7.60 33,456 7.21
Construction (2)............................. 17,608 2.96 12,871 2.50 7,612 1.64
Commercial real estate....................... 32,604 5.49 21,209 4.11 17,322 3.73
Multi-family................................. 6,204 1.04 7,876 1.53 9,675 2.09
A.I.D. (3)................................... - - - - 165 0.04
-------- ------ -------- ------ -------- -----
Total mortgage loans....................... 587,464 98.87 509,559 98.88 458,871 98.91
Other loans................................... 6,725 1.13 5,772 1.12 5,055 1.09
-------- ------ -------- ------ -------- -----
Total loans receivable .................... 594,189 100.00% 515,331 100.00% 463,926 100.00%
====== ====== ======
Less:
Net deferred loan fees (costs)and
(premiums) and discounts .................... (408) 95 499
Allowance for loan losses..................... 6,097 5,322 5,247
-------- -------- --------
Total loans receivable, net ............... $588,500 $509,914 $458,180
======== ======== ========
Mortgage loans:
ARM.......................................... $374,704 63.78% $309,600 60.76% $275,109 59.95%
Fixed-rate................................... 212,760 36.22 199,959 39.24 183,762 40.05
-------- ------ -------- ------ -------- -----
Total mortgage loans ...................... $587,464 100.00% $509,559 100.00% $458,871 100.00%
======== ====== ======== ====== ======== ======
Mortgage-backed securities (4):
CMOs......................................... $ 56,355 16.05% $ 40,095 10.81% $ 65,399 17.41%
FHLMC........................................ 208,018 59.22 248,525 67.00 259,994 69.22
GNMA......................................... 17,505 4.98 27,999 7.54 31,570 8.41
FNMA......................................... 69,380 19.75 54,339 14.65 18,644 4.96
-------- ------ -------- ------ -------- -----
Total mortgage-backed securities ......... 351,258 100.00% 370,958 100.00% 375,607 100.00%
====== ====== ======
Net premiums and (discounts) ................. 2,245 2,094 1,634
Net unrealized gain (loss) on mortgage-
backed securities available for sale......... 791 128 241
-------- -------- --------
Net mortgage-backed securities ............... $354,294 $373,180 $377,482
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1994 1993
-----------------------------------------------------
Percent Percent
Amount of Total Amount of Total
-----------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Mortgage loans(1):
One-to-four family........................... $363,449 85.98% $366,914 86.56%
Home equity loans ........................... 30,768 7.28 27,676 6.53
Construction (2)............................. 3,177 0.75 3,920 0.92
Commercial real estate....................... 13,370 3.16 12,559 2.96
Multi-family................................. 7,779 1.84 7,335 1.73
A.I.D. (3)................................... 178 0.04 191 0.05
-------- ------ -------- ------
Total mortgage loans....................... 418,721 99.05 418,595 98.75
Other loans................................... 4,027 0.95 5,306 1.25
-------- ------ -------- ------
Total loans receivable .................... 422,748 100.00% 423,901 100.00%
====== ======
Less:
Net deferred loan fees (costs)and
(premiums) and discounts .................... 953 1,397
Allowance for loan losses..................... 5,745 5,899
-------- --------
Total loans receivable, net ............... $416,050 $416,605
======== ========
Mortgage loans:
ARM.......................................... $242,499 57.91% $240,424 57.44%
Fixed-rate................................... 176,222 42.09 178,171 42.56
-------- ------ -------- ------
Total mortgage loans ...................... $418,721 100.00% $418,595 100.00%
======== ====== ======== ======
Mortgage-backed securities (4):
CMOs......................................... $ 81,009 26.30% $ 74,523 27.64%
FHLMC........................................ 198,377 64.41 166,245 61.66
GNMA......................................... 10,029 3.26 13,578 5.04
FNMA......................................... 18,573 6.03 15,280 5.67
-------- ------ -------- ------
Total mortgage-backed securities ......... 307,988 100.00% 269,626 100.00%
====== ======
Net premiums and (discounts) ................. 1,153 2,238
Net unrealized gain (loss) on mortgage-
backed securities available for sale......... (1,511) 637
-------- --------
Net mortgage-backed securities ............... $307,630 $272,501
======== ========
</TABLE>
(1) Includes $287,000, $424,000, $148,000 and $1.6 million in mortgage loans
available for sale at December 31, 1996, 1995, 1994 and 1993, respectively. No
loans were available for sale at December 31, 1997.
(2) Net of loans in process of $26.7 million, $12.3 million, $3.8 million, $3.9
million and $6.3 million at December 31, 1997, 1996, 1995, 1994 and 1993,
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 $147.1 million, $120.8 million, $89.3 million, $24.4 million and
$28.3 million in mortgage-backed securities available for sale at
December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
13
<PAGE>
The following table sets forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (1):
At beginning of period............................. $ 504,142 $453,125 $412,023
Mortgage loans originated;
One-to four-family ............................. 110,323 99,956 75,505
Home equity loans............................... 15,052 15,290 10,679
Construction.................................... 15,168 5,258 5,262
Commercial real estate ......................... 12,915 4,943 5,043
Multi-family.................................... 167 1,650 1,976
--------- -------- --------
Total mortgage loans originated.............. 153,625 127,097 98,465
Mortgage loans purchased .......................... 10,733 10,118 5,181
Total mortgage loans originated and purchased...... 164,358 137,215 103,646
Mortgage loans sold ............................... (4,993) (6,932) (6,343
Principal repayments............................... (79,901) (76,585) (51,385
Net increase in premiums and deferred loan costs... 502 404 454
Provision for loan losses.......................... (1,200) (550) (310
Mortgage loans transferred to real estate owned.... (1,133) (2,535) (4,960
--------- -------- --------
At end of period................................... $ 581,775 $504,142 $453,125
========= ======== ========
Other loans
At beginning of period............................. $ 5,772 $ 5,055 $ 4,027
Other loans originated............................. 4,924 3,835 3,828
Principal repayments............................... (3,971) (3,118) (2,800
--------- -------- --------
At end of period................................... $ 6,725 $ 5,772 $ 5,055
========= ======== ========
Mortgage-backed securities (2):
At beginning of period............................. $ 373,180 $377,482 $307,630
Mortgage-backed securities purchased .............. 198,303 191,327 215,292
Mortgage-backed securities sold ................... (126,583) (96,147) (81,792
Accretion/(amortization) of discount/(premium) .... 55 (977) (615
Net change in unrealized gain (loss) on mortgage- 663 (113) 1,752
backed securities available for sale...........
Principal repayments............................... (91,324) (98,392) (64,785
--------- -------- --------
At end of period................................... $ 354,294 $373,180 $377,482
========= ======== ========
- - -------------------
</TABLE>
(1) Includes $287,000 and $424,000 in mortgage loans available for sale at
December 31, 1996 and 1995, respectively. There were no loans available for
sale at December 31, 1997.
(2) Includes $147.1 million, $120.7 million and $89.1 million in mortgage-backed
securities available for
sale at December 31, 1997, 1996 and 1995, respectively.
14
<PAGE>
LOAN MATURITY AND REPRICING. The following table shows the maturity or period
to repricing of the Bank's loan portfolio at December 31, 1997. Loans that have
adjustable rates are shown as being due in the period during which the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal amortization.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------------------------
One Year One Year Three Five Years Ten Years Twenty Total
or Less to Three Years to to Ten to Twenty Years or
Years Five Years Years Years More
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Mortgage loans:
One- to four- family..... $ 98,415 $ 95,711 $108,986 $ 96,773 $ 75,627 $13,351 $488,863
Equity loans............. 13,617 1,017 5,384 9,482 12,685 - 42,185
Construction (1)......... 17,608 - - - - - 17,608
Commercial real estate... 3,214 5,871 2,219 3,146 15,796 2,358 32,604
Multi-family............. - 351 4,513 694 646 - 6,204
------------------------------------------------------------------------------------------------
Total mortgage loans... 132,854 102,950 121,102 110,095 104,754 15,709 587,464
Other loans................ 3,683 1,825 732 118 367 - 6,725
------------------------------------------------------------------------------------------------
Total loans............ $136,537 $104,775 $121,834 $110,213 $105,121 $15,709 $594,189
================================================================================================
Net deferred loan costs and unearned premiums ............................................................. 408
Allowance for loan losses ................................................................................. (6,097)
--------------
Loans receivable, net...................................................................................... $588,500
==============
- - ---------------------------
(1) Net of loans in process of $26.7 million.
</TABLE>
The following table sets forth at December 31, 1997 the dollar amount of loans
contractually due or repricing after December 31, 1998, and whether such loans
have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due or reprice after December 31, 1998
----------------------------------------------------------
Fixed Adjustable Total
-------------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans
One- to four-family........................ $155,935 $234,513 $390,448
Multi-family............................... 159 6,045 6,204
Equity loans............................... 28,568 - 28,568
Commercial real estate..................... 25,512 3,878 39,390
Other loans................................... 3,042 - 3,042
----------------------------------------------------------
Total loans receivable........................ 213,216 244,436 457,652
Mortgage-backed securities (1) ............... 116,575 233,690 350,265
----------------------------------------------------------
Total loans receivable and mortgage-
backed securities......................... $329,791 $478,126 $807,917
==========================================================
- - ---------------------------
(1) Includes $147.1 million in mortgage-backed securities available for sale, at amortized cost.
</TABLE>
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
15
<PAGE>
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 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 December 31, 1997, 82.3% 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
December 31, 1997, the Bank had $28.6 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, at a minimum of $100.00 plus interest, based upon a 10, 15 or 20 year
amortization period. Generally, the interest rate charged is the prime rate of
interest (as published in The Wall Street Journal)
16
<PAGE>
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 Decemember 31, 1997 totalled $13.6 million with
additional available credit lines of $14.3 million.
Construction Lending. At December 31, 1997, construction loans totalled $17.6
million, or 3.0%, 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 $26.7 million at December 31, 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 $6.0 million. At December 31, 1997, the Bank had 21
construction loans, seven of which had a principal balance outstanding of $1.0
million or more, with the largest loan balance being $3.6 million. At December
31, 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 December 31, 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 December 31, 1997, the Bank had 56 loans secured by
commercial real estate, totaling $32.3 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 December 31,
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 the
Bank's portfolio are secured by properties located within New Jersey.
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 December 31, 1997, as its
maximum commercial real estate loan amount.
17
<PAGE>
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 December 31, 1997, $6.2 million, or 1.0%, of the
Bank's total loan portfolio consisted of multi-family residential loans. A
significant portion 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 December 31, 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 December 31, 1997,
totaling $2.2 million, which are secured by four senior citizen complexes.
Other Lending. The Bank also offers other loans, primarily loans secured by
savings accounts and commercial, business, personal and automobile loans. At
December 31, 1997, $6.7 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 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.
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 $93.7 million and $101.2 million of mortgage loans for others at
December 31, 1997 and 1996, respectively. The Bank received $288,000 and
$325,000 in servicing fees for the years ended December 31, 1997 and 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
18
<PAGE>
rights. As a part of 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 December 31, 1997, the Bank did not have any mortgage loans classified as
available for sale. Mortgage loans sold totalled $5.0 million and $6.9 million
for the years ended December 31, 1997 and 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 $10.7 million and $10.1 million in mortgage loans from third-party
correspondents for the years ended December 31, 1997 and 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 purchased 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 $4.3 million at
December 31, 1997, from $4.7 million at December 31, 1996. At December 31, 1997,
one- to four-family loans delinquent 90 days or more consisted of 44 loans.
There can be no assurances, however, that such declines will continue, or that
increases will not occur.
19
<PAGE>
At December 31, 1997, 1996 and 1995, delinquencies in the Bank's loan portfolio
were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------- ----------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------- --------------------- --------------------- ---------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family................. 22 $2,178 46 $4,303 29 $2,505 53 $4,731
Home equity loans................... 1 23 2 29 3 100 2 78
-------- --------- -------- --------- -------- --------- -------- ---------
Total mortgage loans............ 23 2,201 48 4,332 32 2,605 55 4,809
Other loans......................... - - - - - - 2 4
-------- --------- -------- --------- -------- --------- -------- ---------
Total loans..................... 23 $2,201 48 $4,332 32 $2,605 57 $4,813
======== ========= ======== ========= ======== ========= ======== =========
Delinquent loans to total
loans receivable, net (1)....... 0.37% 0.74% 0.51% 0.94%
========= ========= ========= =========
<CAPTION>
1995
----------------------------------------------
60-89 Days 90 Days or More
--------------------- ---------------------
Number Principal Number Principal
of Loans Balance of Loans Balance
-------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family................. 44 $3,284 53 $5,848
Home equity loans................... 1 5 4 190
-------- --------- -------- ---------
Total mortgage loans............ 45 3,289 57 6,038
Other loans......................... 2 90 - -
-------- --------- -------- ---------
Total loans..................... 47 $3,379 57 $6,038
======== ========= ======== =========
Delinquent loans to total
loans receivable, net (1)....... 0.74% 1.32%
========= =========
- - ------------------------------------
(1) Total loans receivable, net includes loans available for sale.
</TABLE>
20
<PAGE>
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more, and REO. At December 31, 1997, REO totaled $1.4
million and consisted of 13 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 year ended
December 31, 1997, the amount of additional interest income that would have been
recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual terms was $326,000.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Non-accrual mortgage loans ......... $3,735 $4,716 $5,838 $ 8,636 $10,631
Non-accrual other loans ............ - 4 - 160 453
Total non-accrual loans ...... 3,735 4,720 5,838 8,796 11,084
-------------- ------------ ----------- ------------ ------------
Loans 90 days or more delinquent
and still accruing .............. 597 93 200 248 463
Total non-performing loans... 4,332 4,813 6,038 9,044 11,547
-------------- ------------ ----------- ------------ ------------
Total real estate owned, net of
related allowance for loss .. 1,380 1,517 3,131 1,633 2,039
-------------- ------------ ----------- ------------ ------------
Total non-performing assets ........ $5,712 $6,330 $9,169 $10,677 $13,586
============== ============ ============ ============ ============
Non-performing loans to total loans
receivable, net.................. 0.74% 0.94% 1.32% 2.17% 2.77%
Total non-performing assets to total
assets.......................... 0.54% 0.64% 0.97% 1.34% 1.73%
</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.
21
<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 December 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
Special mention ........................... $ 698 $ 290 $1,348
Classified Assets
Substandard assets ........................ 6,279 6,037 6,287
Doubtful assets ........................... 41 167 253
----------------- ----------------- -----------------
Total special mention and
classified assets .................. $7,018 $6,494 $7,888
================= ================= =================
</TABLE>
As of December 31, 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 $1.2 million and $550,000 in provision for loan losses for the
years ended December 31, 1997 and 1996, respectively. The Bank determined, after
performing its asset classification review, that the allowance was adequate and
within industry standards. At December 31, 1997, the total allowance was $6.1
million, which amounted to 1.0% of loans receivable, net and 106.7% of non-
performing 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>
For the Years Ended December 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ... $5,322 $5,247 $ 5,745 $5,899 $ 5,751
Provision for loan losses......... 1,200 550 310 300 1,200
Charge-offs....................... (425) (585) (1,044) (490) (1,087)
Recoveries........................ 110 236 36 35
-------------- -------------- -------------- -------------- --------------
Balance at end of period.......... $6,097 $5,322 $ 5,247 $5,745 $ 5,899
============== ============== ============== ============== ==============
</TABLE>
22
<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 December 31,
-------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance to Each Allowance to Each
Total Category to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ ------------ ----------- ------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............................. $3,483 57.13% 82.28% $3,641 68.42% 83.14%
Equity loans.................................... 458 7.51 7.10 437 8.21 7.60
Construction.................................... 894 14.66 2.96 577 10.84 2.50
Commercial real estate.......................... 572 9.38 5.49 347 6.52 4.49
Multi-family.................................... 109 1.79 1.04 89 1.67 1.15
------ ------------ ----------- ------ ------------ -----------
Total mortgage loans........................... 5,516 90.47 98.87 5,091 95.66 98.88
Consumer loans.................................. 193 3.17 1.13 174 3.27 1.12
Other........................................... 65 1.07 - 13 0.24 -
Unallocated..................................... 323 5.30 - 44 0.83 -
------ ------------ ----------- ------ ------------ -----------
Total allowance for loan losses................ $6,097 100.00% 100.00% $5,322 100.00% 100.00%
====== ============ =========== ====== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------ ------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Percent of Each Percent of Each Percent of Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ ---------- ---------- ------ ---------- ---------- ------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ........... $3,842 73.22% 84.20% $4,408 76.73% 85.98% $4,238 71.84% 86.56%
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%
====== ========== ========== ====== ========== ========== ====== ========== ==========
</TABLE>
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which, in general, are passed from the mortgage originators, through
intermediaries that pool and repackage the participation interest in the form of
securities, to investors such as the Bank. Such intermediaries may be private
issuers, or agencies of the U.S. Government, including Freddie Mac, FNMA and
GNMA that guarantee the payment of principal and interest to investors.
