<PAGE>
Rule 424(b)(3)
Registration No. 333-42757
PROSPECTUS
LOGO
First
Source
Bancorp, Inc.
(PROPOSED HOLDING COMPANY FOR FIRST SAVINGS BANK, SLA)
14,391,900 SHARES OF COMMON STOCK
First Source Bancorp, Inc. (the "Company"), a Delaware corporation, is
offering up to 14,391,900 shares of its common stock, par value $.01 per share
(the "Common Stock"), in connection with the reorganization of First Savings
Bank, SLA ("First Savings" or the "Bank") and First Savings Bancshares, MHC,
the mutual holding company of the Bank (the "Mutual Holding Company" or the
"MHC") into the stock holding company structure pursuant to the Mutual Holding
Company's and the Bank's Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan" or "Plan of Conversion"). In certain circumstances,
the Company may increase the amount of Common Stock offered hereby to
16,550,374 shares. See Footnote 4 to the table below.
(continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 23.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE NEW JERSEY
DEPARTMENT OF BANKING, OR ANY OTHER FEDERAL AGENCY OR ANY STATE
SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY, NOR
ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE
COMPANY.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
COMMISSIONS
AND OTHER FEES ESTIMATED
SUBSCRIPTION PRICE(1) AND EXPENSES(2) NET PROCEEDS(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share...... $10.00 $0.16 $9.84
- -------------------------------------------------------------------------------------
Midpoint Per Share..... $10.00 $0.15 $9.85
- -------------------------------------------------------------------------------------
Maximum Per Share...... $10.00 $0.15 $9.85
- -------------------------------------------------------------------------------------
Total Minimum(1)....... $106,375,420 $1,719,000 $104,656,420
- -------------------------------------------------------------------------------------
Total Midpoint(1)...... $125,145,270 $1,917,000 $123,228,270
- -------------------------------------------------------------------------------------
Total Maximum(1)....... $143,919,000 $2,116,000 $141,803,000
- -------------------------------------------------------------------------------------
Total Maximum, as
adjusted(4)........... $165,503,740 $2,344,000 $163,159,740
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Based upon the minimum, midpoint and maximum of the valuation price range,
which was determined in accordance with an independent appraisal prepared
by FinPro, Inc. ("FinPro") dated December 18, 1997. Does not include
shares of Common Stock issued to Public Stockholders in the Exchange (as
both are hereinafter defined). See "The Conversion and Reorganization--
Stock Pricing and Exchange Ratio" and "--Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion and Reorganization, including estimated fixed expenses of
$600,000 and marketing fees to be paid to Sandler O'Neill & Partners, L.P.
("Sandler O'Neill") estimated to be $1.1 million and $1.5 million at the
minimum and the maximum of the Estimated Price Range (as defined herein),
respectively. See "The Conversion and Reorganization--Marketing and
Underwriting Arrangements." See "Pro Forma Data" for the assumptions used
to arrive at these estimates. The actual fees and expenses may vary from
the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the offerings and other
factors. Includes the purchase of shares of Common Stock by the First
Savings Bank, SLA Employee Stock Ownership Plan and related trust (the
"ESOP"), which will be funded by a loan to the ESOP from the Company or a
third party and which will be deducted from the Company's stockholders'
equity. See "Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the $10 per share price ("Purchase Price"),
without resolicitation of subscribers or any right of cancellation, due to
regulatory considerations or changes in market or general financial and
economic conditions. See "Pro Forma Data" and "The Conversion and
Reorganization--Stock Pricing and Exchange Ratio." For a discussion of the
distribution and allocation of the additional shares, if any, see "The
Conversion and Reorganization--Subscription Offering and Subscription
Rights," "--Community Offering" and "--Limitations on Conversion Stock
Purchases."
--------------
Sandler O'Neill & Partners, L.P.
--------------
The date of this Prospectus is February 11, 1998.
<PAGE>
Pursuant to the Plan adopted by the Bank and the Mutual Holding Company, the
Bank will become a subsidiary of the Company upon consummation of the
transactions described herein (collectively, with the Offerings (defined
below), the "Conversion and Reorganization"). As a result of the Conversion
and Reorganization, the Company will undertake an exchange of shares whereby
each share of common stock, par value $.01 per share, of the Bank ("Bank
Common Stock") held by the Mutual Holding Company will be cancelled and each
share of Bank Common Stock held by the Bank's public stockholders (the "Public
Bank Shares") will be converted into shares of the Company's Common Stock
("Exchange Shares") pursuant to a ratio (the "Exchange Ratio") that will
result in the holders of such shares (the "Public Stockholders") owning in the
aggregate approximately the same percentage of the Company as they owned of
the Bank, subject to certain adjustments described herein, before giving
effect to (a) the payment of cash in lieu of fractional Exchange Shares, or
(b) any shares of Common Stock purchased by such stockholders in the Offerings
described herein or by the Bank's ESOP in the Offerings or thereafter (the
"Exchange"). As of October 31, 1997, the Mutual Holding Company held
4,134,812, or 51.6%, of the outstanding shares of Bank Common Stock and Public
Stockholders held 3,881,539, or 48.4%, of the outstanding shares of the Bank's
Common Stock. Based upon the number of Public Shares outstanding as of October
31, 1997, and the final Exchange Ratio, the number of Exchange Shares to be
issued will range from 9,762,458 to 15,189,626 shares of Common Stock at the
minimum and maximum, as adjusted, of the Estimated Price Range, respectively.
The Company will not receive any proceeds from the issuance of Exchange
Shares. See "The Conversion and Reorganization--Stock Pricing and Exchange
Ratio."
In addition to the Exchange, the Company will also commence an offering of
shares whereby non-transferable subscription rights to subscribe for up to
14,391,900 shares (which may be increased to 16,550,374 shares under certain
circumstances described below) of Common Stock (the "Conversion Stock") have
been granted, in order of priority, to each of the Bank's Eligible Account
Holders, to the ESOP, to each of the Bank's Supplemental Eligible Account
Holders, and to Other Members (each as defined herein) in a subscription
offering (the "Subscription Offering"). SUBSCRIPTION RIGHTS ARE
NONTRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS"). Concurrently,
and subject to the prior rights of holders of subscription rights, the Company
is offering the shares of Conversion Stock not subscribed for in the
Subscription Offering for sale in a community offering to certain members of
the general public, with a first preference given to holders of the Public
Bank Shares (the "Community Offering") (the Subscription Offering and
Community Offering are referred to collectively as the "Subscription and
Community Offerings"). Shares not subscribed for in the Subscription and
Community Offerings will be offered to members of the general public in a
syndicated community offering (the "Syndicated Community Offering"). The
Subscription and Community Offerings and the Syndicated Community Offering are
referred to collectively as the "Offerings".