23
<PAGE>
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed- or ARM loans.
Mortgage-backed securities are generally referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgages (e.g., fixed-rate or
adjustable-rate) as well as prepayment, default and other risks associated with
the underlying mortgages (see "Lending Activities") are passed on to the
certificate holder. The life of a mortgage-backed pass-through security is
equal to the life of the underlying mortgage(s).
The actual maturity of a mortgage-backed security varies, depending on when the
mortgagors repay or prepay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the security, thereby affecting its
yield to maturity and the related market value of the mortgage-backed security.
The yield is based upon the interest income and the amortization of the premium
or discount related to the mortgage-backed security. Premiums and discounts are
amortized over the anticipated life of the loans. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield calculation of the mortgage-backed security, and
these assumptions are reviewed periodically to reflect the actual prepayment.
The actual prepayments of the underlying mortgages depend on many factors,
including the type of mortgages, the coupon rates, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages, general levels of market interest rates, and general economic
conditions. GNMA mortgage-backed securities that are backed by assumable
Federal Housing Authority ("FHA") or Veterans Administration ("VA") loans
generally have a longer life than conventional non-assumable loans underlying
Freddie Mac and FNMA mortgages-backed securities. The difference between the
interest rates on the underlying mortgages and the prevailing mortgage interest
rates is an important determinant in the rate of prepayments. During periods of
falling mortgage interest rates, prepayments generally increase, as opposed to
periods of increasing interest rates whereby prepayments generally decrease. If
the interest rate of underlying mortgages significantly exceeds the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages.
Prepayment experience is more difficult to estimate for adjustable-rate
mortgage-backed securities, both convertible and non-convertible.
The Bank has significant investments in mortgage-backed securities and has
utilized such investments to complement its mortgage lending activities. At
December 31, 1997, mortgage-backed securities, net, including those available
for sale, totaled $354.3 million, or 33.8% of total assets. The market value of
such securities totaled approximately $357.8 million at December 31, 1997. The
Bank invests in a large variety of mortgage-backed securities, including ARM,
balloon and fixed-rate mortgage-backed securities, the majority of which are
directly insured or guaranteed by Freddie Mac, GNMA and FNMA. At such date, the
mortgage-backed securities portfolio had a weighted average interest rate of
7.09%. Fixed coupon rates ranged from 7.50% to 9.00% for GNMA, 6.00% to 10.00%
for Freddie Mac, 6.00% to 8.00% for FNMA fixed-rate securities and 5.37% to
9.00% for fixed-rate CMOs. Variable rate coupon ranges were as follows: 7.00%
to 7.38% for GNMA ARM mortgage-backed securities; 6.43% to 8.70% for Freddie Mac
ARM mortgage-backed securities; 6.50% to 7.96% for FNMA ARM mortgage-backed
securities; and 5.82% to 6.95% for adjustable rate CMOs.
Included in the total mortgage-backed securities portfolio are CMOs which had an
amortized cost of $56.4 million. The Bank generally purchases short-term,
straight sequential or planned amortization class ("PAC") CMOs. CMOs are
securities created by segregating or portioning cash flows from mortgage pass-
through securities or from pools of mortgage loans. CMOs provide a broad range
of mortgage investment vehicles by tailoring cash flows from mortgages to meet
the varied risk and return preferences of investors. These securities enable
the issuer to "carve up" the cash flow from the underlying securities and
thereby create multiple classes of securities with different maturity and risk
characteristics. The CMOs and other mortgage-backed securities in which the
Bank invests may have a multi-class structure ("Multi-Class Mortgage
Securities"). Multi-Class Mortgage Securities issued by private issuers may be
collateralized by pass-through securities guaranteed by GNMA or issued by FNMA
or Freddie Mac, or
24
<PAGE>
they may be collateralized by whole loans or pass-through mortgage-backed
securities of private issuers. Each class has a specified maturity or final
distribution date. In one structure, payments of principal, including any
principal prepayments, on the collateral are applied to the classes in the order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class until all classes having an
earlier stated maturity or final distribution date have been paid in full. In
other structures, certain classes may pay concurrently, or one or more classes
may have a priority with respect to payments on the underlying collateral up to
a specified amount. The Bank's funds have not and will not be invested in any
class with residual characteristics. The weighted average life of CMOs at
December 31, 1997, was 2.64 years. The stated weighted average contractual
maturity of the Bank's CMOs, at December 31, 1997, was 21.6 years.
The Bank only purchases CMOs and mortgage-backed securities that are rated "AA"
or higher at the time of purchase. Prior to purchasing CMOs, each security is
tested for Federal Financial Institutions Examination Council ("FFIEC")
qualification. FFIEC qualification is no longer a regulatory requirement,
however, the Bank continues to adhere to these requirements as part of its
investment policy. A large percentage of the fixed-rate CMOs purchased have
projected average durations of three years or less using current market
prepayment assumptions prevalent at the time of purchase and projected average
durations that do not exceed nine years in the event of a 300 basis point
increase in market rates of interest. The Bank receives a detailed analysis
from the broker/dealer or from the Bloomberg System on each security.
Management believes that the Bank is currently in full compliance with OTS
guidelines governing securities, including Thrift Bulletin ("TB") 52, which
became effective February 10, 1992. Among other things, TB 52 sets forth
certain guidelines with respect to depository institutions' investments in
certain "high-risk mortgage securities" that are not suitable investments.
"High-risk mortgage securities" are defined as any mortgage derivative product
that at the time of purchase, or at any subsequent date, meets any of the
following three tests: (i) the expected remaining weighted average life (i.e.,
the expected time until repayment of principal on a mortgage-backed security) of
the security exceeds 10 years; (ii) the expected remaining weighted average
life of the security extends by more than four years in the event of an
immediate and sustained parallel shift in the yield curve of plus 300 basis
points; (iii) the expected remaining weighted average life of the security
shortens by more than six years in the event of an immediate and sustained
parallel shift in the yield curve of negative 300 basis points; or (iv) the
estimated change in the price of the security is more than 17% in the event of
an immediate and sustained paralleled shift in the yield curve of plus or minus
300 basis points. Additionally, floating-rate tranches that are tied to a
conventional widely-used index are subject to reflecting the impact on lifetime
caps and floors. High-risk mortgage securities may be purchased only in limited
circumstances, and if held in portfolio, must be reported as either trading
securities or as available for sale securities. As of December 31, 1997, the
Bank had no securities that qualified as "high risk" mortgage securities under
TB 52, subsequent to their acquisition.
The amortized cost and market value of mortgage-backed securities held to
maturity at December 31, 1997 and 1996, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities due to borrowers
having the right to call or prepay obligations, with or without penalties.
25
<PAGE>
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
AMORTIZED MARKET Amortized MARKET
COST VALUE Cost VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Mortgage-backed securities held to
maturity due in:
Less than one year................. $ 4,029 $ 4,113 $ 13,678 $ 13,761
One year through five years........ 15,184 15,303 24,723 24,941
Five years through ten years....... 16,087 16,326 17,643 17,818
Greater than ten years............. 171,857 174,941 196,339 198,532
------------ ------------ ------------ ------------
$207,157 $210,683 $252,383 $255,052
============ ============ ============ ============
Mortgage-backed securities available
for sale due in:
Less than one year................. $ 0 $ 0 $ 0 $ 0
One year through five years........ 1,377 1,362 1,667 1,635
Five years through ten years....... 22,704 22,862 7,010 6,947
Greater than ten years............. 122,265 122,913 111,993 112,215
------------ ------------ ------------ ------------
$146,346 $147,137 $120,670 $120,797
============ ============ ============ ============
</TABLE>
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 held to maturity,
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 December 31, 1997, the Bank had investment securities held to
maturity in the aggregate amount of $31.0 million, with a market value of $31.2
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 $77.5 million in
amortized cost of investment and mortgage-backed securities from held to
maturity to available for sale. The net unrealized loss after tax effect as of
the date of the transfer was $40,000. At December 31, 1997, investment
securities available for sale had a net unrealized gain of $27,000.
Investments Available for Sale. The Bank maintains a portfolio of investments
available for sale to minimize 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
26
<PAGE>
available for sale investments is reviewed and priced at least monthly. As of
December 31, 1997, the market value of investment securities available for sale
was $17.7 million, with an amortized cost basis of $17.7 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 3.61 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 December 31, 1997, $39.7 million, or 81.4% of the total
investment portfolio, including securities available for sale, were callable.
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 December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Investment securities held to maturity:
U.S. Government and agency
obligations.......................... $28,966 $29,083 $38,955 $38,980 $39,003 $39,617
State obligations..................... 2,065 2,067 - - - -
------- ------- ------- ------- ------- -------
Total investment securities
held to maturity ................... $31,031 $31,150 $38,955 $38,980 $39,003 $39,617
======= ======= ======= ======= ======= =======
Investment securities available for sale:
U.S. Government and agency
obligations.......................... $12,976 $13,016 $12,964 $12,836 $ 1,000 $ 996
Corporate obligations................. 4,698 4,685 2,000 1,995 1,041 1,062
------- ------- ------- ------- ------- -------
Total investment securities
Available for sale ................. $17,674 $17,701 $14,964 $14,831 $ 2,041 $ 2,058
======= ======= ======= ======= ======= =======
Other income-earning investments:
Federal Funds sold.................... $ 6,050 $ 6,050 $ 1,850 $ 1,850 $17,875 $17,875
FHLB-NY stock......................... 8,045 8,045 7,428 7,428 6,276 6,276
------- ------- ------- ------- ------- -------
Total other income-earning
investments ........................ $14,095 $14,095 $ 9,278 $ 9,278 $24,151 $24,151
======= ======= ======= ======= ======= =======
</TABLE>
27
<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 December 31, 1997.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------
More than One Year to More than Five Years to
One Year or Less Five Years 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.................. $ - -% $ 11,991 6.77% $ 13,976 7.32%
State obligations............... - - 600 6.26 585 6.53
---------- --------- ----------- ---------- ---------- -----------
Total investment securities held
To maturity.................. $ - -% $ 12,591 6.75% $ 14,561 7.29%
========== ========= =========== ========== ========== ===========
Investment securities available for
sale:
U.S. Government and agency
obligations.................. $ - -% $ 9,976 6.22% $ 3,000 6.75%
Corporate obligations........... 2,698 4.93 2,000 5.79 - -
---------- --------- ----------- ---------- ---------- -----------
Total investment securities
available
For sale....................... $ 2,698 4.93% $ 11,976 6.15% $ 3,000 6.75%
========== ========= =========== ========== ========== ===========
Other income-earning investments:
Federal funds sold.............. $ 6,050 5.20% $ - -% $ - -%
FHLB-NY stock (1)............... 8,045 7.05 - - - -
---------- --------- ----------- ---------- ---------- -----------
Total other income-earning
Investments.................. $ 14,095 6.26% $ - -% $ - -%
========== ========= =========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
More than Ten Years Total
----------------------- ----------------------------------------------
Weighted Average Weighted
Amortized Average Life in Amortized Market Average
Cost Yield Years Cost Value Yield
---------- ----------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to
maturity:
U.S. Government and agency
obligations.................. $ 2,999 8.02% 6.28 $ 28,966 $ 29,083 7.16%
State obligations............... $ 880 6.80 8.37 2,065 2,067 6.57
---------- ----------- ---------- ---------- ---------- ----------
Total investment securities held
To maturity.................. $ 3,879 7.74% 6.42 $ 31,031 $ 31,150 7.12%
========== =========== ========== ========== ========== ==========
Investment securities available for
sale:
U.S. Government and agency
obligations.................. $ - -% 4.23 $ 12,976 $ 13,016 6.34%
Corporate obligations........... - - 1.91 4,698 4,685 5.30
---------- ----------- ---------- ---------- ---------- ----------
Total investment securities
available
For sale....................... $ - - 3.61 $ 17,674 $ 17,701 6.06%
========== =========== ========== ========== ========== ==========
Other income-earning investments:
Federal funds sold.............. $ - - $ - $ 6,050 $ 6,050 5.20%
FHLB-NY stock (1) - - - 8,045 8,045 7.05
---------- ----------- ---------- ---------- ---------- ----------
Total other income-earning
Investments.................. $ - - $ - $ 14,095 $ 14,095 6.26%
========== =========== ========== ========== ========== ==========
- - -------------------------------------
</TABLE>
(1) FHLB-NY stock does not have a stated maturity.
28
<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 investments; 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 December 31, 1997, $121.0 million of the
Bank's deposit balance consisted of IRAs. Also at that date, $74.7 million, or
9.2%, 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. As of
December 31, 1997, the Bank continued to operate four of the offices, and
transferred the deposits of the other two offices into existing First Savings
branches. In February 1998, the Bank sold its Eatontown branch, with deposits
of $25.2 million, to another financial institution. The Eatontown branch was
one of the six acquired from the RTC in 1991. 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 the communities
within which these branches reside. During 1995, the Bank's deposit base grew
$11.9 million, or 1.7%, excluding the $112.8 million in deposits acquired.
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 year ended December 31, 1997, deposits increased
$21.7 million, or 2.7%, due to partial retention of interest credited.
The following table presents the deposit activity of the Bank for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1997 1996 1995
----------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C>
Deposits ............................... $ 1,647,809 $ 1,672,325 $ 1,374,946
Withdrawals............................. (1,660,439) (1,718,034) (1,396,632)
Deposits acquired in purchase (1)....... - - 112,785
----------------- ------------------- -------------------
Withdrawals less than
(in excess of) deposits.............. (12,630) (45,709) 91,099
Interest credited ...................... 34,318 33,966 33,626
Total increase (decrease) in deposits... $ 21,688 $ (11,743) $ 124,725
================= =================== ===================
</TABLE>
- - ------------------
(1) Purchase of deposits from the Resolution Trust Corporation.
29
<PAGE>
The following table presents, by various categories, the amount of certificate
accounts outstanding at December 31, 1997 and 1996, and the time to maturity of
the certificates accounts outstanding at December 31, 1997.