Except for the ESOP, no Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member may, in their respective capacities as such,
purchase in the Subscription Offering more than $750,000 of Conversion Stock
offered for sale in the Conversion and Reorganization; no person, together
with associates of or persons acting in concert with such person, may purchase
in the Community Offering and the Syndicated Community Offering more than
$750,000 of Conversion Stock offered for sale in the Conversion and
Reorganization; and no person, together with associates of or persons acting
in concert with such person, may purchase in the aggregate more than the
number of shares of Conversion Stock that when combined with Exchange Shares
received by such person would exceed the overall maximum purchase limitation
of 2.1% of the total number of shares of Conversion Stock offered for sale in
the Conversion and Reorganization exclusive of any shares issued pursuant to
an increase in the Estimated Price Range of up to 15%; provided, however, that
such purchase limitations and the amount that may be subscribed for may be
increased or decreased at the discretion of the Company, the Mutual Holding
Company and the Bank (the "Primary Parties"), subject to such approvals as may
be required by the OTS. See "The Conversion and Reorganization--Subscription
Offering and Subscription Rights," "--Community Offering" and "--Limitations
on Conversion Stock Purchases." The minimum purchase is 25 shares.
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 12:00 NOON,
EASTERN TIME, ON MARCH 30, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY
THE PRIMARY PARTIES, WITH APPROVAL OF THE
2
<PAGE>
OTS, IF NECESSARY. Orders submitted are irrevocable until the completion of
the Conversion and Reorganization; provided that, if the Conversion and
Reorganization is not completed within 45 days after the close of the
Subscription and Community Offerings, unless such period has been extended
with the consent of the OTS, if necessary, all subscribers will have their
funds returned promptly with interest, and all withdrawal authorizations will
be canceled. Such extensions may not go beyond April 2, 2000. See "The
Conversion and Reorganization--Subscription Offering and Subscription Rights"
and "--Procedure for Purchasing Shares in Subscription and Community
Offerings."
The Company will have its Common Stock traded on the Nasdaq National Market
under the symbol "FSLA" upon completion of the Conversion and Reorganization.
The Bank's Common Stock currently trades on the Nasdaq National Market under
the symbol "FSLA." See "Market for the Common Stock."
This Prospectus contains forward-looking statements which reflect the
Primary Parties' views regarding future events and financial performance.
Actual results could differ materially from those projected in the forward-
looking statements as a result of risks and uncertainties including, but not
limited to, those found in the Risk Factors section. The words "believe,"
"expect," and "anticipate" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date of this Prospectus.
The Primary Parties undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise unless such update is deemed material. The "Risk Factors"
discussion begins on page 23 of this Prospectus.
3
<PAGE>
LOGO
[MAP APPEARS HERE]
4
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
and Consolidated Financial Statements of the Bank and Notes thereto appearing
elsewhere in this Prospectus.
FIRST SOURCE BANCORP, INC.
First Source Bancorp, Inc. is a Delaware corporation recently organized by
the Bank for the purpose of holding all of the capital stock of the Bank and
facilitating the Conversion and Reorganization. Immediately following the
Conversion and Reorganization, the only significant assets of the Company will
be the capital stock of the Bank, two loans to the ESOP and the net proceeds of
the Offerings retained by the Company. The Company will transfer to the Bank
50% of the net proceeds from the Offerings and will retain the remaining net
proceeds. Funds retained by the Company will be used for general business
activities, including a loan to the ESOP to enable the ESOP to purchase up to
8% of the aggregate of the Conversion Stock issued, as well as the refinancing
of the existing loan to the ESOP. On an interim basis, the net proceeds are
expected to be deposited by the Company into a deposit account at the Bank. See
"Use of Proceeds." The business of the Company will initially consist of the
business of the Bank. See "Business of the Bank" and "Regulation--Holding
Company Regulation."
The Company's executive offices are located at the administrative office of
the Bank at 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095. The
Company's telephone number is (732) 726-9700.
FIRST SAVINGS BANK, SLA
First Savings is a New Jersey-chartered capital stock savings and loan
association headquartered in Woodbridge, New Jersey. First Savings has operated
in its present market area since 1901. Until 1992, the Bank operated in the
mutual form of organization. In July 1992, First Savings reorganized to become
a federally-chartered mutual holding company, First Savings Bancshares, MHC,
and simultaneously formed the Bank as a majority-owned subsidiary of the
Company ("1992 MHC Reorganization"). The Mutual Holding Company transferred
substantially all of its assets (except $1.0 million in cash) and all its
liabilities to the newly organized Bank in exchange for 1,660,000 shares of the
Bank's common stock. Concurrently with the 1992 MHC Reorganization, the Bank
sold one million shares of its common stock to the general public at $10 per
share, resulting in net proceeds of $9.2 million. Upon completion of the 1992
MHC Reorganization, 62.4% of the Bank's Common Stock outstanding was held by
the Mutual Holding Company. Subsequently, the Bank completed a Secondary Stock
Offering of 600,000 shares of common stock at $13.00 per share on July 11, 1995
("1995 Secondary Offering"), which resulted in a decrease in the Mutual Holding
Company's ownership interest from 62.4% to 52.5%. By October 31, 1997, the
Mutual Holding Company's ownership interest had decreased to 51.6% due to the
exercise of stock options by Public Stockholders.
First Savings' deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The
Bank has been a member of the Federal Home Loan Bank System ("FHLB") System
since 1945. At September 30, 1997, the Bank had total assets of $1.0 billion,
total deposits of $809.4 million and stockholders' equity of $99.2 million. The
Mutual Holding Company's assets at September 30, 1997 consisted of $491,000 in
cash and certificates of deposit, a loan to the Bank's ESOP of $571,000, and a
51.6% interest in the Bank's outstanding common stock.
The Bank is a community-oriented institution that offers traditional deposit
and loan products. It operates 17 full service offices in its market area of
Middlesex, Monmouth and Union Counties in New Jersey. Based on an evaluation of
its retail operations, the Bank has entered into an agreement to sell its
Eatontown branch with deposits totaling $28.2 million at September 30, 1997 for
approximately $1.2 million. The Bank's principal business has been, and
continues to be, attracting retail deposits from the general public and
investing those
5
<PAGE>
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's revenues are derived principally from
interest on its mortgage loan and mortgage-backed securities portfolios, and
interest and dividends on its investment securities. The Bank's total loan
portfolio amounted to $573.0 million at September 30, 1997, which represented
54.3% of total assets. Single-family mortgage loans accounted for 78.1% of
total loans, while home equity loans and lines of credit equalled 7.3% of total
loans. In addition, the Bank had investments in mortgage-backed securities,
including those available for sale, totaling $350.5 million, or 33.6% of total
assets, at September 30, 1997.