<TABLE>
<CAPTION>
At December 31, Maturity at December 31, 1997
--------------------------------- ---------------------------------------------------------------------
Within One One through
1997 1996 Year Three Years Thereafter Total
--------------- --------------- --------------- --------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less ............ $ 2,279 $ 2,750 $ 2,279 $ - $ - $ 2,279
4.00% to 4.49% ........... 59 6,095 59 59
4.50% to 4.99% ........... 22,485 115,608 20,676 1,809 22,485
5.00% to 5.49%............ 223,735 206,457 211,624 6,353 5,758 223,735
5.50% to 5.99%............ 159,343 50,905 102,959 39,983 16,401 159,343
6.00% to 6.49%............ 22,313 30,351 1,463 4,570 16,280 22,313
6.50% to 6.99%............ 29,664 43,605 5,833 12,231 11,600 29,664
7.00% to 7.49%............ 2,592 2,535 2,486 0 106 2,592
7.50% to 7.99%............ 2,888 2,811 349 1,396 1,143 2,888
8.00% and greater......... 380 664 173 207 0 380
-------- -------- -------- ------- ------- --------
Total.................. $465,738 $461,781 $347,901 $66,549 $51,288 $465,738
======== ======== ======== ======= ======= ========
</TABLE>
At December 31, 1997, the Bank had $43.1 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Amount
------------------
(In thousands)
MATURITY PERIOD
- - ---------------
<S> <C>
Three months or less.................................................. $14,365
Over 3 through 6 months............................................... 9,915
Over 6 through 12 months.............................................. 8,116
Over 12 months........................................................ 10,712
------------------
Total............................................................ $43,108
==================
</TABLE>
The following table sets forth the distribution of the Bank's average accounts
for the periods indicated and the weighted average nominal interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- ----------------------------- ---------------------------------
Percent of Percent of Percent of
Total Weighted Total Weighted Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand... $ 21,864 2.71% -% $ 19,491 2.42% -% $ 16,610 2.10% -%
Money market accounts......... 135,931 16.83 3.31 124,097 15.40 3.28 129,426 16.37 3.20
Savings accounts.............. 127,744 15.82 2.55 139,045 17.26 2.53 140,122 17.73 2.55
NOW accounts.................. 57,832 7.16 1.87 54,079 6.71 1.96 50,552 6.40 1.89
-------- ------ ----- -------- ------ ----- -------- ------ -----
Sub-total................ 343,371 42.52 2.57 336,712 41.79 2.57 336,710 42.60 2.57
-------- ------ ----- -------- ------ ----- -------- ------ -----
Certificate accounts:
Less than six months........ 141,821 17.56 5.09 142,332 17.67 4.85 128,984 16.32 5.05
Over 6 through 12 months.... 171,859 21.29 5.32 166,356 20.65 5.34 157,267 19.90 5.51
Over 12 through 36 months... 53,151 6.58 5.73 59,192 7.35 5.65 67,921 8.59 5.22
Over 36 months.............. 97,320 12.05 6.07 101,014 12.54 6.16 99,483 12.59 6.41
-------- ------ ----- -------- ------ ----- -------- ------ -----
Total certificate
accounts ............... 464,151 57.48 5.46 468,894 58.21 5.39 453,655 57.40 5.53
-------- ------ ----- -------- ------ ----- -------- ------ -----
Total average deposits... $807,522 100.00% 4.23% $805,606 100.00% 4.22% $790,365 100.00% 4.27%
======== ====== ===== ======== ====== ===== ======== ====== =====
</TABLE>
30
<PAGE>
BORROWINGS
The Bank's policy has been to utilize borrowings as an alternate 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 loan 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 other than 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 December 31, 1997, the Bank's
FHLB-NY advances totaled $23.0 million, representing 2.4% of total liabilities.
During 1997, the Bank continued to borrow funds from the FHLB-NY and primary
broker/dealers. The borrowings are collateralized by designated mortgage-backed
and investment securities. The total of these borrowings at December 31, 1997
was $95.4 million, representing 10.1% of total liabilities.
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 year ended
December 31, 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 the 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
totaling $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 December 31, 1997 and 1996, was $546,000 and $646,000, 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 each of the years ended December
31, 1997 and 1996, $25,000 of dividends paid on ESOP shares were used to pay
down ESOP debt. Total interest paid on ESOP debt for the years ended December
31, 1997 and 1996, was $43,000 and $48,000, respectively. In July, 1995, the
Bank completed a secondary stock offering, whereby the ESOP purchased an
additional 42,000 shares of common stock at $13.00 per share, totaling $546,000.
The funds to purchase the shares were borrowed from the Mutual Holding Company.
As of December 31, 1997, the borrowing is secured by 50,820 shares (as adjusted
for stock dividends) of the Bank's common stock.
31
<PAGE>
The following table sets forth certain information regarding the Bank's borrowed
funds on the dates indicated:
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
(Dollars in thousands)
FHLB-NY advances:
Average balance outstanding............................... $ 33,308 $21,846 $21,231
Maximum amount outstanding at any month-end
during the period.................................... 40,000 30,000 34,000
Balance outstanding at end of period...................... 23,000 30,000 19,000
Weighted average interest rate during the period.......... 6.20% 6.13% 5.72%
Weighted average interest rate at end of period........... 6.28% 6.06% 6.13%
Reverse repurchase agreements:
Average balance outstanding............................... $ 80,662 $32,691 $11,834
Maximum amount outstanding at any month-end
during the period.................................... 105,894 57,994 24,865
Balance outstanding at end of period...................... 95,444 57,994 19,750
Weighted average interest rate during the period.......... 6.08% 6.05% 6.50%
Weighted average interest rate at end of period........... 5.96% 6.02% 6.13%
ESOP debt:
Average balance outstanding............................... $ 604 $ 704 $ 510
Maximum amount outstanding at any month-end
during the period.................................... 646 746 796
Balance outstanding at end of period...................... 546 646 746
Weighted average interest rate during the period ......... 7.07% 7.74% 8.08%
Weighted average interest rate at end of period........... 7.00% 6.75% 7.00%
Total borrowings:
Average balance outstanding............................... $114,574 $55,241 $33,575
Maximum amount outstanding at any month-end
during the period.................................... 131,465 88,640 59,661
Balance outstanding at end of period...................... 118,990 88,640 39,496
Weighted average interest rate during the period.......... 6.13% 6.10% 6.06%
Weighted average interest rate at end of period........... 6.03% 6.04% 6.15%
</TABLE>
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 year ended December 31, 1997, FSB
Financial Corp. had net income of $189,000.
1000 Woodbridge Center Drive, Inc. 1000 Woodbridge Center Drive, Inc. is a
wholly owned subsidiary of the Bank. 1000 Woodbridge Center Drive, Inc. is the
owner of the Bank's corporate center. The subsidiary was inactive in 1997.
32
<PAGE>
PERSONNEL
As of December 31, 1997, the Bank had 214 full-time employees and 28 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.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Mutual Holding Company and the Bank report their income on an
unconsolidated basis. 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, the Mutual Holding Company 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 December 31, 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 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 Mutual Holding Company and, in the future, 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
33
<PAGE>
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
Mutual Holding Company or 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 and Reorganization, 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).
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 Mutual Holding Company and,
in the future, the Company may exclude from 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 Mutual Holding
Company, 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 and the Mutual Holding Company file 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.
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision by the
New Jersey Department of Banking ("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
34
<PAGE>
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
Mutual Holding Company , 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 Mutual Holding Company , 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
Certain of the regulatory requirements applicable to the Bank and to the Mutual
Holding Company and/or the Company are referred to below or elsewhere herein.
The description of statutory provisions and regulations applicable to savings
associations set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank, the
Mutual Holding Company and/or 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 December 31, 1997, the Bank's general policy is to limit loans-
to-one borrower to $13.8 million. At December 31, 1997, the Bank's largest
aggregate amount of loans-to-one borrower totaled $10.7 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the
QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least nine months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1997, the Bank maintained 90.8% 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
35
<PAGE>
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 minimum 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 December 31, 1997
was 39.4%, 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 years ended December 31, 1997, 1996 and 1995
totaled $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 Mutual
Holding Company, the Company and any non-savings institution subsidiaries that
the Mutual Holding Company or the Company may establish) is limited by Sections
23A and 23B of the Federal Reserve Act ("FRA"). Section 23A restricts the
aggregate amount of covered transactions with any individual affiliate to 10% of
the capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally requires that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
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
36
<PAGE>
range from the issuance of a capital directive or cease and desist order to
removal of officers or directors, receivership, conservatorship or termination
of deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or $1 million per day in especially egregious cases.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal and state law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal banking
agency to prescribe for all insured depository institutions standards relating
to, among other things, internal controls, information systems and audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, and compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. The federal banking
agencies have adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness ("Guidelines") to implement these safety and
soundness standards. The Guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. The Guidelines
address internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth;
asset quality; earnings; and compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings institutions
to meet three capital standards: a 1.5% tangible capital standard, a 3% leverage
(core capital) ratio and an 8% risk based capital standard. Core capital is
defined as common stockholder's equity (including retained earnings), certain
non-cumulative perpetual preferred stock and related surplus, minority interests
in equity accounts of consolidated subsidiaries less intangibles other than
certain mortgage servicing rights ("MSRs") and credit card relationships. The
OTS regulations require that, in meeting the leverage ratio, tangible and risk-
based capital standards institutions generally must deduct investments in and
loans to subsidiaries engaged in activities not permissible for a national bank.
In addition, the OTS prompt corrective action regulation provides that a savings
institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "Prompt
Corrective Regulatory Action."
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.
37
<PAGE>
At December 31, 1997, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. The following table presents the Bank's capital
position at December 31, 1997.
<TABLE>
<CAPTION>
Excess (Deficiency)
Bank Actual Minimum Capital Adequacy Amount
----------------------------------------------------------------------
Amount Ratio (%) Amount Ratio (%) Amount Ratio (%)
------- --------- ----------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
December 31, 1997
- - -------------------------------------
Tangible capital..................... $92,344 8.86 $15,625 1.50 $76,719 7.36
Core (leverage) capital ............. 92,344 8.86 31,250 3.00 61,094 5.86
Risk-based capital .................. 97,797 22.44 34,866 8.00 62,931 14.44
</TABLE>
THRIFT RECHARTERING
Recently enacted legislation provides that the Bank Insurance Fund ("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
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.
38
<PAGE>
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 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 totaled
$5.2 million on a pre-tax basis, or $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, 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 year ended December 31, 1997 was 6.48 basis
points and the regular premium expense for the year ended December 31, 1997 was
$414,000.
39
<PAGE>
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 December 31, 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 December 31, 1997, the Bank had $23.0
million in FHLB advances and $47.8 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 years ended December 31, 1997, 1996 and 1995, dividends
from FHLB stock to the Bank amounted to $525,000, $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 Reserve Board) the reserve requirement is 3%; and for accounts
greater than $47.8 million, the reserve requirement is $1.3 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%) against
that portion of total transaction accounts in excess of $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 reduces 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
40
<PAGE>
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 Mutual Holding Company is, and the Company will be, a non-diversified
unitary savings and loan holding company within the meaning of the HOLA. As
such, the Mutual Holding Company is, and the Company will be, subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Mutual Holding 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 Mutual Holding Company or the Company.
As a unitary savings and loan holding company, the Mutual Holding 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 Mutual Holding
Company of another savings association, the Mutual Holding Company would become
a multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject
to the prior approval of the OTS, and to other activities authorized by OTS
regulation. Recently proposed legislation would treat all savings and loan
holding companies as bank holding companies and limit the activities of such
companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution, or holding company thereof, without prior
written approval of the OTS and from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company or 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
41
<PAGE>
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.
ITEM 2. PROPERTIES
- - -------------------
The Bank conducts its business through its main office and 16 full service
branch offices (one branch location was sold in February 1998, reducing the
current number of full service branch offices from 17 at December 31, 1997), 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
December 31, 1997. The aggregate net book value of the Bank's premises and
equipment was $13.1 million at December 31, 1997.
42
<PAGE>
<TABLE>
<CAPTION>
Net Book
Value at
Date Leased December 31, Leased or
Location or Acquired 1997 Owned
- - ------------------------------------- ----------- --------------- ---------
<S> <C> <C> <C>
MAIN OFFICE
339 State Street: 4/29 $1,293,304 Owned
Perth Amboy, NJ 08861(1)
CORPORATE HEADQUARTERS: 5/94 5,482,962 Owned
1000 Woodbridge Center Drive
Woodbridge, NJ 07095
BRANCH OFFICES:
158 Wyckoff Road 7/93 102,595 Leased
Eatontown, NJ 07724 (2)
980 Amboy Avenue 6/74 666,498 Owned
Edison, NJ 08837
2100 Oak Tree Road 4/84 309,783 Owned
Edison, NJ 08820
206 South Avenue 9/91 361,865 Owned
Fanwood, NJ 07023
Lafayette Road & Ford Avenue 4/84 52,915 Leased
Fords, NJ 08863
Rt. 35 & Bethany Road 1/91 14,761 Leased
Hazlet, NJ 07730
101 New Brunswick Avenue 6/76 62,478 Leased
Hopelawn, NJ 08861
1220 Green Street 11/84 634,869 Owned
Iselin, NJ 08830
599 Middlesex Avenue 1/95 42,812 Leased
Metuchen, NJ 08840 (3)
1580 Rt. 35 South 4/95 233,442 Leased
Middletown, NJ 07748
97 North Main Street 1/95 1,045,256 Owned
Milltown, NJ 08850 (3)
Rt. 9 & Ticetown Road 6/79 6,973 Leased
Old Bridge, NJ 08857
100 Stelton Road 9/91 298,195 Leased
Piscataway, NJ 08854 (4)
325 Amboy Avenue 1/70 230,329 Owned
Woodbridge, NJ 07095
Rt. 1 & St. Georges Avenue 6/80 511 Leased
Woodbridge, NJ 07095
</TABLE>
- - ---------------------------------------------------
(1) Includes an adjacent administrative building with a net book value of
$934,000.
(2) The Eatontown branch was sold in February 1998. The assets of the branch
were sold for their net book value as of the sale date.
(3) Acquired/leased in conjunction with the purchase of deposits from the RTC
on January 20, 1995.
(4) Includes property acquired in 1994 for future branch.
43
<PAGE>
ITEM 3. 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 is not expected to have a material adverse effect on the Bank's results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained on the inside cover under the section captioned
"Market Information for Common Stock" in the 1997 Annual Report to Stockholders
is incorporated herein by reference. At December 31, 1997, 8,016,352 shares of
the Bank's outstanding common stock was held of record by approximately 1,076
persons or entities, not including the number of persons or entities holding
stock in nominee or stock name through various brokers or banks. Of those
shares outstanding, 4,134,813 shares of common stock are currently held by First
Savings Bancshares, MHC, the Bank's mutual holding company.
ITEM 6. SELECTED FINANCIAL DATA
The information is contained in the tables under Item I, on pages 6 and 7 of
this Form 10-K Report under the caption "Consolidated Financial Highlights."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Comparison of Operating Results" on
pages 5 through 10 of the 1997 Annual Report to Stockholders is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Disclosure relating to market risk is included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations," contained at
Item I of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS
The Bank's consolidated financial statements listed in Item 14 herein,
together with the report thereon by KPMG Peat Marwick LLP, are found in the 1997
Annual Report to Stockholders on pages 11 through 35 and are incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
Director Term
NAME AGE(1) POSITION(S) HELD WITH THE BANK 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................ 62 Director 1983 1999
John P. Mulkerin................... 60 President, Chief Executive Officer, General
Counsel and Director 1996 1998
Philip T. Ruegger, Jr.............. 71 Director 1983 2000
Jeffries Shein..................... 58 Director 1985 1998
Christopher P. Martin.............. 41 Executive Vice President, Chief Financial
and Operating Officer, Corporate
Secretary and Director 1997 1998
</TABLE>
(1) As of February 28, 1998.
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................. 47 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 February 28, 1998.
Executive 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. 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 Mutual Holding Company
and is a director of FSB Financial Corp., a wholly owned subsidiary
45
<PAGE>
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 joined the Board of First Savings in 1997. Mr. 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 Mutual Holding
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.
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 joined the Board of First Savings in 1964 and was appointed
Chairman of the Board of Directors in June 1996. Mr. Timpson has operated a real
estate appraisal firm in Metuchen, New Jersey, for over forty years.
Each director named is also a director of the Mutual Holding 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 THE MUTUAL
HOLDING COMPANY
The business of the Bank's Board of Directors is conducted through meetings
and activities of the Board and its committees. During the year ended December
31, 1997, the Board of Directors held 13 regular meetings, including the annual
organization meeting, and eight special meetings. During the year ended December
31, 1997, no director attended fewer than 75% of the total meetings of the Board
of Directors of the Bank and committees on which such director served.
46
<PAGE>
The Audit Committee consists of Directors Akey (Chairman), Burke, McLaughlin,
Ruegger and Timpson. The Audit Committee met five times during the year ended
December 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 year ended December
31, 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 three
times during the year ended December 31, 1997.
DIRECTOR COMPENSATION
Non-employee directors receive $750 for each Board of Directors meeting
attended, plus a $1,750 monthly retainer. Non-employee 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 and in connection with the Conversion and Reorganization,
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.
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
were reserved for issuance to 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 is 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
47
<PAGE>
exercisable at an exercise price of $3.413 per share, as adjusted the four 10%
stock dividends and the stock split. As of December 31, 1997, 33,466 options had
been exercised under this plan.
1996 Incentive Plan. During 1996, 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 were reserved for issuance to
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 is 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.
ITEM 11. 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, 1997 ("Named Executive Officers"). In
addition, the table sets forth information regarding total remuneration for the
years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
--------------------------------------- -------------------------- --------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR (1)(2) (3) (4) (5) (6) (7) (8)(9)
- - -------------------------------------- ---- -------- ------- ------------ --------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John P. Mulkerin(10).................. 1997 $257,250 $70,875 $ -- $ -- $ -- $ -- $ 52,004
President, Chief Executive Officer 1996 202,250 67,500 -- 66,138 13,915 -- 19,813
and General Counsel 1995 152,000 30,400 -- -- -- -- 17,062
Christopher P. Martin(11)............. 1997 201,250 56,700 -- -- -- -- 52,004
Executive Vice President, Chief 1996 160,460 54,000 -- 66,138 13,915 -- 18,905
Financial Officer, Chief Operating 1995 125,000 25,000 -- -- -- -- 14,168
Officer and Corporate Secretary
Richard Spengler...................... 1997 105,000 15,750 -- -- -- -- 34,176
Senior Vice President, 1996 100,000 15,000 -- 17,875 2,420 -- 13,042
Chief Lending Officer 1995 74,480 11,250 -- -- -- -- 7,995
</TABLE>
(1) Includes directors' fees paid to Mr. Mulkerin in 1997 and 1996, and paid to
Mr. Martin for 1997.
(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.
(4) The Bank provides certain executive officers with the use of 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 $219,373, $219,373 and
$59,290, respectively, at December 31, 1997. 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 1997, 1996 and 1995, the Bank had no long-term incentive plan;
accordingly, there were no payouts or awards under any long-term incentive
plan.
(8) Includes $4,725, $4,725 and $3,150 contributed by the Bank in 1997 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 $47,279, $47,279 and $31,026, contributed by the Bank pursuant to
the Bank's ESOP in 1997 allocated for the benefit of Messrs. Mulkerin,
Martin and Spengler.
48
<PAGE>
(10) Mr. Mulkerin was appointed to the positions of President and Chief
Executive Officer on June 12, 1996.
(11) Mr. Martin was appointed to the added positions of Chief Operating Officer
and Corporate Secretary on June 12, 1996.
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. There were no stock options under the
Incentive Plan granted to Named Executive Officers for the year ended December
31, 1997.
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, 1997, 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 UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(1) DECEMBER 31, 1997(1)(2)
------------------------------ -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ------------------------------------------------ -------------- -------------- ------------------ -----------------
<S> <C> <C> <C> <C>
John P. Mulkerin................................ 6,768 9,277 $255,845 $300,410
Christopher P. Martin........................... 4,638 9,277 158,745 300,410
Richard Spengler................................ 807 1,613 27,621 55,208
</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.
(2) The market value of the Common Stock at December 31, 1997, was $49.00 per
share.
A Committee of the Board of Directors of the Bank and the Mutual Holding Company
comprised of non employee 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.
EMPLOYMENT AGREEMENTS
The Mutual Holding Company and the Bank currently have Employment Agreements
with Messrs. Mulkerin and Martin. The Employment Agreements are intended to
ensure that the Bank and the Mutual Holding Company will be able to maintain a
stable and competent management base. The continued success of the Bank and the
Mutual Holding Company depends to a significant degree on the skills and
competence of Messrs. Mulkerin and Martin.
The Employment Agreements provide for a three-year term for the Named
Executives, with annual renewals upon written approval of the Board of
Directors. The Employment Agreements provide for the payment of compensation in
the event of a change in control of the Bank or the Mutual Holding Company, and
in certain other events. The Employment Agreements provide for termination by
the Bank or the Mutual Holding Company for "cause," as defined in the
agreements, at any time. In the event the Bank or the Mutual Holding Company
would choose to terminate the Executive's employment for reasons
49
<PAGE>
other than for "cause," or in the event of the Executive's resignation from the
Bank and the Mutual Holding 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 Mutual Holding Company; or (v) a breach of the agreement by the
Bank or the Mutual Holding 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 Mutual
Holding Company during the remaining term of the agreement. The Bank and the
Mutual Holding Company would also continue and pay for the Executive's life,
health and disability coverage for the remaining term of the Employment
Agreements. In no event will such payments made under the employment contracts
constitute an excess parachute payment under Section 280G of the Internal
Revenue Code. The employment contracts will not result in a material change in
compensation levels.
Under the Employment Agreements, if voluntary or involuntary termination
follows a "change in control" of the Bank or the Mutual Holding Company, as
defined in the Employment Agreements, the Executive or, in the event of death,
his beneficiary, would be entitled to a payment equal to three times the average
of the three preceding taxable years' compensation. The Bank would continue the
Executive's life, health, and disability coverage for 36 months. In the event
of a "change in control" of the Bank, 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.
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 the Company, the total payments
that would be due under the CIC Agreements, based solely on the cash
compensation paid to the officers covered by the CIC Agreements over the past
three fiscal years and excluding any benefits under any employee benefit plan
which may be payable, would be approximately $2.0 million.
EMPLOYEE SEVERANCE COMPENSATION PLAN
It is anticipated that the Bank's Board of Directors will, subsequent to the
Conversion and Reorganization, establish the First Savings Bank, 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
50
<PAGE>
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.
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
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Average 10 15 20 25 AND OVER
- - ----------------------------------------------------- ------- ------- -------- ---------------
$ 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, 1997, for each of the individuals named in the Executive Compensation Table.
<TABLE>
<CAPTION>
YEARS OF
CREDITED SERVICE
-----------------
<S> <C>
John P. Mulkerin..................................................................... 10
Christopher P. Martin................................................................ 14
Richard Spengler..................................................................... 15
</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
51
<PAGE>
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.
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 remains 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - ------------------------------------------------------------------------
(A) & (B) BENEFICIAL OWNERSHIP OF BANK COMMON STOCK
The following table includes, as of February 28, 1998, 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.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership as of
Name of Beneficial Owner February 28, Percent of Bank
or Number of Persons in Group 1998(1)(3)(4)(5) Common Stock
- - ----------------------------------------------------------------- --------------------------- ----------------
<S> <C> <C>
First Savings Bancshares, MHC(2)................................. 4,134,812 51.57%
Walter K. Timpson................................................ 135,980 1.70
Donald T. Akey, M.D.............................................. 29,531 0.69
Harry F. Burke................................................... 55,005 0.81
Keith H. McLaughlin.............................................. 65,167 0.81
Philip T. Ruegger, Jr............................................ 153,760 1.92
Jeffries Shein................................................... 206,565 2.58
John P. Mulkerin................................................. 88,558 1.10
Christopher P. Martin............................................ 51,560 0.64
John F. Cerulo, Jr............................................... 13,033 0.16
Karen I. Martino................................................. 9,585 0.12
Richard Spengler................................................. 24,335 0.30
All Directors and Executive Officers as a Group (11 persons)..... 833,079 10.39
</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.
(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 February 28, 1998 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.
52
<PAGE>
(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.
(c) Changes in Control
Pursuant to the Bank's and the Mutual Holding Company's Plan of Conversion and
Agreement and Plan of Reorganization, and subject to the approval of the Bank's
stockholders and the Mutual Holding Company's members, the Mutual Holding
Company will be merged out of existence and the bank will become the wholly
owned subsidiary of First Source Bancorp, Inc. The Conversion and
reorganization id expected to be consummated in April, 1998. For further
information concerning the transaction, see Item I of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") required that all loans or extensions of credit to executive officers
and directors be made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
the general public and not involve more than the normal risk of repayment or
present other unfavorable features. In addition, loans made to a director or
executive officer in excess of the greater of $25,000, or 5% of the Bank's
capital and surplus (up to a maximum of $500,000) must have been approved in
advance by a majority of the disinterested members of the Board of Directors.
The Bank currently makes loans to executive officers and directors on the same
terms and conditions offered to the general public. The Bank's policy provides
that all loans made by the Bank to its executive officers and directors be made
in the ordinary course of business, on substantially the same terms, including
collateral, as those prevailing at the time for comparable transactions with
other persons and may not involve more than the normal risk of collectibility or
present other unfavorable features
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 December 31, 1997. Set forth below is certain
information as of December 31, 1997, as to loans made by the Bank prior to the
enactment of FIRREA (August 9, 1989), to any director or executive officer and
associates of directors and executive officers whose aggregate indebtedness to
the Bank exceeded $60,000 at any time since January 1, 1997, and who were
extended accommodations on origination fees and application fees on first
mortgage loans and as to rate on home equity credit lines.
<TABLE>
<CAPTION>
OUTSTANDING
ORIGINAL BALANCE AT
NAME OF OFFICER OR DIRECTOR DATE ORIGINATED AMOUNT OF LOAN DECEMBER 31, 1997 INTEREST RATE LOAN TYPE
- - --------------------------- --------------- -------------- ----------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Keith H. McLaughlin, Director ....... 11/87 $100,000 $ 23,261 9.50% (1) Home Equity
John F. Cerulo, Sr. V.P. ............ 4/88 165,000 149,108 8.00 Credit Line
-------- -------- Mortgage
$265,000 $172,369
======== ========
</TABLE>
(1) Home equity credit lines are 1.0% over the prime rate.
53
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements.
The Consolidated Financial Statements and Independent Auditors' Report for the
year ended December 31, 1997, included in the Annual Report, listed below, are
incorporated herein by reference.
Consolidated Statements of Financial Condition at December 31, 1997
and 1996 (Annual Report Page 11).
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995 (Annual Report Page 12).
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995 (Annual Report Page 13).
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995 (Annual Report Page 14).
Notes to Consolidated Financial Statements (Annual Report Page 15
through 34).
Independent Auditors' Report (Annual Report Page 35).
The remaining information appearing in the Annual Report of
Stockholders is not deemed to be filed as part of this report, except
as provided herein.
(2) Financial Statement Schedules.
All schedules have been omitted because the required information is
either inapplicable or included in the Notes to Consolidated Financial
Statements.
54
<PAGE>
(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description Reference
- - ---------------------------- -------------------------------------------------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation of First Savings *
Bank, SLA
3.2 Bylaws of First Savings Bank, SLA *
4.0 Stock Certificate of First Savings Bank, SLA *
10.1 Form of Employment Agreement between
the Bank and Certain Executive Officers,
including John P. Mulkerin and Christopher P. Martin **
10.2 Form of Special Termination Agreement between the *
Bank and Certain Executive Officers
10.3 First Savings Bank, SLA Employee Stock *
Ownership Plan and Trust
10.4 Form of First Savings Bank, SLA 1992 *
Incentive Stock Option Plan
10.5 Form of First Savings Bank, SLA 1992 Stock *
Option Plan for Outside Directors
10.6 First Savings Bank, SLA 1992 Recognition and *
Retention Plan and Trust
10.7 First Savings Bank, SLA Incentive Savings Plan *
10.8 First Savings Bank, SLA Omnibus Incentive Plan *
11.0 Computation of per share earnings Filed herein
13.0 1997 Annual Report to Stockholders Filed herein
21.0 Subsidiary of Registrant incorporated by reference
herein to Part I - Subsidiaries
23.0 Consent of KPMG Peat Marwick LLP Filed herein
</TABLE>
* Incorporated herein by reference into this document from the Application
for Conversion on Form AC and exhibits thereto of First Savings Bancshares,
MHC, and any amendments or supplements thereto filed with the OTS on
December 19, 1997 and amended on February 9, 1998, Docket No. 05056.
** Incorporated herein by reference into this document from the Exhibits 10.1
to the Registrant's Form 10-K for the year ended December 31, 1996, filed
on March 27, 1997.
(b) Reports on Form 8-K.
Form 8-K, dated September 24, 1997, incorporated herein by reference.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 25, 1998 FIRST SAVINGS BANK, SLA
/s/ John P. Mulkerin
--------------------
John P. Mulkerin
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
Signature Title Date
- - --------- ----- ----
/s/ John P. Mulkerin President, Chief Executive March 25, 1998
- - -------------------- Officer and Director
John P. Mulkerin
/s/Harry F. Burke Director March 25, 1998
- - -----------------
Harry F. Burke
/s/Jeffries Shein Director March 25, 1998
- - -----------------
Jefferies Shein
/s/Donald T. Akey, M.D. Director March 25, 1998
- - -----------------------
Donald T. Akey, M.D.
/s/Keith H. McLaughlin Director March 25, 1998
- - ----------------------
Keith H. McLaughlin
/s/Philip T. Ruegger, Jr. Director March 25, 1998
- - -------------------------
Philip T. Ruegger, Jr.
/s/Walter K. Timpson Chairman of the Board March 25, 1998
- - --------------------
Walter K. Timpson
/s/Christopher P. Martin Executive Vice President, March 25, 1998
- - ------------------------ Chief Operating and Financial
Christopher P. Martin Officer and Director
56
<PAGE>
CORPORATE PROFILE
First Savings Bank has been serving the banking needs of central New Jersey
residents since its founding in Perth Amboy in 1901 as the Modern Building and
Loan Association. Currently, we have 16 retail banking offices in Middlesex,
Monmouth and Union Counties where our customers are offered a full range of
banking services.
Our mission is to provide our stockholders with an above- market rate of return,
to provide our customers with the highest level of service while meeting their
needs for financial products and services, and to be a positive economic, civic
and social force in our communities.
To achieve this, we:
*Consistently evaluate the needs of our customers to provide the most
appropriate products, services, and delivery systems.
*Practice prudent lending, investing and pricing policies to maintain
profitability and enhance stockholder value.
*Maintain a work environment which will attract and retain a highly competent,
dedicated and motivated staff.
*Identify and develop new markets to achieve consistent, controlled and
profitable growth.
*Promote and participate in community affairs.
MARKET INFORMATION FOR COMMON STOCK
First Savings Bank Common Stock is traded over-the-counter and is listed on The
Nasdaq Stock Market under the symbol "FSLA." At December 31, 1997, there were
1,076 holders of record of First Savings Bank's Common Stock. The following
table sets forth the high and low sales prices per share of the Bank's Common
Stock, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High LOW
-------- --------
Year Ending December 31, 1997:
- - -------------------------------------
<S> <C> <C>
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 ENDING 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
</TABLE>
The Bank issued 10% stock dividends on October 30, 1997 and December 16, 1996.
The Bank paid a quarterly cash dividend of $0.12 per share for the quarter ended
December 31, 1997; $0.11 per share for the quarters ended September 30, 1997,
and June 30, 1997; $0.09 per share for the quarter ended March 31, 1997 and
$0.08 per share during each quarter of 1996. These amounts have been adjusted
for the 10% stock dividends described above.
TABLE OF CONTENTS
Message from the Chairman and President ............ 2
Consolidated Financial Highlights................... 4
Management's Discussion and Analysis................ 5
Consolidated Financial Statements................... 11
Notes to Consolidated Financial Statements ......... 15
Independent Auditors' Report........................ 35
Directors and Officers.............................. 36
Corporate and Stockholders' Information............. Inside Cover
1
<PAGE>
MESSAGE FROM OUR CHAIRMAN AND PRESIDENT
To Our Stockholders:
1997 was another successful year for First Savings Bank. Our net earnings
of $9.3 million made it one of the most profitable years in our 96-year history.
A highlight of the year was our move to our new corporate headquarters in
Woodbridge at 1000 Woodbridge Center Drive. The move brought together our
employees from various sites, enabling us to create a centralized department for
loan services and to operate all of our administrative departments more
efficiently. A full service branch was also opened in our corporate building to
serve neighboring residents.