THE CONVERSION AND REORGANIZATION
On October 24, 1997, the Boards of Directors of the Bank and the Mutual
Holding Company adopted the Plan, which was subsequently amended on December
16, 1997, January 28, 1998 and February 9, 1998. In December 1997, the Company
was incorporated under Delaware law. Subsequent to its incorporation, the
Company became a first-tier wholly owned subsidiary of the Bank. Pursuant to
the Plan, through a series of steps, the Mutual Holding Company will cease to
exist and the Bank will become a wholly owned subsidiary of the Company. In the
Exchange, the outstanding Public Bank Shares will be converted into 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 described in "--Effects of the
Exchange on Public Stockholders" and "The Conversion and Reorganization--Stock
Pricing and Exchange Ratio," but before giving effect to (a) the payment of
cash in lieu of issuing fractional Exchange Shares, or (b) any shares of
Conversion Stock purchased by the Bank's Stockholders or by the ESOP in the
Offerings or thereafter.
In addition to shares of Common Stock to be issued pursuant to the Exchange,
the Company is offering shares of Conversion Stock in the Offerings as part of
the Conversion and Reorganization. See "--The Offerings" below and "The
Conversion and Reorganization." The following diagrams reflect: (i) the current
organizational structure of the parties' ownership interests; (ii) the
intermediate structure of the parties following commencement of the Conversion
and Reorganization; and (iii) the resulting structure upon consummation of the
transaction:
6
<PAGE>
(i) FIRST SAVINGS BANCSHARES, HOLDERS OF PUBLIC BANK
MHC SHARES
51.6% 48.4%
FIRST SAVINGS BANK, SLA
(ii)FIRST SAVINGS BANCSHARES, HOLDERS OF PUBLIC BANK
MHC SHARES
51.6% 48.4%
FIRST SAVINGS BANK, SLA
100%
FIRST SOURCE BANCORP, INC.
100%
FIRST INTERIM SAVINGS BANK, FSB
(iii)PURCHASERS OF CONVERSION HOLDERS OF PUBLIC BANK
STOCK SHARES
52.1% 47.9%
FIRST SOURCE BANCORP, INC.
100%
FIRST SAVINGS BANK, SLA
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization is conditioned upon the approval of the Plan by the OTS, as well
as (1) the approval of the holders of at least a majority of the total number
of votes eligible to be cast by the members of the Mutual Holding Company
("Members") as of the close of business on 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"). In
addition, in accordance with current OTS policy, the Plan must be approved by a
majority of the votes cast in person or by proxy by the holders of the Public
Bank Shares at the Stockholders' Meeting. The Mutual Holding Company intends to
vote its shares of Bank Common Stock, which amounts to 51.6% of the outstanding
shares, in favor of the Plan at the Stockholders' Meeting. Officers and
directors of the Bank, who owned in the aggregate 9.3% of the Bank's Common
Stock as of November 30, 1997, also intend to vote in favor of the Plan.
7
<PAGE>
PURPOSES OF THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Bank and the Mutual Holding Company believe
that the Conversion and Reorganization is in the best interests of their
respective stockholders and Members. A principal purpose of the Conversion and
Reorganization is to structure the Mutual Holding Company and the Bank in a
form used by most other holding companies of savings institutions and
commercial banks and most other business entities. The Conversion and
Reorganization will also support future expansion of operations of the Bank, as
well as possible diversification into other banking-related businesses.
Although there are no current arrangements, understandings or agreements
regarding such opportunities, the Company will be in a position after the
Conversion and Reorganization, subject to regulatory limitations and the
Company's financial position, to take advantage of any additional opportunities
for such expansion that may arise.
In addition, the Mutual Holding Company and the Bank considered various
regulatory uncertainties associated with the mutual holding company structure,
including the ability to waive dividends from the Bank in the future, and the
tax limitation on the Bank to repurchase its Common Stock, as well as the
general uncertainty regarding a possible elimination of the thrift charter. See
"Use of Proceeds" and "Dividend Policy." The Offerings will also result in more
shares of stock outstanding, which should create a more active and liquid
market for the Common Stock than currently exists for the Bank Common Stock,
although there can be no assurances that this will be the case. See "Market for
the Common Stock."
In light of the foregoing, the Boards of Directors of the Bank and the Mutual
Holding Company believe that the Conversion and Reorganization is in the best
interests of such companies and their respective stockholders and Members. See
"The Conversion and Reorganization."
EFFECTS OF THE EXCHANGE ON PUBLIC STOCKHOLDERS
Stock Pricing and Number of Shares to be Issued in the Exchange. FinPro,
Inc., an independent appraiser, has advised the Primary Parties that in its
opinion, dated December 18, 1997, the estimated aggregate pro forma market
value of the Bank and the Mutual Holding Company was $240.0 million (the
"Appraisal"). In accordance with OTS requirements, the Appraisal was multiplied
by an Exchange Ratio which was determined on the basis of the Mutual Holding
Company's ownership interest in the Bank's common stock, increased by $1.1
million to reflect a portion of the previously waived dividends of $7.2
million. Such adjustment was required by the OTS despite prior OTS policy which
permitted the Mutual Holding Company to waive dividends paid by the Bank
without impacting any future exchange ratio established in a conversion and
reorganization of the Mutual Holding Company. Due to the change in OTS policy,
the Exchange Ratio was reduced from 2.9925 to 2.9590 at the midpoint of the
Estimated Price Range. After giving effect to the adjustment for waived
dividends, but before giving effect to the payment of cash in lieu of issuing
fractional Exchange Shares and any shares of Conversion Stock purchased by
Public Stockholders in the Offerings or by the ESOP thereafter, the Exchange
Ratio will result in the Public Stockholders holding approximately 47.9% of the
outstanding shares of the Company's Common Stock, as compared to the current
ownership interest in the Bank's common stock of 48.4%.
8
<PAGE>
The following table sets forth the effects of the Conversion and
Reorganization on Public Stockholders, assuming that at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, as defined
herein, one Public Bank Share will be exchanged for 2.5151, 2.9590, 3.4028 and
3.9133 shares of Company Common Stock. See "Pro Forma Data."