One of the past year's most significant developments occurred in October,
when we announced our intention to apply for regulatory approvals to undertake a
second step conversion of our Mutual Holding Company and conduct an offering of
common stock. Pursuant to our Plan of Conversion and Agreement and Plan of
Reorganization, a holding company, First Source Bancorp, Inc., a Delaware
corporation, was formed and shares of common stock of the holding company are
being offered for sale. Shares of existing stockholders of First Savings Bank,
SLA, will be exchanged for shares in First Source Bancorp, Inc. The Plan is
subject to the approvals of both our members and stockholders. Regulatory
approvals were received in February, 1998, and the stock offering has commenced.
The transaction is expected to be completed early in the second quarter of 1998.
As previously mentioned, 1997 was a profitable year for us, with net income
of $9.3 million, or $1.16 per diluted share, representing an increase of 97%
from 1996 net income of $4.7 million, or $.59 per diluted share. Earnings for
1997 included an impairment writedown of the core deposit intangible, resulting
in an after-tax charge of $867,000. Excluding this charge, net income for 1997
was $10.2 million, or $1.27 per diluted share. Earnings for 1996 were impacted
by several non-recurring items, the largest of which was a one-time charge of
$3.3 million (net of tax) assessed as a result of legislation to recapitalize
the Savings Association Insurance Fund (SAIF).
During 1997, we reached an important milestone in our growth when our
assets exceeded $l.0 billion. On December 31, 1997, our assets totaled $1.0
billion and deposits were $816.3 million. Stockholders' equity increased to
$101.7 million from $92.9 million last year. Our capital levels continue to
exceed all ratios required by regulatory agencies.
This past year we expanded our customers' access to their accounts with 24-
hour "Bank-by-Phone" service, which gained immediate popularity with our
convenience-oriented customers. We also began originating Automated Clearing
House (ACH) transactions so that all of our loan customers could have their
payments made automatically, whether they maintained their checking account here
or at another bank. On the commercial side, we enhanced our competitive
position when we expanded our services to include merchant processing services
for credit card transactions.
During 1997 interest rates remained relatively low, and loan demand
relatively steady. In the past year, we originated $158.5 million in loans,
compared to $130.9 million in 1996. In 1998, in order to make applying for a
loan with us as convenient as possible, we will
2
<PAGE>
be launching a 24-hour "Loan-by-Phone" service.
In support of our affordable housing initiatives, our Board of Directors
committed another $5 million to our "Great Start" mortgage program for lower-
income home buyers, raising our total commitment to date to $15 million. During
the year, we also continued to sponsor the First Home Club, a program from the
Federal Home Loan Bank of New York (FHLB-NY) for low-to-moderate income first-
time home buyers. During the year, six members of the Club were able to
purchase homes with the aid of the $5,000 grant each received from FHLB-NY to
match their savings as members of the First Savings First Home Club.
Sales in 1997 of our uninsured products, including fixed rate annuities,
variable annuities and mutual funds, continued to grow as more of our branch
employees became licensed representatives of our subsidiary, FSB Financial Corp.
At year-end we expanded our product line in this area with the introduction of
low-cost term life insurance.
In the second quarter of last year our Board of Directors increased
stockholders' quarterly cash dividend by 20%, from $0.10 per share to $0.12 per
share. Also, the Board authorized a 10% stock dividend which was distributed to
stockholders in the fourth quarter. In addition to our two-for-one stock split
in December, 1994, this was our fourth 10% stock dividend since our
reorganization in 1992.
Our customers have relied on us, their local community bank since 1901, for
quality service and personalized attention for all their banking needs. Thanks
to our dedicated employees, we have not only continued to fulfill their
expectations but most often exceeded them.
We truly appreciate the support that you, our stockholders, have given us in the
past year. On behalf of our Board of Directors, officers and staff, we thank
you for your investment in First Savings Bank.
Sincerely,
Walter K. Timpson
Chairman of the Board
John P. Mulkerin
President
3
<PAGE>
The following selected financial data and selected operating data should be read
in conjunction with the consolidated financial statements of the Bank and
accompanying notes thereto, which are presented elsewhere herein.
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............................................. $ 1,049,316 $ 987,115 $ 945,012 $ 798,350 $ 783,846
Loans receivable, net.................................... 588,500 509,627 457,756 415,902 415,010
Loans available for sale................................. -- 287 424 148 1,595
Investment securities.................................... 31,031 38,955 39,003 23,997 19,019
Investment securities available for sale................. 17,701 14,831 2,058 13,206 41,064
Other interest-earning assets (1)........................ 14,095 9,278 24,151 10,066 9,967
Mortgage-backed securities, net.......................... 207,157 252,383 288,143 283,263 244,187
Mortgage-backed securities available for sale............ 147,137 120,797 89,339 24,367 28,314
Deposits................................................. 816,283 794,595 806,338 681,613 678,961
Borrowed funds........................................... 118,990 88,640 39,496 34,300 26,400
Stockholders' equity..................................... 101,686 92,863 89,713 74,064 68,809
--------------------------------------------------------------
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......................................... $ 73,222 $ 68,039 $ 64,573 $ 52,909 $ 54,665
Interest expense........................................ 41,183 37,264 35,691 25,135 26,448
-------- --------- -------- -------- --------
Net interest income................................... 32,039 30,775 28,882 27,774 28,217
Provision for loan losses............................... 1,200 550 310 300 1,200
-------- --------- -------- -------- --------
Net interest income after provision for loan losses... 30,839 30,225 28,572 27,474 27,017
Other operating income.................................. 2,801 1,995 2,171 1,734 2,791
Operating expenses (2).................................. 18,863 24,701 17,830 16,021 15,551
-------- --------- -------- -------- --------
Income before income taxes and accounting changes..... 14,777 7,519 12,913 13,187 14,257
Income taxes............................................ 5,482 2,809 4,611 4,912 5,352
-------- --------- -------- -------- --------
Income before accounting changes...................... 9,295 4,710 8,302 8,275 8,905
Cumulative effect of accounting changes(3).............. -- -- -- -- 398
-------- --------- -------- -------- --------
Net income............................................ $ 9,295 $ 4,710 $ 8,302 $ 8,275 $ 9,303
======== ========= ======== ======== ========
Basic earnings per share before cumulative effect of
accounting changes(4)(5)............................... $ 1.17 $ 0.60 $ 1.06 $ 1.06 $ 1.14
Cumulative effect of accounting changes(3)(4)........... -- -- -- -- 0.05
-------- --------- -------- -------- --------
Basic earnings per share after cumulative effect of
accounting changes(4)(5)............................... $ 1.17 $ 0.60 $ 1.06 $ 1.06 $ 1.19
======== ========= ======== ======== ========
Diluted earnings per share(4)(5)........................ $ 1.16 $ 0.59 $ 1.04 $ 1.03 $ 1.17
======== ========= ======== ======== ========
Dividends per share, as adjusted(5)(6).................. $ 0.43 $ 0.33 $ 0.30 $ 0.27 $ 0.27
======== ========= ======== ======== ========
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average assets(2)(3)............................ 0.90 % 0.49% 0.91% 1.04% 1.20%
Return on average stockholders' equity(2)(3).............. 9.58 5.12 10.14 11.63 14.70
Average stockholders' equity to average assets............ 9.34 9.52 8.95 8.92 8.19
Stockholders' equity to total assets...................... 9.69 9.41 9.49 9.28 8.78
</TABLE>
(1) Includes federal funds sold and investment in the stock of the FHLB-NY.
(2) Includes the effect of non-recurring items in 1997 and 1996. The non-
recurring item for 1997 was an impairment writedown of core deposit
goodwill totaling $1.3 million, or $867,000 net of tax. Non-recurring
items for 1996 included the SAIF assessment of $5.2 million, or $3.3
million net of tax, a writedown of $334,000 of core deposit goodwill, and a
provision for benefits payable as a result of the passing of the Bank's
long-time President.
(3) Reflects the implementation of Statement of Financial Accounting Standards
("SFAS") No 106 "Accounting for Postretirement Benefits" and SFAS No 109
"Accounting for Income Taxes."
(4) Per share data reflects a 10% stock dividend 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.
(5) Earnings per share amounts have been adjusted to reflect the adoption of
SFAS No 128 "Earnings Per Share."
(6) Excludes shares owned by the MHC, for which cash dividends were waived with
regulatory approval, after giving effect to prior stock dividends and
split.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND COMPARISON OF OPERATING RESULTS
GENERAL
First Savings Bank, SLA ("the Bank"), is a community-oriented financial
institution offering a variety of financial services in its market area. The
Bank is engaged primarily in the business of attracting 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 and 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 reorganized
from a mutual to a stock form of ownership in July, 1992. The Bank is currently
in the process of undergoing a "second step" transaction, see Note 2 to the
Consolidated Financial Statements for additional information.
The Bank's net income is primarily dependent on its net interest income, which
is the difference between interest income earned on its loans, mortgage-backed
securities, investment securities, and other interest-earning assets, and its
cost of funds, consisting of interest paid on its deposits and borrowings. The
Bank's net income is also affected by other factors, including non-interest
income from net gains and losses on sales of loans, mortgage-backed securities,
and investment securities, and also income from fees and service charges. These
are offset by non-interest expenses, consisting of compensation and employee
benefits, occupancy and equipment expenses, federal deposit insurance premiums,
loan loss provisions and other general and administrative expenses. The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies, and actions of regulatory authorities.
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 31, 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. Management emphasized the origination of
single family residential five year adjustable-rate mortgages and construction
loans. Loan originations totaled $158.5 million for the year ended December 31,
1997, as compared to $130.9 million for the same period in 1996. Repayment of
principal on loans totaled $83.9 million for the year ended December 31, 1997,
as compared to $79.7 million for the same period in 1996. During 1997, period,
principal repayments and sales of mortgage backed securities were primarily used
to fund loan growth. 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 conjunction with the
completion of the Bank's new corporate headquarters in Woodbridge, New Jersey.
Excess of cost 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 the 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 Resolution
Trust Company ("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 previously 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. The Bank entered into an agreement
to sell
5
<PAGE>
the branch deposits of its Eatontown location, which totaled $27.6 million at
December 31, 1997, for approximately $1.1 million. This transaction was
completed on February 26, 1998.
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 cash dividends of $1.7 million declared and paid during
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 $527,000, net of applicable income tax effect.
Stock options exercised during 1997 totaled $463,000. Common Stock, Paid-in
Capital and Retained Earnings were all adjusted to reflect the 10% stock
dividend paid on October 30, 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996.
RESULTS OF OPERATIONS. Net income for the year ended December 31, 1997 was $9.3
million compared with $4.7 million for the corresponding 1996 period. 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. 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 year ended December 31,
1997, excluding this charge, was $10.2 million. 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. Normalized earnings for 1996 would have been $9.0
million without these non-recurring charges.
INTEREST INCOME. Interest income increased $5.2 million, or 7.6%, to $73.2
million for the year ended December 31, 1997, compared to $68.0 million for
1996. Interest on loans increased $5.0 million, or 13.0%, to $43.6 million for
the year ended December 31, 1997, compared to $38.6 million for 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 $487.6
million for the same period in 1996. Interest on mortgage-backed securities
held to maturity decreased $2.8 million, or 14.7%, to $16.3 million for the year
ended December 31, 1997, compared to $19.1 million for 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. The decrease in mortgage-backed securities held to
maturity was due primarily to principal repayments on existing mortgage-backed
securities being utilized to fund loan production. In addition, the majority of
mortgage-backed securities purchased in 1997 were classified as available for
sale. Interest on investment securities held to maturity decreased $197,000, or
4.8%, to $3.9 million for the year ended December 31, 1997, compared to $4.1
million for 1996. The decrease was due to the decreased average balance of the
investment securities held to maturity portfolio and other interest-earning
investments for 1997 to $56.2 million, from $60.3 million for 1996, partially
offset by an increase in the yield on the portfolio to 7.06% for 1997 from 6.79%
for 1996. Interest on investments and mortgage-backed securities available for
sale increased $3.2 million, or 51.1%, to $9.4 million for the year ended
December 31, 1997, compared to $6.2 million for 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 $3.9 million, or 10.5%, to $41.2
million for the year ended December 31, 1997, compared to $37.3 million for
1996. Interest expense on deposits increased $269,000, or 0.8%, to $34.2
million for the year ended December 31, 1997, compared to $33.9 million for
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 $3.7 million, or 108.2%, to $7.0 million for the year ended December
31, 1997, compared to $3.4 million for 1996. The increase was due primarily to
the growth in the average balance of borrowings of $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.
6
<PAGE>
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased $1.3 million, or 4.1%, to $32.0
million for the year ended December 31, 1997, compared to $30.8 million for
1996. The increase was due to the changes in interest income and interest
expense described previously.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $650,000, or
118.2%, to $1.2 million for the year ended December 31, 1997, compared to
$550,000 for 1996. The increase in the provision was primarily due to the
increase in the size of the loan portfolio. Net loans increased $78.6 million
for 1997. 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, management recognizes that additional problems could
develop and lead to additional loan loss provisions and asset write-downs.
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, increased $806,000,
or 40.4%, to $2.8 million for the year ended December 31, 1997, compared to $2.0
million for 1996. Fees and service charges increased $287,000, or 18.4%, to
$1.8 million for the year ended December 31, 1997, compared to $1.6 million for
1996. The increase was due primarily 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 mortgage-backed securities
available for sale. The "Other, net" category of Other operating income
increased $162,000, or 80.2%, to $364,000 for the year ended December 31, 1997,
compared to $202,000 for 1996. The increase was due to increased income of
$123,000 realized by the Bank's wholly owned subsidiary, FSB Financial Corp.,
reduced expenses of $32,000 associated with REO operations and increased rental
income of $19,000. FSB Financial Corp. markets annuities and other non-insured
financial products to customers of the Bank and receives commissions on the
sales.
OPERATING EXPENSES. Operating expenses decreased $5.8 million, or 23.6%, to
$18.9 million for the year ended December 31, 1997, compared to $24.7 million
for 1996. The decrease was primarily due to the one-time special SAIF
assessment in 1996 of $5.2 million. Compensation and employee benefits
decreased $753,000, or 7.3%, to $9.5 million for the year ended December 31,
1997, compared to $10.3 million for 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
$392,000, or 37.9%, to $1.4 million for the year ended December 31, 1997,
compared to $1.0 million for 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. 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 was reflected as an
expense in the 1996 period of $5.2 million. 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 been reduced to 6.4 basis points
from 23 basis points and the corresponding FDIC expense decreased $1.4 million,
or 77.7%, to $414,000 for the year ended December 31, 1997, from $1.9 million
for 1996. 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.
Impairment writedowns of the core deposit intangible totaling $1.3 million and
$334,000 were recognized for the years ended December 31, 1997 and 1996,
respectively, with respect to deposits acquired from the RTC. General and
administrative expenses increased $319,000, or 13.0%, to $2.8 million for the
year ended December 31, 1997, compared to $2.5 million for 1996. The increase
was due primarily to increased expenses associated with legal and consulting
fees, check processing and postage.
INCOME TAX EXPENSE. Income tax expense increased $2.7 million, or 95.2%, to
$5.5 million for the year ended December 31, 1997, compared to $2.8 million for
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.
7
<PAGE>
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 decrease from the $8.3 million earned in 1995. The
decrease was primarily attributable to non-recurring charges for the special
assessment to recapitalize the SAIF and the expenses resulting from the sudden
passing of the Bank's long-time President.
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 was due
primarily 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 due primarily 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 due primarily
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,
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 possible 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 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 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
8
<PAGE>
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
sudden passing of the Bank's long-time President, accompanied by increased
salary and benefit costs. Occupancy expense decreased $8,000 to $2.0 million
for the year ended December 31, 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 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 with respect to 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.
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; 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 flows and
mortgage prepayments are greatly influenced by interest rates, economic
conditions, and competition.