<TABLE>
<CAPTION>
PRO FORMA AT OR FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
BASED UPON SALE AT $10.00 PER SHARE
---------------------------------------------------
HISTORICAL 16,550,374
AT OR FOR THE 10,637,542 12,514,527 14,391,900 SHARES
NINE MONTHS SHARES SHARES SHARES (15% ABOVE
ENDED (MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
SEPTEMBER 30, ESTIMATED ESTIMATED ESTIMATED ESTIMATED
1997 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Book value per share:
Tangible book value
per share............ $11.26 $8.97 $8.30 $7.81 $7.39
Tangible book value of
Exchange
Shares(1)(2)......... N/A 22.56 24.56 26.58 28.92
Total book value per
share................ 12.39 9.41 8.68 8.14 7.67
Total book value of
Exchange Shares(1)... N/A 23.67 25.68 27.70 30.02
Earnings:
Earnings per share.... 0.86 0.44 0.39 0.35 0.31
Earnings on Exchange
Shares(1)............ N/A 1.11 1.15 1.19 1.21
Dividend(3):
Dividends per share,
as adjusted
(annualized)......... 0.34 0.12 0.12 0.12 0.12
Dividends on Exchange
Shares(1)............ N/A 0.31 0.36 0.41 0.47
</TABLE>
- --------
(1) Based on 2.5151, 2.9590, 3.4028 and 3.9133 shares of Company Common Stock
being exchanged for one Public Bank Share at the minimum, midpoint, maximum
and maximum, as adjusted, of the Estimated Price Range.
(2) Represents a pro forma increase of 151.5%, 195.9%, 240.3% and 291.3% on an
exchange basis at the minimum, midpoint, maximum and maximum, as adjusted,
of the Estimated Price Range.
(3) Dividends have been adjusted to reflect a 10% stock dividend paid on
October 30, 1997. Pro forma dividends reflect the Company's intention to
pay a quarterly dividend of $0.03 per share. No assurance can be given that
dividends will be paid or that dividends will not be reduced or eliminated
in future periods. See "Dividend Policy."
Effect of the Exchange on Stockholders' Equity Per Share. The Conversion and
Reorganization is expected to significantly increase the stockholders' equity
of the Public Stockholders. At September 30, 1997, stockholders' equity per
share was $12.39 for each share of Bank Common Stock outstanding. Based on the
pro forma information set forth in "Pro Forma Data" assuming the sale of
12,514,527 shares at the midpoint of the Estimated Price Range at September 30,
1997, the pro forma stockholders' equity for the aggregate number of Exchange
Shares to be received for each Public Bank Share was $25.68 per share. This
represents a pro forma increase of 107.3% from stockholders' equity at
September 30, 1997.
Effect of the Exchange on Earnings Per Share. The Conversion and
Reorganization will also affect Public Stockholders' pro forma earnings per
share. For the nine months ended September 30, 1997, the Bank's basic earnings
per share was $0.86. Based on the information set forth in "Pro Forma Data"
assuming the sale of 12,514,527 shares of Common Stock at the midpoint of the
Estimated Price Range, the pro forma earnings per share of Common Stock was
$0.39, and the pro forma earnings for the aggregate number of Exchange Shares
to be received for each Public Bank Share was $1.15. On a pro forma basis, this
represents a 33.7% increase from historical earnings per share for the nine
months ended September 30, 1997.
9
<PAGE>
THE MARKET PRICE OF THE EXCHANGE SHARES TO BE RECEIVED FOR EACH PUBLIC BANK
SHARE MAY BE LESS THAN THE MARKET PRICE OF THE PUBLIC BANK SHARES AT THE TIME
OF THE EXCHANGE, BASED ON THE FINAL EXCHANGE RATIO AND THE MARKET PRICE AT THE
TIME OF THE EXCHANGE. AT THE MINIMUM, MIDPOINT AND MAXIMUM OF THE ESTIMATED
PRICE RANGE, ONE PUBLIC BANK SHARE WILL BE EXCHANGED FOR 2.5151, 2.9590, 3.4028
AND 3.9133 SHARES OF COMMON STOCK, RESPECTIVELY (WHICH HAVE A CALCULATED
EQUIVALENT VALUE OF $25.15, $29.59, $34.03, AND $39.13 BASED ON THE $10.00
PURCHASE PRICE OF A SHARE OF COMMON STOCK IN THE OFFERINGS AND THE
AFOREMENTIONED EXCHANGE RATIOS). AS OF FEBRUARY 11, 1998, THE DATE OF THIS
PROSPECTUS, THE AVERAGE PRICE PAID FOR BANK COMMON STOCK WAS $42.00 PER SHARE.
FURTHER, THERE CAN BE NO ASSURANCE AS TO THE ACTUAL MARKET VALUE OF A SHARE OF
COMMON STOCK AFTER THE CONVERSION AND REORGANIZATION OR THAT SUCH SHARES COULD
BE SOLD AT OR ABOVE THE $10.00 PURCHASE PRICE. PUBLIC STOCKHOLDERS WILL BE PAID
CASH IN LIEU OF ISSUING FRACTIONAL EXCHANGE SHARES. SEE "--STOCK PRICING AND
NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION AND REORGANIZATION" AND "RISK
FACTORS--ESTIMATED PRICE RANGE BELOW MARKET PRICE."
Under New Jersey law, stockholders of the Bank will not have dissenters'
rights or appraisal rights in connection with the Conversion and
Reorganization. See "The Conversion and Reorganization--Effects of the
Conversion and Reorganization--Effect on Public Bank Shares."
THE OFFERINGS
Pursuant to the Plan and in connection with the Conversion and
Reorganization, the Company is offering up to 14,391,900 shares of Conversion
Stock in the Offerings in addition to the shares being issued in the Exchange.
Conversion Stock will be offered in the Subscription and Community Offerings
and, to the extent shares are available, in the Syndicated Community Offering.
Conversion Stock offered in the Subscription Offering will be offered in the
following order of priority: (1) holders of savings accounts in the Bank
totaling $50 or more on December 31, 1995 ("Eligible Account Holders"); (2) the
ESOP; (3) holders of savings accounts in the Bank totaling $50 or more on
December 31, 1997 ("Supplemental Eligible Account Holders"); and (4) other
members of the MHC, consisting of depositors of the Bank as of February 4,
1998, the Members' Voting Record Date for the special meeting of members to
vote on the Conversion, and borrowers with loans outstanding as of July 10,
1992, which continue to be outstanding as of the Members' Voting Record Date,
other than those members who otherwise qualify as Eligible Account Holders or
Supplemental Eligible Account Holders ("Other Members"). Subject to the prior
rights of holders of subscription rights, Conversion Stock not subscribed for
in the Subscription Offering is being concurrently offered in the Community
Offering to certain members of the general public, with a preference given to
the Public Stockholders. The Primary Parties reserve the absolute right to
reject or accept any orders in the Community Offering, in whole or in part,
either at the time of receipt of an order or as soon as practicable following
the Expiration Date.
All shares of Conversion Stock not purchased in the Subscription and
Community Offerings, if any, will be offered for sale to the general public in
a Syndicated Community Offering through a syndicate of registered broker-
dealers to be formed and managed by Sandler O'Neill acting as agent of the
Company to assist the Company and the Bank in the sale of the Conversion Stock.