The primary investing activity of the Bank is the origination of single family
residential mortgage loans. During the years ended December 31, 1997, 1996 and
1995, the Bank originated mortgage loans in the amounts of $153.6 million,
$127.1 million and $98.5 million, respectively. The Bank originated other loans
totaling $4.9 million, $3.8 million and $3.8 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The Bank also purchased loans
and mortgage-backed and investment securities to reduce excess liquidity not
otherwise utilized for lending activities. Purchases of mortgage loans totaled
$10.7 million, $10.1 million and $5.2 million in 1997, 1996 and 1995,
respectively. Purchases of mortgage-backed securities, including those available
for sale, totaled $198.3 million, $191.3 million and $215.3 million in 1997,
1996 and 1995, respectively. Purchases of investment securities, including
those available for sale, totaled $30.8 million, $52.7 million and $48.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Other
investing activities include investment in FHLB-NY stock and federal funds. The
investing activities were funded primarily by principal repayments on loans and
mortgage-backed securities of $175.2 million, $178.1 million and $119.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Additionally, proceeds from
9
<PAGE>
sales of loans, mortgage-backed and investment securities totaling $142.2
million, $124.2 million and $114.8 million for 1997, 1996 and 1995, and, to a
lesser extent, called or maturing investment securities totaling $26.0 million,
$19.0 million and $19.0 million for the years ended December 31, 1997, 1996 and
1995, respectively, provided additional liquidity.
The Bank had several other sources of liquidity, including FHLB-NY advances
which, at December 31, 1997, totaled $23.0 million, of which $10.0 million are
due in 1998. 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 had other borrowings that provided additional liquidity, totaling
$95.4 million at December 31, 1997, $25.4 million of which is due in 1998.
Other sources of liquidity are investment and mortgage-backed securities
available for sale, totaling $164.8 million at December 31, 1997.
The Bank is required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement is based
upon a percentage of deposits and short-term borrowings. The regulation was
amended by the OTS in 1997 to increase the type of assets that qualify as
"liquid assets" and to reduce the required percentage. The required minimum
ratio was 4.00% and 5.00% at December 31, 1997 and 1996, respectively. The
Bank's liquidity ratios were 39.39% and 10.28% at December 31, 1997 and 1996,
respectively. The Bank's liquid assets at December 31, 1997, consist of cash
and cash equivalents, and most investment and mortgage-backed securities
(excluding securities that have been pledged for repurchase agreements). The
level of these assets depends upon the Bank's operating, financing and investing
activities during any given period. At December 31, 1997, 1996 and 1995, cash,
cash equivalents, and investments qualifying for liquidity purposes totaled
$319.4 million, $72.2 million and $110.5 million, respectively.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. At December 31, 1997, the Bank had commitments to
originate and purchase mortgage loans of $31.5 million, there were no
commitments to purchase mortgage-backed or investment securities. The Bank is
obligated to pay $1.3 million under its lease agreements for branch and
administrative facilities, of which $361,000 is due in 1998. Certificates of
deposit which are scheduled to mature in one year or less totaled $347.9 million
at December 31, 1997. Based upon historical experience, management estimates
that a significant portion of such deposits will remain with the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes presented herein have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money 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 in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
YEAR 2000 COMPLIANCE
First Savings Bank has adopted a Year 2000 Compliance Plan. This plan 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
millenium. As recommended by the Federal Financial Institutions Examination
Council, the Year 2000 Compliance Plan encompasses the following phases:
Awareness, Assessment, Renovation, Validation and Implementation. 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 have been addressed,
along with contract and service agreements. The Renovation Phase will include
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.
10
<PAGE>
FIRST SAVINGS BANK, SLA AND SUBSIDIARIES
- - ------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................................ $ 8,377 $ 7,192
Federal funds sold..................................................................... 6,050 1,850
--------------- -------------
Total cash and cash equivalents........................................................ 14,427 9,042
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost, (note 10)................. 8,045 7,428
Investment securities, at amortized cost (estimated fair value of $31,150 and
$38,980 at 12/31/97 and 12/31/96, respectively) (notes 4 and 10)...................... 31,031 38,955
Investment securities available for sale (notes 4 and 10).............................. 17,701 14,831
Mortgage-backed securities, net (estimated fair value of $210,683 and
$255,052 at 12/31/97 and 12/31/96, respectively) (notes 5 and 10)..................... 207,157 252,383
Mortgage-backed securities available for sale (notes 5 and 10)......................... 147,137 120,797
Loans receivable, net (notes 6 and 10)................................................. 588,500 509,627
Loans available for sale (notes 6 and 10).............................................. - 287
Interest and dividends receivable (note 7)............................................. 7,882 7,415
Premises and equipment, net (note 8)................................................... 13,087 10,356
Excess of cost over fair value of net assets acquired.................................. 8,806 10,950
Other assets (note 12)................................................................. 5,543 5,044
--------------- -------------
Total assets........................................................................ $1,049,316 $987,115
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (note 9)...................................................................... $ 816,283 $794,595
Borrowed funds (note 10)............................................................... 118,444 87,994
Employee Stock Ownership Plan (ESOP) debt (note 11).................................... 546 646
Advances by borrowers for taxes and insurance.......................................... 5,444 4,600
Other liabilities (notes 12 and 13).................................................... 6,913 6,417
--------------- -------------
Total liabilities...................................................................... 947,630 894,252
--------------- -------------
Commitments and contingencies (note 14)
STOCKHOLDERS' EQUITY
Preferred stock; authorized 1,000,000 shares; issued and outstanding - none
Common stock, $.01 par value, 10,000,000 shares authorized;
8,016,352 and 7,903,719 shares issued and outstanding
at 12/31/97 and 12/31/96, respectively (note 13)....................................... 80 72
Paid-in capital (note 13).............................................................. 43,302 27,427
Retained earnings (note 12)............................................................ 58,509 66,299
Net unrealized gain (loss) on securities available for sale (notes 4 and 5)............ 524 (3)
Less: Common stock acquired by the ESOP (note 13)...................................... (546) (646)
Common stock acquired by the Recognition and
Retention Plan (RRP) (note 13)......................................................... (183) (286)
--------------- -------------
Total stockholders' equity (notes 2 and 3)............................................. 101,686 92,863
--------------- -------------
Total liabilities and stockholders'equity.............................................. $1,049,316 $987,115
=============== =============
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
11
<PAGE>
FIRST SAVINGS BANK, SLA AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans............................................................. $ 43,622 $ 38,596 $ 35,245
Mortgage-backed securities........................................ 16,333 19,147 22,140
Investment securities............................................. 3,968 4,094 4,671
Investment and mortgage-backed securities and
loans available for sale......................................... 9,299 6,202 2,517
Total interest income........................................... 73,222 68,039 64,573
----------- ----------- -----------
INTEREST EXPENSE:
Deposits:
NOW and money market demand....................................... 5,579 5,122 5,090
Savings........................................................... 3,253 3,514 3,568
Certificate of deposit.............................................. 25,329 25,256 24,997
----------- ----------- -----------
34,161 33,892 33,655
Borrowed funds...................................................... 7,022 3,372 2,036
----------- ----------- -----------
Total interest expense............................................ 41,183 37,264 35,691
----------- ----------- -----------
Net interest income............................................... 32,039 30,775 28,882
Provision for loan losses (note 6).................................. 1,200 550 310
----------- ----------- -----------
Net interest income after provision for loan losses............... 30,839 30,225 28,572
----------- ----------- -----------
OTHER OPERATING INCOME:
Fees and service charges (note 6)................................. 1,844 1,557 1,604
Net gain on sales of loans and securities (notes 4 and 5)......... 593 236 751
Other, net........................................................ 364 202 (184)
----------- ----------- -----------
Total other operating income.................................... 2,801 1,995 2,171
----------- ----------- -----------
OPERATING EXPENSES:
Compensation and benefits (note 13)................................. 9,530 10,283 8,531
Occupancy (note 14)................................................. 1,967 2,048 2,056
Equipment........................................................... 1,425 1,033 1,186
Advertising......................................................... 601 445 563
Federal deposit insurance........................................... 414 1,860 1,701
Special SAIF assessment (note 15)................................... - 5,220 -
Amortization \ writedowns of intangibles............................ 2,144 1,349 1,066
General and administrative.......................................... 2,782 2,463 2,727
----------- ----------- -----------
Total operating expenses........................................ 18,863 24,701 17,830
----------- ----------- -----------
Income before income tax expense................................ 14,777 7,519 12,913
Income tax expense (note 12)........................................ 5,482 2,809 4,611
----------- ----------- -----------
Net income...................................................... $ 9,295 $ 4,710 $ 8,302
=========== =========== ===========
Basic earnings per share............................................ $ 1.17 $ 0.60 $ 1.06
=========== =========== ===========
Weighted average shares outstanding................................. 7,916,932 7,828,399 7,821,269
=========== =========== ===========
Diluted earnings per share.......................................... $ 1.16 $ 0.59 $ 1.04
=========== =========== ===========
Weighted average shares outstanding
including common stock equivalents.................................. 8,007,315 7,983,799 7,974,549
=========== =========== ===========
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
12
<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, 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 .... - 7,205 - - - - 7,205
Stock acquired by ESOP .............. - - - - (546) - (546)
Cash dividends - $0.28/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 ............... - - - - - (310) (310)
Cash dividends - $0.32/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 - - - - 35
------ ------- -------- -------------- -------- -------- ------------
Balance at December 31, 1996 ........ 72 27,427 66,299 (3) (646) (286) 92,863
Net income for the year
ended December 31, 1997 ............ - - 9,295 - - - 9,295
Issuance of 10% stock dividend ...... 7 15,422 (15,429) - - - -
Cash in lieu of fractional shares ... - (9) - - - - (9)
Cash dividends - $0.43/share ........ - - (1,656) - - - (1,656)
Net change in unrealized gain/loss .. - - - 527 - - 527
Amortization of RRP ................. - - - - - 103 103
Principal payments on ESOP loan ..... - - - - 100 - 100
Exercise of stock options ........... 1 462 - - - - 463
------ ------- -------- -------------- -------- -------- -------------
Balance at December 31, 1997 ........ $80 $43,302 $ 58,509 $ 524 ($546) ($183) $101,686
====== ======= ======== ============== ======== ======== =============
</TABLE>
- - --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
13
<PAGE>
FIRST SAVINGS BANK, SLA AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 9,295 $ 4,710 $ 8,302
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment........................................... 1,006 842 1,018
Amortization of excess of cost over fair value of assets acquired................ 2,144 1,349 1,066
Amortization of ESOP............................................................. 100 100 100
Amortization of RRP.............................................................. 103 24
Net accretion and amortization of deferred loan fees............................ (502) (284) (335)
Provision for loan losses........................................................ 1,200 550 310
Provision for losses on real estate owned........................................ 81 105 222
Net (gain) loss on sales of investment securities available for sale............. (129) (114) 104
Net loss on trading account securities .......................................... 29 - -
Loans originated for sale........................................................ (4,708) (6,798) (6,619)
Proceeds from sales of mortgage loans available for sale......................... 5,011 6,892 6,358
Net (gain) loss on sales of mortgage loans available for sale.................... (18) 40 (15)
Net gain on sales of mortgage-backed securities available for sale............... (475) (162) (840)
Net gain on sales of real estate owned........................................... (88) (183) (52)
Investment securities purchased for trading...................................... (1,989) - -
Proceeds from sales of investment securities held for trading.................... 1,971 - -
Net accretion of premiums and amortization of discounts.......................... (89) 1,191 (467)
Increase in interest and dividends receivable.................................... (467) (622) (1,552)
Increase in other liabilities.................................................... 496 765 1,011
(Decrease) increase in other assets.............................................. (941) 5 (461)
---------- ---------- ----------
Net cash provided by operating activities...................................... 12,030 8,410 8,150
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale.................. 10,128 20,978 25,823
Proceeds from sales of mortgage-backed securities available for sale............. 127,058 96,309 82,632
Proceeds from sale of real estate owned.......................................... 1,277 4,351 3,299
Investment securities purchased for sale......................................... (12,694) (31,808) (1,016)
Purchases of mortgage-backed securities available for sale....................... (168,025) (136,935) (86,767)
Purchases of investment securities............................................... (18,062) (20,937) (47,002)
Maturities of investment securities.............................................. 25,994 19,000 19,000
Origination of loans............................................................. (153,841) (124,134) (95,674)
Purchases of mortgage loans...................................................... (10,733) (10,118) (5,181)
Purchases of mortgage-backed securities.......................................... (30,278) (54,392) (128,524)
Principal repayments on loans.................................................... 83,872 79,703 54,185
Principal payments on mortgage-backed securities................................. 91,324 98,392 64,785
Purchase of FHLB-NY stock........................................................ (617) (1,152) (585)
Purchases of premises and equipment.............................................. (3,737) (1,849) (2,065)
Cost in excess of fair value of assets acquired.................................. - - (12,640)
---------- ---------- ----------
Net cash used in investing activities.......................................... (58,334) 62,592) (129,730)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock offering................................................. - - 7,205
Proceeds from ESOP debt.......................................................... - - 546
Payment on ESOP debt............................................................. (100) (100) (100)
Cost of stock contributed to RRP................................................. - (310) -
Purchase of ESOP shares.......................................................... - - (546)
Stock options exercised.......................................................... 463 35 30
Cash dividends paid.............................................................. (1,656) (1,238) (1,004)
Proceeds from acquisition of deposits............................................ - - 112,784
Net increase (decrease) in deposits.............................................. 21,688 (11,743) 11,941
Net increase in borrowed funds................................................... 30,450 49,244 4,750
Net increase in advances by borrowers for taxes and insurance.................... 844 787 80
---------- ---------- ----------
Net cash provided by financing activities...................................... 51,689 36,675 135,686
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........................... 5,385 (17,507) 14,106
Cash and cash equivalents at beginning of year..................................... 9,042 26,549 12,443
---------- ---------- ----------
Cash and cash equivalents at end of year .......................................... $ 14,427 $ 9,042 $ 26,549
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest....................................................................... $ 40,723 $ 36,967 $ 35,409
Income taxes................................................................... 5,505 3,831 4,495
Non cash investing and financing activities for the period:
Transfer of loans to real estate owned......................................... 1,133 2,535 4,960
Transfer of investment and mortgage-backed securities from held
to maturity to available for sale............................................. - - 77,549
========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
14
<PAGE>
(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 Subsidiaries ("the Bank").
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.
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.
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 December 31, 1997 or 1996.
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.
On December 15, 1995, the Bank reassessed its held to maturity and available for
sale classifications for investments and mortgage-backed securities and, in
accordance with accounting standards, transferred $77.5 million in amortized
cost of investment and mortgage-backed securities to the available for sale
classification. The related net unrealized loss after tax effect as of the date
of the transfer was $40,000.
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
15
<PAGE>
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.
The Bank has defined the population of impaired loans to be all non-accrual
commercial real estate, multi-family and land loans. Impaired loans are
individually assessed to determine that the loan's carrying value is not in
excess of the fair value of the collateral or the present value of the loan's
expected future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
installment loans are specifically excluded for the impaired loan portfolio.
There were no impaired loans at December 31, 1997 or 1996.
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.
The Bank capitalizes 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, are
evaluated for impairment on a quarterly basis with any adjustments recognized
through a valuation allowance. The balance of capitalized mortgage servicing
rights was $116,000 and $81,000 at December 31, 1997 and 1996, respectively.
The Bank amortizes mortgage servicing rights over the estimated life of the
loans on a straight line basis. The Bank recognized amortization of $16,000 and
$8,000 for the years ended December 31, 1997 and 1996, respectively.
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, as determined by current appraisals, 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 $1.4 million and $1.5 million in real estate owned included in Other
Assets at December 31, 1997 and 1996, 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
16
<PAGE>
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 overstated. The Bank recognized impairment writedowns of $1.3 million
and $334,000 for the years ended December 31, 1997 and 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 years 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 OPTION PLANS
The Bank applies the "intrinsic value based method" as described in Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock based
compensation. Accordingly, no compensation cost has been recognized for the
stock option plan.
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 period at a rate of 33.3% per year, commencing
on the date of the award grant. Compensation expense is recorded at the fair
value of the shares at the grant date ratably over the vesting period.
INCOME TAXES
The Bank accounts for income taxes according to the asset and liability method
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates applicable to taxable income for the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
PENSION PLAN
Pension plan costs based on actuarial computation of current and future benefits
for employees are charged to expense and are funded based on the maximum amount
that can be deducted for Federal income tax purposes.
POST-RETIREMENT BENEFITS
The Bank accrues 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 and diluted earnings per share are presented in accordance with the
provisions on Statement of Financial Accounting Standards ("SFAS") 128,
"Earnings Per Share." SFAS 128 was adopted by the Bank effective December 31,
1997, and all prior earnings per share have been restated to conform with SFAS
128.
Basic earnings per share is calculated by dividing net income by the daily
average number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued.
Per share data reflects 10% stock dividends paid on December 16, 1996, and
October 30, 1997, applied retroactively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 amounts to conform
to the 1997 presentation.
17
<PAGE>
(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 December 31, 1997, the total minority ownership was
48.4%.
On October 27, 1997, the Boards of Directors for First Savings Bank, SLA, and
First Savings Bancshares, MHC, the mutual holding company of the Bank, announced
that a Plan of Conversion and Reorganization (the "Plan") was adopted to convert
First Savings Bancshares, MHC to stock form and to reorganize First Savings
Bancshares, MHC, and First Savings Bank, SLA, 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 has received regulatory approvals from the
OTS has been declared effective by the United States Securities and Exchange
Commission, but still must be ratified by 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, assuming receipt of such approvals.
(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 December 31, 1997 and
1996, 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 ration 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.
18
<PAGE>
Management believes that, as of December 31, 1997, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent OTS
notification categorized the Bank as a well capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1997 and 1996, compared to the OTS minimum capital adequacy
requirements and the OTS requirements for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
OTS Requirements
----------------------------------------------------------
Minimum Capital Adequacy For Classification as
Bank Actual Well-Capitalized
------------------------------------------------------------------------------------
Amount Ratio (%) Amount Ratio (%) Amount Ratio (%)
------- --------- ----------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
- - --------------------------------
Tangible capital ............... $92,344 8.86 $15,625 1.50
Tier 1 (core) capital........... 92,344 8.86 31,250 3.00 $52,084 5.00
Risk-based capital:
Tier 1......................... 92,344 21.19 26,149 6.00
Total.......................... $97,797 22.44 $34,866 8.00 $43,582 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
======= ===== ======= ==== ======= =====
</TABLE>
(4) INVESTMENT SECURITIES
A summary of investment securities at December 31, 1997 and 1996, is as follows
(in thousands):
<TABLE>
<CAPTION>
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............... $ 28,966 $ 129 $ (12) $ 29,083
State obligations.................................... 2,065 6 (4) 2,067
-------- --------------- ------------ -----------
Total investment securities held to maturity......... $ 31,031 $ 135 $ (16) $ 31,150
======== =============== ============ ===========
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agency obligations............... $ 12,976 $ 57 $ (17) $ 13,016
Corporate obligations................................ 4,698 - (13) 4,685
-------- --------------- ------------ -----------
Total investment securities available for sale....... $ 17,674 $ 57 $ (30) $ 17,701
======== =============== ============ ===========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
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>
The cost and estimated fair value of investment securities at December 31, 1997,
by contractual maturity, are shown below (in thousands). Expected maturities
may differ from contractual maturities because issuers may have the right to
call or repay obligations at par value without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized market
INVESTMENTS HELD TO MATURITY cost value
----------- -----------
<S> <C> <C>
Due in:
One to five years.................................................................... $12,591 $12,628
Five to ten years.................................................................... 14,561 14,612
Ten to fifteen years................................................................. 3,879 3,910
----------- -----------
$31,031 $31,150
=========== ===========
<CAPTION>
Estimated
Amortized market
INVESTMENTS AVAILABLE FOR SALE cost value
----------- -----------
<S> <C> <C>
Due in:
Less than one year................................................................... $ 2,698 $ 2,690
One year to five years............................................................... 11,976 11,995
Five to ten years.................................................................... 3,000 3,016
----------- -----------
$ 17,674 $ 17,701
=========== ===========
</TABLE>
Proceeds from sales of investment securities and the realized gross gains and
losses from those sales are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Proceeds from sales of investment securities available for sale and held for trading .... $ 12,099 $ 20,978 $ 25,823
======== ======== ========
Gross realized gains..................................................................... $ 184 $ 147 $ 94
Gross realized losses.................................................................... (84) (33) (198)
-------- -------- --------
$ 100 $ 114 $ (104)
======== ======== ========
</TABLE>
Investment securities with an amortized cost of $16.0 million at December 31,
1997, 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).
20
<PAGE>
(5) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at December 31, 1997 and 1996, is as
follows (in thousands):
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
FHLMC...................................................... $ 120,132 $ 2,725 $ (23) $ 122,834
GNMA....................................................... 17,599 512 - 18,111
FNMA....................................................... 30,436 355 (14) 30,777
Collateralized mortgage obligations........................ 38,990 109 (138) 38,961
-------------- ------------ ------------ -----------
Total mortgage-backed securities held to maturity.......... $ 207,157 $ 3,701 $ (175) $ 210,683
============== ============ ============ ===========
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
FHLMC...................................................... $ 89,503 $ 634 $ (174) $ 89,963
FNMA....................................................... 39,407 138 - 39,545
Collateralized mortgage obligations........................ 17,436 233 (40) 17,629
-------------- ------------ ------------ -----------
Total mortgage-backed securities available for sale........ $ 146,346 $ 1,005 $ (214) $ 147,137
============== ============ ============ ===========
<CAPTION>
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>
Proceeds from sales of mortgage-backed securities and the realized gross gains
and losses from those sales are as follows
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
(in thousands) 1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Proceeds from sales.......................................................... $ 127,058 $ 96,309 $ 82,632
========= ======== ========
Gross realized gains......................................................... $ 528 $ 324 $ 986
Gross realized losses........................................................ (53) (162) (146)
--------- -------- --------
$ 475 $ 162 $ 840
========= ======== ========
</TABLE>
Mortgage-backed securities with an amortized cost of $289,000 at December 31,
1997, were pledged as collateral to secure deposits held for municipalities
within the State of New Jersey. Mortgage-backed securities with an amortized
cost of $89.8 million at December 31, 1997, 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.
21
<PAGE>
(6) LOANS RECEIVABLE, NET
A summary of loans receivable at December 31, 1997 and 1996, is as follows (in
thousands):
<TABLE>
<CAPTION>
LOANS RECEIVABLE 1997 1996
--------- ---------
<S> <C> <C>
Real estate mortgages:
One- to four-family.................................................................... $ 486,453 $ 425,175
Multi-family and commercial............................................................ 38,808 29,085
Home equity............................................................................ 42,185 39,139
FHA-insured and VA-guaranteed.......................................................... 2,410 3,002
--------- ---------
569,856 496,401
Real estate construction................................................................. 44,320 25,124
Consumer................................................................................. 6,725 5,772
Total Loans............................................................................ 620,901 527,297
--------- ---------
Loans in process......................................................................... (26,712) (12,253)
Net deferred expenses.................................................................... 411 19
Net unearned discount.................................................................... (3) (114)
Allowance for loan losses................................................................ (6,097) (5,322)
--------- ---------
(32,401) (17,670)
--------- ---------
Loans receivable, net.................................................................. $ 588,500 $ 509,627
========= =========
LOANS AVAILABLE FOR SALE
Real estate mortgages - one-to-four family .............................................. $ - $ 287
========= =========
</TABLE>
The Bank serviced loans for others in the amount of $93.7 million, $101.2
million and $106.9 million at December 31, 1997, 1996 and 1995, respectively.
Related servicing income earned on loans serviced for others totaled $288,000,
$325,000 and $350,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Loans in the amount of $1.6 million, and $1.9 million were outstanding to
directors and executive officers of the Bank at December 31, 1997 and 1996,
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 December 31, 1997 and 1996, is as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Nonaccrual loans........................................................................ $ 3,735 $ 4,720
Loans 90 days or more delinquent and still accruing..................................... 597 93
------------- -------------
Total nonperforming loans.......................................................... 4,332 4,813
Real estate owned (included in other assets) ........................................... 1,380 1,517
------------- -------------
Total nonperforming assets ........................................................ $ 5,712 $ 6,330
============= =============
</TABLE>
If interest income on nonaccrual loans had been current in accordance with their
original terms, approximately $326,000, $364,000 and $579,000 of interest income
for the years ended December 31, 1997, 1996 and 1995, respectively, would have
been recorded. Interest income recognized on nonaccrual loans totaled $84,000,
$105,000 and $114,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, there were no commitments to lend
additional funds to borrowers whose loans are classified as nonperforming.
22
<PAGE>
An analysis of the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Balance at beginning of period................................................ $ 5,322 $ 5,247 $ 5,745
Provision charged to operations............................................... 1,200 550 310
------- ------- --------
6,522 5,797 6,055
Charge-offs.................................................................... (425) (585) (1,044)
Recoveries..................................................................... - 110 236
------- ------- --------
Balance at end of period ...................................................... $ 6,097 $ 5,322 $ 5,247
======= ======= ========
</TABLE>
(7) INTEREST AND DIVIDENDS RECEIVABLE, NET
A summary of interest and dividends receivable, net of allowance for uncollected
interest of $344,000 and $440,000 at December 31, 1997 and 1996, respectively,
is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Loans...................................................................................... $ 3,304 $ 2,868
Investment securities...................................................................... 890 908
Mortgage-backed securities................................................................. 3,688 3,639
------- -------
$ 7,882 $ 7,415
======= =======
</TABLE>
(8) PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31, 1997 and 1996, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land ........................................................................................ $ 2,235 $ 1,423
Buildings and improvements .................................................................. 10,913 7,977
Leasehold improvements ...................................................................... 1,405 1,967
Furnishings, equipment and automobiles ...................................................... 4,746 3,265
Construction in progress..................................................................... 123 1,788
-------- --------
Total 19,422 16,420
Accumulated depreciation and amortization.................................................... (6,335) (6,064)
-------- --------
$ 13,087 $ 10,356
======== ========
</TABLE>
(9) DEPOSITS
Deposits at December 31, 1997 and 1996, are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------- ----------------------------------
INTEREST WEIGHTED Interest Weighted
RATE AVERAGE rate average
AMOUNT RANGES RATE Amount ranges rate
--------- ----------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand ................. $ 26,440 -% -% $ 19,888 -% -%
NOW and money market ........................ 201,559 0 - 3.41 2.91 181,499 0 - 5.43 2.90
Savings...................................... 122,546 0 - 4.11 2.51 131,427 0 - 2.50 2.50
Certificates of deposit 465,738 3.45 - 9.34 5.54 461,781 3.69 - 9.34 5.38
--------- ---------
$ 816,283 4.25% $ 794,595 4.20%
========= ======== ========= ========
</TABLE>
23
<PAGE>
The scheduled maturities of certificates of deposit at December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C> <C>
One year or less............................................................................................ $ 347,901
After one to twoyears....................................................................................... 44,976
After two to three years.................................................................................... 21,573
After three to four years .................................................................................. 11,482
After four to five years.................................................................................... 16,238
After five years............................................................................................ 23,568
-------------
$ 465,738
=============
</TABLE>
Included in deposits at December 31, 1997 and 1996, are $74.7 million and $62.5
million of deposits of $100,000 and over, and $392,000 and $331,000,
respectively, of accrued interest payable on deposits.
(10) BORROWED FUNDS
Advances from the FHLB-NY at December 31, 1997 and 1996, are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
WEIGHTED Weighted
AVERAGE Average
INTEREST Interest
Maturity AMOUNT RATE Amount Rate
- - -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
1997......................................... $ - - % $ 12,000 5.80%
1998......................................... 10,000 6.71 10,000 6.56
1999......................................... 6,000 5.87 6,000 5.87
2000......................................... 2,000 5.76 2,000 5.76
2002......................................... 5,000 6.10 - -
---------- ----------- ---------- -----------
$ 23,000 6.28 % $ 30,000 6.06%
========== =========== ========== ===========
</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
December 31, 1997 and 1996, totaled $5.0 million and $10.0 million,
respectively. The maximum amount of FHLB-NY advances outstanding at any month-
end during the years ended December 31, 1997 and 1996 was $40.0 million and
$30.0 million, respectively. The average amount of FHLB-NY advances outstanding
during the years ended December 31, 1997 and 1996 was $33.3 million and $21.8
million, respectively. At December 31, 1997 and 1996, $10.0 million and $5.0
million of FHLB-NY advances had adjustable rates, respectively.
Advances from the FHLB-NY are secured by pledges of FHLB-NY stock of $8.0
million and $7.4 million at December 31, 1997 and 1996, 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 December 31, 1997.
24
<PAGE>
OTHER BORROWINGS
The following is a summary of other borrowings at December 31, 1997 and 1996
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------- --------------------------
WEIGHTED Weighted
AVERAGE Average
INTEREST Interest
Contractual Maturity AMOUNT RATE Amount Rate
- - -------------------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
1997................................. $ - - % $ 13,750 5.93 %
1998................................. 25,444 6.32 24,244 6.35
1999................................. 15,000 5.71 15,000 5.71
2000................................. 20,000 6.05 - -
2001................................. 5,000 5.55 5,000 5.55
2002................................. 20,000 5.70 - -
2004................................. 10,000 5.97 - -
$ 95,444 5.96 % $ 57,994 6.02 %
============ =========== ============ ==========
</TABLE>
The maximum amount of other borrowings outstanding at any month-end during the
years ended December 31, 1997 and 1996 was $105.9 million and $58.0 million,
respectively. The average amount of other borrowings outstanding during the
years ended December 31, 1997 and 1996 was $80.7 million and $32.7 million,
respectively. Securities underlying other borrowings included mortgage-backed
and investment securities, which had an amortized cost of $105.8 million and
$63.7 million, and market values of $106.8 million and $63.8 million at December
31, 1997 and 1996, respectively. At December 31, 1997 and 1996, $70.0 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 December 31, 1997 and 1996, was $546,000 and $646,000,
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 years ended December
31, 1997 and 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 years
ended December 31, 1997 and 1996, was $43,000 and $48,000, respectively. In
July, 1995, the Bank completed a secondary stock offering, whereby the ESOP
purchased an additional 42,000 shares of common stock at $13.00 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 50,820 shares of the Bank's common stock.
(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 return for 1995. 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 December 31, 1997 and 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
25
<PAGE>
complete or partial liquidation, stock redemptions, excess distributions to
shareholders or a change in federal tax law. At December 31, 1997 and 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 years ended December 31, 1997,
1996 and 1995, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
FEDERAL:
Current...................................... $ 5,231 $ 3,183 $ 3,671
Deferred..................................... (200) (603) 545
------------- ------------- -------------
5,031 2,580 4,216
------------- ------------- -------------
STATE:
Current...................................... 469 282 365
Deferred..................................... (18) (53) 30
------------- ------------- -------------
451 229 395
------------- ------------- -------------
$ 5,482 $ 2,809 $ 4,611
============= ============= =============
</TABLE>
The effective tax rates for years ended December 31, 1997, 1996 and 1995, the
rates were 37.1%, 37.4%, and 35.7%, respectively.