The Primary Parties reserve the absolute right to reject orders, in whole or
part, in their sole discretion, in the Syndicated Community Offering.
Prospectus Delivery and Procedure for Purchasing Shares. To ensure that each
purchaser in the Offerings receives a prospectus at least 48 hours prior to the
Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), no prospectus will be mailed any
later than five days prior to the Expiration Date or hand delivered any later
than two days prior to such date. Stock order forms will only be distributed
with a prospectus. The Bank is not obligated to accept for processing orders
not submitted on original stock order forms. Stock order forms unaccompanied by
an executed certification form will not be accepted. Payment by check, money
order, bank draft, cash or debit authorization to an existing
10
<PAGE>
account at the Bank must accompany the stock order and certification forms. No
wire transfers will be accepted. The Bank is prohibited from lending funds to
any person or entity for the purpose of purchasing shares of Conversion Stock
in the Conversion and Reorganization. See "The Conversion and Reorganization--
Procedure for Purchasing Shares in Subscription and Community Offerings."
Restrictions on Transfer of Subscription Rights and Shares. Prior to the
completion of the Offerings, no person may transfer or enter into any agreement
or understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the Plan or the shares of Common Stock to be
issued upon their exercise. Following the Offerings, there generally will be no
restrictions on the transfer or sale of shares by purchasers other than
affiliates of the Company and the Bank. See "Regulation--Federal Securities
Laws" and "The Conversion and Reorganization--Certain Restrictions on Purchase
or Transfer of Shares After Conversion."
Purchase Limitations. The minimum purchase in the Subscription and Community
Offerings is 25 shares. With the exception of the ESOP, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member, in their capacity
as such, may subscribe in the Subscription Offering for more than $750,000 of
Conversion Stock offered; no person, together with associates of or persons
acting in concert with such person, may purchase in the Community Offering and
the Syndicated Community Offering in the aggregate more than $750,000 of
Conversion Stock offered; and no person, together with associates of or persons
acting in concert with such person, may purchase in the Offerings the number of
shares of Conversion Stock that, when combined with any Exchange Shares
received by such person, aggregates to more than the overall maximum purchase
limitation of 2.1% of the total number of shares of Conversion Stock offered in
the Conversion and Reorganization, exclusive of any shares issued pursuant to
an increase in the Estimated Price Range of up to 15%. See "Risk Factors--
Effect of Purchase Limitations on Ability of Public Stockholders to Purchase
Conversion Shares."
At any time during the Offerings, and without further approval by the Mutual
Holding Company's Members or the Bank's Public Stockholders, the Primary
Parties may, subject to any other necessary approvals as may be required,
decrease the overall maximum purchase limitation to 1% of the number of shares
of Conversion Stock to be issued in the Subscription and Community Offerings,
when aggregated with any Exchange Shares, and/or may decrease the amount that
may be subscribed for in the Subscription and Community Offerings.
Additionally, at any time during the Conversion and Reorganization and without
further approval by the Mutual Holding Company's Members or the Bank's Public
Stockholders, the Primary Parties may, subject to any other necessary
approvals, increase the overall maximum purchase limitation and/or increase the
amount that may be subscribed for in the Subscription and Community Offerings,
up to 5% of the Conversion Stock to be offered in the Offerings. Prior to
consummation of the Conversion and Reorganization, if the maximum purchase
limitation is increased, subscribers for the maximum amount will be, and
certain other large subscribers in the sole discretion of the Primary Parties
may be, given the opportunity to increase their subscriptions up to the then
applicable limit.
PURSUANT TO OTS POLICY, BECAUSE THE OVERALL MAXIMUM PURCHASE LIMITATION
CONTAINED IN THE PLAN OF CONVERSION INCLUDES EXCHANGE SHARES TO BE ISSUED TO
PUBLIC STOCKHOLDERS FOR THEIR PUBLIC BANK SHARES, CERTAIN HOLDERS OF PUBLIC
BANK SHARES MAY BE LIMITED IN THEIR ABILITY TO SUBSCRIBE FOR CONVERSION STOCK
IN THE OFFERINGS. Further, due to OTS policy, the purchase limitations were set
at a level that will preclude certain officers and directors of the Bank from
purchasing any Common Stock in the Offerings. In the event of an increase in
the Estimated Price Range, the additional shares will be distributed and
allocated to fill unfilled orders in the Subscription and Community Offerings,
with priority given to the ESOP, without any resolicitation of subscribers, as
described in "The Conversion and Reorganization--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitations on Conversion
Stock Purchases." See also "Risk Factors--Effect of Purchase Limitations on
Ability of Public Stockholders to Purchase Conversion Shares."
11
<PAGE>
Stock Pricing and Number of Shares to be Issued in the Offerings. Federal
regulations require that the aggregate purchase price of the Conversion Stock
to be offered in the Conversion and Reorganization be consistent with an
independent appraisal of the estimated pro forma market value of the Common
Stock of the Company. FinPro, an independent appraiser, has advised the Primary
Parties that in its opinion, dated December 18, 1997, the estimated aggregate
pro forma market value of the Common Stock of the Company was $240.0 million
(the "Appraisal"). The Appraisal was multiplied by the Mutual Holding Company's
ownership interest in the Bank's common stock, increased by $1.1 million to
reflect a portion of the previously waived dividends of $7.2 million.
Specifically, the Appraisal was multiplied by 52.1% to determine the midpoint
of the price range, which was $125.1 million. In accordance with OTS
regulations, the minimum and maximum of the offering range were set at 15%
below and above the midpoint, respectively, resulting in an offering range of
$106.4 million to $143.9 million (the "Estimated Price Range"). The full text
of the appraisal report of FinPro describes the procedures followed, the
assumptions made, limitations on the review undertaken and matters considered,
which included the trading market for the Bank Common Stock (see "Market for
the Common Stock") but was not solely dependent thereon.
Based on the $39.25 and $43.00 closing prices of the Bank Common Stock on
October 23, 1997, the day preceding the Bank's announcement of the Conversion
and the Reorganization and February 11, 1998, the date of this Prospectus,
respectively, the estimated market value of all outstanding shares of Bank
Common Stock (including shares held by the Mutual Holding Company) was $314.6
million and $344.7 million, respectively. The disparity between the estimated
pro forma market value of the Company's Common Stock and the recent estimated
market value of the Bank Common Stock is primarily the result of investor
speculation as to the value of the stock, overall market movements, comparable
and other market multiples, the economy, the level of interest rates, the
Bank's earnings growth potential, and numerous other factors that affect the
value of all stocks generally. For further information, see "The Conversion and
Reorganization--Stock Pricing and Exchange Ratio." THE APPRAISAL OF THE COMMON
STOCK IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY
KIND AS TO THE ADVISABILITY OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE
GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE OFFERINGS WILL BE ABLE TO SELL
SUCH SHARES AFTER THE COMPLETION OF THE CONVERSION AND REORGANIZATION AT OR
ABOVE THE PURCHASE PRICE.
All shares of Conversion Stock issued in the Offerings will be sold at the
Purchase Price of $10.00 per share, as determined by the Primary Parties. The
actual number of shares to be issued in the Offerings will be determined by the
Primary Parties based upon the final updated estimate of the aggregate pro
forma market value of the Common Stock of the Company, giving effect to the
Conversion and Reorganization, at the completion of the Offerings. The maximum
of the Estimated Price Range may be increased by up to 15% and the number of
shares of Conversion Stock to be issued in the Conversion and Reorganization
may be increased to 16,550,374 shares due to regulatory considerations or
changes in market or general financial and economic conditions. No
resolicitation of subscribers will be made and subscribers will not be
permitted to modify or cancel their subscriptions unless the gross proceeds
from the sale of the Conversion Stock are less than the minimum or more than
15% above the maximum of the current Estimated Price Range. Any increase or
decrease in the number of shares of Conversion Stock will result in a
corresponding change in the number of Exchange Shares, so that upon
consummation of the Conversion and Reorganization, the Conversion Stock and the
Exchange Shares will represent approximately 52.1% and 47.9%, respectively, of
the Company's total outstanding shares. See "Risk Factors--Possible Increase in
Estimated Price Range and Number of Shares Issued," "Pro Forma Data," and "The
Conversion and Reorganization--Stock Pricing and Exchange Ratio" and "--Number
of Shares to be Issued."
Based on the 3,881,539 Public Bank Shares outstanding at October 31, 1997,
and assuming a minimum of 10,637,542 and a maximum of 14,391,900 shares of
Conversion Stock are issued in the Offerings, the Exchange Ratio is expected to
range from 2.5151 Exchange Shares to 3.4028 Exchange Shares for each Public
Bank Share outstanding immediately prior to the consummation of the Conversion
and Reorganization. The Exchange Ratio
12
<PAGE>
will be affected if any stock options to purchase shares of Bank Common Stock
are exercised after October 31, 1997 and prior to consummation of the
Conversion and Reorganization. If any of such stock options are outstanding
immediately prior to consummation of the Conversion and Reorganization, they
will be converted into options to purchase shares of Common Stock, with the
number of shares subject to the option and the exercise price per share to be
adjusted based upon the Exchange Ratio so that the aggregate exercise price
remains unchanged, and with the duration of the option remaining unchanged. At
October 31, 1997, there were options exercisable to purchase 77,201 shares of
Bank Common Stock outstanding, which have a weighted average exercise price of
$4.32 per share. Another 65,340 options had been awarded, but were not
exercisable at October 31, 1997. The weighted average exercise price of these
options was $14.35. The Bank has no plans to grant additional stock options
prior to the consummation of the Conversion and Reorganization.
The following table sets forth, based upon the minimum, midpoint, maximum and
15% above the maximum of the Estimated Price Range: (i) the total number of
shares of Conversion Stock and Exchange Shares to be issued in the Conversion
and Reorganization, (ii) the percentage of the total Common Stock represented
by the Conversion Stock and the Exchange Shares, and (iii) the Exchange Ratio.
The table does not give effect to cash paid in lieu of issuing fractional
Exchange Shares.
<TABLE>
<CAPTION>
CONVERSION STOCK EXCHANGE SHARES TOTAL SHARES
TO BE OFFERED(1) TO BE ISSUED(1)(2) OF COMMON
------------------ ------------------ STOCK TO BE EXCHANGE
AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING(1) RATIO(1)
---------- ------- ---------- ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Minimum................. 10,637,542 52.1% 9,762,458 47.9% 20,400,000 2.5151
Midpoint................ 12,514,527 52.1 11,485,473 47.9 24,000,000 2.9590
Maximum................. 14,391,900 52.1 13,208,100 47.9 27,600,000 3.4028
15% above maximum....... 16,550,374 52.1 15,189,626 47.9 31,740,000 3.9133
</TABLE>
- --------
(1) Assumes that outstanding options to purchase 142,541 shares of Bank Common
Stock at October 31, 1997 are not exercised prior to consummation of the
Conversion and Reorganization.
(2) Based upon 3,881,539 Public Bank Shares outstanding as of October 31, 1997.
Does not reflect unexercised options.
The final Exchange Ratio will be determined based upon the number of shares
issued in the Offerings in order to obtain a 47.9% ownership interest in the
Bank by Public Stockholders at October 31, 1997, which reflects an adjustment
required by the OTS. See "The Conversion and Reorganization--Stock Pricing and
Exchange Ratio." The final Exchange Ratio will not be based solely upon the
market value of the Public Bank Shares. At the minimum, midpoint and maximum of
the Estimated Price Range, one Public Bank Share will be exchanged for 2.5151,
2.9590, 3.4028, and 3.9133 shares of Common Stock, respectively (which have a
calculated equivalent value of $25.15, $29.59, $34.03, and $39.13 based on the
$10.00 Purchase Price of a share of Common Stock in the Offerings and the
aforementioned Exchange Ratios). THE VALUE OF THE EXCHANGE SHARES TO BE
RECEIVED FOR EACH PUBLIC BANK SHARE MAY BE LESS THAN THE MARKET PRICE OF THE
PUBLIC BANK SHARES AT THE TIME OF THE EXCHANGE, BASED ON THE FINAL EXCHANGE
RATIO AND THE MARKET PRICE AT THE TIME OF THE EXCHANGE. For a discussion of the
high and low trading prices of the Bank's Common Stock over the last three
years, see "Market for the Common Stock." As of February 11, 1998, the date of
this Prospectus, the average price paid for Bank Common Stock was $42.00 per
share. Further, there can be no assurance as to the actual market value of a
share of Common Stock after the Conversion and Reorganization or that such
shares could be sold at or above the $10.00 Purchase Price. Public Stockholders
will be paid cash in lieu of issuing fractional Exchange Shares.
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $104.7 million and $141.8 million (or $163.2 million if the Estimated
Price Range is increased by 15%) depending on the number of shares
13
<PAGE>
sold and the expenses of the Conversion and Reorganization. See "Pro Forma
Data." The Company plans to contribute to the Bank 50% of the net proceeds from
the Offerings, and to retain the remaining net proceeds. Net proceeds to be
retained by the Company after the contribution to the Bank are estimated to be
between $52.4 million and $70.9 million (or $81.6 million if the Estimated
Price Range is increased by 15%). The Company will be unable to utilize any of
the net proceeds until the close of the Offerings.