A reconciliation between the effective income tax expense and the amount
computed by multiplying the applicable statutory federal income tax rate for the
years ended December 31, 1997, 1996 and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Income before income taxes................................. $ 14,777 $ 7,519 $ 12,913
Applicable statutory federal tax rate ..................... 35% 35% 35%
------------- ------------- -------------
Computed "expected" federal income tax expense............. 5,172 2,632 4,520
Increase in federal income tax expense resulting from:
State income taxes, net of federal benefit .............. 293 151 257
Other items, net......................................... 17 26 (166)
------------- ------------- -------------
$ 5,482 $ 2,809 $ 4,611
============= ============= =============
</TABLE>
26
<PAGE>
The tax effects of temporary differences that give rise to a significant portion
of deferred tax assets and liabilities at December 31, 1997 and 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
DEFERRED TAX ASSETS
Provision for loan losses-book............................................. $ 2,277 $ 1,980
Postretirement benefits.................................................... 376 350
Cash to accrualadjustment.................................................. - 1
Excess pensionexpense...................................................... 304 670
Deferred directors' fees................................................... 98 63
Unrealized loss on securities available for sale........................... - 2
Goodwill................................................................... 482 -
Other...................................................................... 11 2
------------- -------------
Total gross deferred tax assets (included in Other assets)............. 3,548 3,068
------------- -------------
DEFERRED TAX LIABILITIES
Provision for loan losses-tax.............................................. 1,161 1,161
Unrealized gain on securities available for sale........................... 295 -
Tax depreciation less than book depreciation............................... 210 179
Excess sum-of-year discount over straight line............................. 81 90
Amortization of core deposit premium....................................... - 55
Net mortgage premium accretion............................................. 65 66
Deferred points............................................................ 138 -
Other...................................................................... 160 -
------------- -------------
Total gross deferred tax liabilities (included in Other liabilities)... 2,110 1,551
------------- -------------
Net deferred tax asset.................................................... $ 1,438 $ 1,517
============= =============
</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.
(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 $190,000, $320,000 and
$330,000 for the years ended December 31, 1997, 1996 and 1995, 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
$680,000, $550,000 and $200,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
27
<PAGE>
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 $134,000, $135,000 and $119,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
POSTRETIREMENT BENEFITS
Postretirement benefit expense for the years ended December 31, 1997 and 1996
was $70,000 and $157,000, respectively. There was no expense for the year ended
December 31, 1995, due to a reduction in the accumulated postretirement benefit
obligation of $102,000. The accumulated postretirement benefit obligation for
fully eligible active plan participants and retirees was $1.0 million and
$948,000 as of December 31, 1997 and 1996, respectively. The plan is unfunded
as of December 31, 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.
BANK RECOGNITION AND RETENTION PLAN AND TRUST
In 1992, the Bank adopted a Recognition and Retention Plan and Trust 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, as approved by the OTS and
stockholders.
The market value of shares issued and granted under the RRP in 1996 was
$310,000. Amortization of the RRP for the years ended December 31, 1997 and
1996, was $103,000 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. Stock dividends and splits have caused the restatement of
the shares originally purchased to equal 204,974 shares and stock dividends have
caused the shares purchased in the secondary offering to equal 50,820 shares.
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 $2.8 million at December 31, 1997. The ESOP allocated 29,282;
29,282 and 26,620 shares for the years ended December 31, 1997, 1996 and 1995,
respectively, inclusive of four stock dividends of 10%, and a 2-for-1 stock
split. The compensation expense for payments made to the ESOP totaled $75,000
for each of the years ended December 31, 1997, 1996 and 1995.
28
<PAGE>
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 72,600 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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ---------------------- ----------------------
WEIGHTED Weighted Weighted
NUMBER AVERAGE Number average Number average
OF EXERCISE of exercise of exercise
SHARES PRICE shares price shares price
---------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period.... 271,958 $ 6.306 209,627 $ 3.413 218,451 $ 3.413
Granted............................... - - 72,600 14.245 - -
Exercised............................. (129,417) 3.413 (10,269) 3.413 (8,824) 3.413
---------- -------- -------
Outstanding at end of period.......... 142,541 $ 8.931 271,958 $ 6.306 209,627 $ 3.413
========== ========== ======== ========== ======= ==========
Options exercisable at year-end....... 94,141 199,356 180,343
========== =========== ===========
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1997, as adjusted for the effect of stock dividends:
<TABLE>
<CAPTION>
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 end price
---------------- ----------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 3.413 69,941 4.3 $ 3.413 69,941 $ 3.413
13.017 - 14.773 72,600 8.7 14.243 24,200 14.246
----------- -------------
$ 3.413 - 14.773 142,541 6.5 $ 8.931 94,141 $ 6.198
================ =========== ============= ======== ============= ========
</TABLE>
The Bank applies APB 25 in accounting for the Plans. There were no options
granted in 1997 or 1995. 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 (in thousands, except per share
data):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
NET INCOME:
As reported.............................................................. $9,295 $4,710 $8,302
Pro forma................................................................ 9,295 4,649 8,302
EARNINGS PER SHARE:
Basic earnings per share................................................. $ 1.17 $ 0.60 $ 1.06
Diluted earnings per share............................................... 1.16 0.59 1.04
Pro forma basic earnings per share ...................................... 1.17 0.59 1.06
Pro forma diluted earnings per share .................................... 1.16 0.58 1.04
Weighted average fair value of options granted during year................. $ 4.38
</TABLE>
29
<PAGE>
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 or 1995
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 December 31,
1997 and 1996, which are not reflected in the accompanying consolidated
financial statements (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Origination of mortgage loans:
Fixed rate....................................................................................... $ 8,490 $ 6,477
Variable rate.................................................................................... 22,890 22,813
Purchase of mortgage loans - variable rate......................................................... - 2,773
Undisbursed home equity credit lines............................................................... 14,300 15,210
Purchase of investment and mortgage-backed securities ............................................. - 21,268
Undisbursed construction credit lines.............................................................. 26,712 12,243
Undisbursed consumer lines of credit............................................................... 1,939 -
Participations in Thrift Institutions Community Investment Corp. of NJ............................. 100 650
Unused credit card lines........................................................................... 907 964
Standby letters of credit.......................................................................... 2,228 1,322
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.
<PAGE>
LEASE OBLIGATIONS
At December 31, 1997, the Bank was obligated under noncancellable operating
leases for premises and equipment. Rental expense under these leases aggregated
approximately $613,000, $711,000 and $714,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
The projected minimum rental commitments as of December 31, 1997, are as follows
(in thousands):
<TABLE>
<S> <C>
1998..................... $ 361
1999..................... 357
2000..................... 218
2001..................... 158
2002..................... 150
Thereafter............... 99
------
$1,343
======
</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 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 $414,000, $1.9 million and $1.7 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
(16) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("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.
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
31
<PAGE>
securities available for sale. SFAS 130 is effective for annual and interim
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 adoption of SFAS 130 did not have a material effect
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 adoption of SFAS 131 will not have a
material effect on the Bank's financial statement presentation.
In February 1998, FASB issued SFAS 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." SFAS 132 amends the disclosure requirements
of SFAS 87, "Employers' Accounting for Pensions," SFAS 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits" and SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 132 standardizes the
disclosure requirements of SFAS 87 and SFAS 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. SFAS 132 is applicable to all entities and addresses
disclosure only. It is effective for fiscal years beginning after December 15,
1997. Restatement of comparative period disclosures is required unless the
information is not readily available, in which case the notes to the financial
statements shall include all available information and a description of the
information not available. As SFAS 132 addresses disclosure only, the adoption
of SFAS 132 will not have a material effect on the Bank's financial position or
results of operations.
(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 December 31, 1997 and 1996. 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.
32
<PAGE>
BORROWINGS
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.
The estimated fair values of the Bank's financial instruments at December 31,
1997 and 1996, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------ --------------------------------
BOOK FAIR Book Fair
VALUE VALUE Value Value
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents...................................... $ 14,427 $ 14,427 $ 9,042 $ 9,042
FHLB-NY stock.................................................. 8,045 8,045 7,428 7,428
Investment securities.......................................... 31,031 31,150 38,955 38,980
Investment securities available for sale....................... 17,701 17,701 14,831 14,831
Mortgage-backed securities..................................... 207,157 210,683 252,383 255,052
Mortgage-backed securities available for sale.................. 147,137 147,137 120,797 120,797
Loans receivable, net.......................................... 588,500 594,544 509,627 514,084
Loans available for sale....................................... - - 287 290
FINANCIAL LIABILITIES:
Deposits....................................................... 816,283 817,239 794,595 795,545
Borrowings..................................................... 118,990 118,412 88,640 88,648
OFF-BALANCE SHEET INSTRUMENTS:
Loan commitments............................................... - 134 - 393
Standby letters of credit...................................... - 22 - 13
</TABLE>
LIMITATIONS:
The foregoing fair value estimates were made at December 31, 1997 and 1996,
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 December 31, 1997 and 1996, 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.
33
<PAGE>
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data for the years ended
December 31, 1997 and 1996 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Interest income................................................ $ 17,791 $ 18,263 $ 18,582 $ 18,586
Interest expense............................................... 9,828 10,262 10,501 10,592
--------- --------- --------- ---------
Net interest income before provision for loan losses........... 7,963 8,001 8,081 7,994
Provision for loan losses...................................... 300 300 300 300
--------- --------- --------- ---------
Net interest income after provision for loan losses............ 7,663 7,701 7,781 7,694
Other operating income......................................... 525 526 1,135 615
Operating expenses............................................. 4,124 4,417 6,040 4,282
--------- --------- --------- ---------
Income before income tax expense............................... 4,064 3,810 2,876 4,027
Income tax expense............................................. 1,563 1,356 1,071 1,492
--------- --------- --------- ---------
Net income..................................................... $ 2,501 $ 2,454 $ 1,805 $ 2,535
========= ========= ========= =========
Basic earnings per share....................................... $ 0.32 $ 0.31 $ 0.23 $ 0.32
========= ========= ========= =========
Diluted earnings per share..................................... $ 0.31 $ 0.30 $ 0.22 $ 0.31
========= ========= ========= =========
<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 loan 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 before income tax expense............................... 3,436 2,695 (2,391) 3,779
Income tax expense............................................. 1,244 1,005 (873) 1,433
--------- --------- --------- ---------
Net income..................................................... $ 2,192 $ 1,690 $ (1,518) $ 2,346
========= ========= ========= =========
Basic earnings per share....................................... $ 0.28 $ 0.22 $ (0.19) $ 0.30
========= ========= ========= =========
Diluted earnings per share..................................... $ 0.27 $ 0.21 $ (0.19) $ 0.29
========= ========= ========= =========
</TABLE>
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Savings Bank, SLA:
We have audited the accompanying consolidated statements of financial condition
of First Savings Bank, SLA and Subsidiaries as of December 31, 1997 and 1996,
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,
1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Short Hills, New Jersey
February 6, 1998
35
<PAGE>
FIRST SAVINGS BANK, SLA AND SUBSIDIARIES
- - -------------------------------------------------------------------------------
Corporate Information
DIRECTORS
WALTER K. TIMPSON, Chairman of the Board
Owner, Walter K. Timpson Co., real estate &
appraisal firm
DONALD T. AKEY, MD
Retired Physician
HARRY F. BURKE
Retired owner of general insurance agency
CHRISTOPHER MARTIN
Executive Vice President, Chief Operating and
Financial Officer and Corporate Secretary
First Savings Bank, SLA
KEITH H. McLAUGHLIN
President and Chief Executive Officer,
Raritan Bay Medical Center
JOHN P. MULKERIN
President and Chief Executive Officer
First Savings Bank, SLA
JEFFRIES SHEIN
Partner, Jacobson, Goldfarb & Tanzman Associates, L.L.C.
PHILIP T. RUEGGER, JR.
Investor
OFFICERS
<TABLE>
<S> <C>
JOHN P. MULKERIN PAULA SUICH
President and Chief Executive Officer Treasurer
CHRISTOPHER MARTIN
Executive Vice President, Chief Operating and ELLEN JORGENSEN
Financial Officer and Corporate Secretary Assistant Vice President
JOHN F. CERULO, JR. CAROLINE NIKFORCHUK
Senior Vice President Assistant Vice President
RICHARD P. GAVIN STEPHANIE SZATKOWSKI
Senior Vice President Assistant Vice President
KAREN I. MARTINO DONNA ACOSTA
Senior Vice President Assistant Secretary
EDMUND RACKE INGRID ANDRADE
Senior Vice President Assistant Secretary
RICHARD SPENGLER WILDA DIAZ
Senior Vice President Assistant Secretary
JOANNE L. BARBARA SUSAN EBERLE
Vice President Assistant Secretary
JOAN C. DEYAK CAROL FILIDEI
Vice President Assistant Secretary
JOHN M. FIELDS, JR. WANDA GHIGLIOTTY
Vice President Assistant Secretary
BARBARA GALLOP CAROL HILL
Vice President Assistant Secretary
MARYANNE GUENTHER MARY ANN LOVAS
Vice President Assistant Secretary
MARY MARLEY BONNIE PETZ
Vice President Assistant Secretary
PATRICIA A. PARENTE JENNIFER PHULCHAND
Vice President Assistant Secretary
RICHARD ST. GEORGE JOAN PRESSLER
Vice President Assistant Secretary
</TABLE>
36
<PAGE>
- - ------------------------------------------------------------------------------
Corporate and Stockholder Information
<TABLE>
<S> <C>
BANKING OFFICES:
Perth Amboy (Main Office)
339 State Street, 08861 732-442-2770
Manager: Wilda Diaz
EDISON
980 Amboy Avenue, 08837 732-225-0800
Manager: Mary Ann Lovas
2100 Oak Tree Road, 08820 732-548-4900
Manager: Joan Mullen
FANWOOD
206 South Avenue, 07023 908-322-8660
Manager: Karen LaSala
FORDS
33 Lafayette Road, 08863 732-225-0220
Manager: Thomas Wright
HAZLET
Rte. 35 & Bethany Road, 07730 732-739-9500
Manager: Ann Marie Alfieri
HOPELAWN
101 New Brunswick Avenue, 08861 732-826-4600
Manager: Denise Figueroa
ISELIN
1220 Green Street, 08830 732-283-0700
Manager: Donna Acosta
METUCHEN
599 Middlesex Avenue, 08840 732-549-5858
Manager: Jennifer Phulchand
MIDDLETOWN
1580 Rte 35 South, 07748 732-706-0303
Manager: Angie Shapinski
MILLTOWN
97 North Main Street, 08850 732-828-0410
Manager: Susan Eberle
OLD BRIDGE
Rte. 9 & Ticetown Road, 08857 732-679-7600
Manager: Ingrid Andrade
PISCATAWAY
100 Stelton Road, 08854 732-968-9100
Manager: Wanda Ghigliotty
WOODBRIDGE
325 Amboy Avenue, 07095 732-634-2600
Manager: Carol Filidei
Rte. 1 & St. Georges Avenue, 07095 732-634-2900
Manager: Cheryl Pivola
1000 Woodbridge Center Dr., 07095 732-726-5500
Manager: Ana Ferreira
24-hour banking at all locations
LOAN DEPARTMENT:
1000 Woodbridge Center Drive
Woodbridge, 07095 732-726-9700
24-HOUR RATE INFORMATION 732-726-9700
BANK-BY-PHONE 732-726-9700
EXECUTIVE OFFICES
1000 Woodbridge Center Drive
Woodbridge, New Jersey 07095 732-726-9700
STOCKHOLDER RELATIONS
Maryanne Guenther, Vice President
First Savings Bank
1000 Woodbridge Center Drive
Woodbridge, New Jersey 07095 732-726-9700
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016 908-272-8511
AUDITORS
KPMG Peat Marwick LLP
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
COUNSEL
Wilentz Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, New Jersey 07095
Patten Boggs, LLP
2550 M Street, NW
Washington, DC 20037
MARKET MAKERS
Ryan, Beck & Co.
80 Main Street
West Orange, New Jersey 07052
Sandler O'Neill & Partners, L.P.
2 World Trade Center, 104th Floor
New York, NY 10048
</TABLE>
10K AVAILABILITY
COPIES OF FIRST SAVINGS BANK'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997,
ARE AVAILABLE FREE-OF-CHARGE TO STOCKHOLDERS UPON WRITTEN REQUEST TO FIRST
SAVINGS BANK, 1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NEW JERSEY 07095;
ATTENTION: MARYANN MINTER
37