Funds retained by the Company will be used for general business activities,
including a loan to the ESOP to purchase Conversion Stock in the Offerings (to
the extent such loan is not funded by a third party), the refinancing of an
existing loan to the ESOP and, subject to applicable limitations, the possible
payment of dividends and repurchases of Common Stock. Assuming the acquisition
by the ESOP of 8% of the aggregate of the number of shares of Conversion Stock
to be issued in the Conversion and Reorganization, the amount of the loan to
the ESOP is estimated to be between $8.5 million and $11.5 million (or $13.2
million if the Estimated Price Range is increased by 15%) to be repaid over a
15-year period at the prevailing market rate of interest. See "Management of
the Bank--Benefits--Employee Stock Ownership Plan and Trust." Funds received by
the Bank from the Company's purchase of its capital stock will be used for
general business purposes. The Company and the Bank may also use such funds to
expand operations through the acquisition or establishment of branch offices
and the acquisition of smaller financial institutions or assets of other
financial institutions. Neither the Bank nor the Company has any pending
agreements or understandings regarding acquisitions of any specific financial
institutions, branch offices or assets of other financial institutions. See
"Use of Proceeds" and "Business of the Bank." To the extent that the stock-
based benefit programs which the Company or Bank intend to adopt subsequent to
the Conversion and Reorganization are not funded with authorized but unissued
common stock of the Company, the Company or Bank may use net proceeds from the
Conversion and Reorganization to fund the purchase of stock in the open market
to be awarded under such stock benefit programs. See "Management of the Bank--
Benefits--Stock-Based Incentive Plan."
DIVIDENDS
The Bank has paid cash dividends on each Public Bank Share for each quarter
since reorganizing in July 1992. The Bank intends to continue to pay regular
quarterly dividends through either the date of consummation of the Conversion
and Reorganization (on a pro rata basis) or the end of the fiscal quarter
during which the consummation of the Conversion and Reorganization occurs.
Commencing with the first full quarter following consummation of the
Conversion and Reorganization, the Board of Directors of the Company intends to
pay cash dividends on the Common Stock at an initial quarterly rate of $0.03
per share, regardless of the total number of shares of Common Stock
outstanding. Declarations of dividends by the Company's Board of Directors will
depend upon a number of factors, however, including the amount of the net
proceeds from the Offerings retained by the Company, investment opportunities
available to the Company or the Bank, capital requirements, regulatory
limitations, the Company's and the Bank's financial condition and results of
operations, tax considerations and general economic conditions. Consequently,
there can be no assurance that dividends will in fact be paid on the Common
Stock or that, if paid, such dividends will not be reduced or eliminated in
future periods. See "Dividend Policy" and "Market for the Common Stock."
BENEFITS OF THE CONVERSION AND REORGANIZATION TO MANAGEMENT
Among the benefits to the Company and the Bank anticipated from the
Conversion and Reorganization is the ability to attract and retain personnel
through the prudent use of stock options and other stock related benefit
programs. Subsequent to the Conversion and Reorganization, the Company intends
to adopt one or more stock-based benefit plans to provide stock options,
restricted stock awards and certain related rights to directors, officers and
employees (hereinafter individually or collectively referred to as the "Stock-
Based Incentive Plan"). If such Stock-Based Incentive Plan is adopted within
one year after the Conversion and Reorganization, under current OTS regulations
the plan will be subject to stockholders' approval at a meeting of stockholders
which may not
14
<PAGE>
be held earlier than six months after the Conversion and Reorganization. The
Company intends to adopt a plan which would provide for the granting of Common
Stock to officers, directors and employees of the Bank and Company in an amount
equal to 4% of the Conversion Stock issued in the Conversion and Reorganization
at no cost to the recipients. The Company also intends to adopt a plan to
provide the Company with the ability to grant options to officers, directors
and employees of the Bank and Company to purchase Common Stock equal to 10% of
the number of shares of Conversion Stock sold in the Conversion and
Reorganization. For a further description of the Stock-Based Incentive Plan,
see "Risk Factors--Stock Based Benefits to Management and Directors" and
"Management of the Bank--Benefits--Stock-Based Incentive Plan." See also
"Beneficial Ownership of Capital Stock--Subscriptions of Executive Officers and
Directors," and "Restrictions on Acquisition of the Company and the Bank--
Restrictions in the Company's Certificate of Incorporation and Bylaws."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
15
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The selected data presented below under the captions "Selected Consolidated
Financial Data" and "Selected Operating Data" for and as of the end of each of
the years in the five-year period ended December 31, 1996, are derived from the
consolidated financial statements of First Savings Bank, SLA, and subsidiaries,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The selected data presented below for
the nine month periods ended September 30, 1997 and 1996, are derived from the
unaudited consolidated financial statements of First Savings Bank, SLA, and
subsidiaries included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------- -----------------------------------------------
1997(1) 1996(1) 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
FINANCIAL DATA:
Total assets............ $1,044,513 $974,771 $987,115 $945,012 $798,350 $783,846 $759,495
Loan receivable, net.... 567,197 498,472 509,627 457,756 415,902 415,010 413,748
Loans available for
sale................... -- 149 287 424 148 1,595 2,287
Investment securities... 40,959 39,968 38,955 39,003 23,997 19,019 43,039
Investment securities
available for sale..... 18,024 21,690 14,831 2,058 13,206 41,064 8,960
Other interest-earning
assets(2).............. 25,970 7,428 9,278 24,151 10,066 9,967 9,475
Mortgage-backed securi-
ties, net.............. 228,158 270,855 252,383 288,143 283,263 244,187 255,931
Mortgage-backed securi-
ties available for
sale................... 122,371 93,402 120,797 89,339 24,367 28,314 3,528
Deposits................ 809,449 800,441 794,595 806,338 681,613 678,961 673,031
Borrowed funds.......... 124,465 70,108 88,640 39,496 34,300 26,400 20,600
Stockholders' equity.... 99,213 90,226 92,863 89,713 74,064 68,809 58,551
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- -----------------------------------------------
1997(1) 1996(1) 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......... $ 54,636 $ 50,499 $ 68,039 $ 64,573 $ 52,909 $ 54,665 $ 62,142
Interest expense........ 30,591 27,644 37,264 35,691 25,135 26,448 33,810
---------- -------- -------- -------- -------- -------- --------
Net interest income be-
fore provision for
loan losses........... 24,045 22,855 30,775 28,882 27,774 28,217 28,332
Provision for loan
losses................ 900 375 550 310 300 1,200 2,400
---------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan losses........... 23,145 22,480 30,225 28,572 27,474 27,017 25,932
Other operating income.. 2,186 1,382 1,995 2,171 1,734 2,791 2,786
Operating expenses...... 14,581 20,122(3) 24,701(3) 17,830 16,021 15,551 15,194
---------- -------- -------- -------- -------- -------- --------
Income before income
taxes, and cumulative
effect of accounting
changes............... 10,750 3,740 7,519 12,913 13,187 14,257 13,524
Income taxes........... 3,990 1,376 2,809 4,611 4,912 5,352 5,495
---------- -------- -------- -------- -------- -------- --------
Income before cumula-
tive effect of ac-
counting changes...... 6,760 2,364 4,710 8,302 8,275 8,905 8,029
Cumulative effect of
accounting
changes(4)............ -- -- -- -- -- 398 --
---------- -------- -------- -------- -------- -------- --------
Net income............. $ 6,760 $ 2,364 $ 4,710 $ 8,302 $ 8,275 $ 9,303 $ 8,029
========== ======== ======== ======== ======== ======== ========
Basic earnings per share
before cumulative ef-
fect of accounting
changes(5)(6).......... $ 0.86 $ 0.31 $ 0.60 $ 1.06 $ 1.06 $ 1.14 N/A
Cumulative effect of ac-
counting
changes(4)(5).......... -- -- -- -- -- 0.05 N/A
---------- -------- -------- -------- -------- -------- --------
Basic earnings per share
after cumulative effect
of accounting
changes(5)(6).......... $ 0.86 $ 0.31 $ 0.60 $ 1.06 $ 1.06 $ 1.19 N/A
========== ======== ======== ======== ======== ======== ========
Diluted earnings per
share(5)(6)............ $ 0.83 $ 0.29 $ 0.59 $ 1.04 $ 1.03 $ 1.17 N/A
========== ======== ======== ======== ======== ======== ========
Dividends per share, as
adjusted(5)(7)......... $ 0.31 $ 0.25 $ 0.33 $ 0.30 $ 0.27 $ 0.27 N/A
========== ======== ======== ======== ======== ======== ========
</TABLE>
(Footnotes on following page)
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------ -----------------------------------------------
1997(1) 1996(1) 1996 1995 1994 1993 1992
--------- --------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS
AND OTHER DATA(5):
Return on average as-
sets(4)................ 0.87% 0.33% 0.49% 0.91% 1.04% 1.20% 1.04%
Return on average stock-
holders' equity(4)..... 9.37 3.46 5.12 10.14 11.63 14.70 15.84
Average stockholders'
equity to average as-
sets................... 9.31 9.44 9.52 8.95 8.92 8.19 6.58
Stockholders' equity to
total assets........... 9.50 9.26 9.41 9.49 9.28 8.78 7.71
Interest rate spread.... 2.83 2.86 2.88 2.77 3.26 3.40 3.46
Net interest margin(8).. 3.25 3.29 3.30 3.22 3.58 3.74 3.78
Operating expenses to
average assets(9)...... 1.63 2.62(3) 2.42(3) 1.83 1.98 1.99 1.92
Net interest income
before provision for
loan losses to
operating expenses(9).. 1.90x 1.20x(3) 1.32x(3) 1.72x 1.76x 1.84x 1.91x
Non-performing loans to
total loans receivable,
net.................... 0.69 0.93 0.94 1.32 2.17 2.77 3.81
Non-performing assets to
total assets........... 0.51 0.67 0.64 0.97 1.34 1.73 2.25
Allowance for loan
losses to non-perform-
ing loans.............. 151.83 110.27 110.58 86.90 63.52 51.09 36.32
Allowance for loan
losses to non-perform-
ing assets............. 112.06 77.90 84.08 57.23 53.81 43.42 33.60
Allowance for loan
losses to total loans
receivable, net........ 1.05 1.02 1.04 1.15 1.38 1.42 1.38
Dividend payout ra-
tio(7)................. 17.59 39.26 26.29 12.09 9.51 7.36 N/A
Average interest-earning
assets to average
interest-bearing
liabilities............ 1.10x 1.11x 1.11x 1.11x 1.10x 1.10x 1.07x
Full service offices.... 17(10) 16 16 17 15 15 15
</TABLE>
- --------
(1) The data presented at September 30, 1997 and 1996 and for the nine months
ended September 30, 1997 and 1996 were derived from unaudited financial
statements and reflect, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) which are necessary to
present fairly the results for such interim periods. Interim results for
the nine months ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
All selected financial ratios and other data relating to operating results
for the nine month periods ended September 30, 1997 and September 30, 1996
are presented on an annualized basis.
(2) Includes federal funds sold and investment in the stock of the FHLB-NY.
(3) Includes the Savings Association Insurance Fund ("SAIF") special
assessment of $5.2 million for the nine months ended September 30, 1996
and for the year ended December 31, 1996.
(4) Reflects the implementation of Statement of Financial Accounting Standards
("SFAS") No. 106 "Accounting for Postretirement Benefits" and SFAS No. 109
"Accounting for Income Taxes."
(5) Per share data reflects 10% stock dividends paid July 1, 1993, April 1,
1994, December 16, 1996 and October 30, 1997, as well as a 2-for-1 stock
split on December 1, 1994, adjusted retroactively.
(6) Earnings per share amounts have been adjusted to reflect the adoption of
SFAS No. 128 "Earnings Per Share."
(7) Excludes shares owned by the MHC, for which cash dividends were waived
with regulatory approval, after giving effect to prior stock dividends and
the two-for-one stock split.
(8) Calculation is based upon the net interest income before provision for
loan losses divided by interest earning assets.
(9) For purposes of calculating these ratios, operating expenses equal total
operating expenses less amortization of intangibles.
(10) The Bank has signed an agreement to sell the branch deposits of its
Eatontown location, which totaled $28.2 million at September 30, 1997, for
approximately $1.2 million. The closing date is scheduled for February
1998.
17
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The following tables set forth certain consolidated financial and other data
of the Bank at and for the periods indicated. Consolidated financial and
operating data and financial ratios and other data at and for the year ended
December 31, 1997, and at and for the three months ended December 31, 1997 and
1996, were derived from unaudited financial statements.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1997(1) 1996
---------- --------
(IN THOUSANDS)
<S> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets............................................. $1,049,316 $987,115
Loans receivable, net.................................... 588,500 509,627
Loans available for sale................................. -- 287
Investment securities, net............................... 31,031 38,955
Investment securities available for sale................. 17,701 14,831
Mortgage-backed securities, net.......................... 207,157 252,383
Mortgage-backed securities available for sale............ 147,137 120,797
Other interest-earning assets(2)......................... 14,095 9,278
Deposits................................................. 816,283 794,595
Advances from FHLB-NY and other borrowed funds........... 118,990 88,640
Stockholders' equity..................................... 101,686 92,863
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------
1997(1) 1996(1) 1997(1) 1996
---------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income................... $ 18,586 $ 17,540 $ 73,222 $ 68,039
Interest expense.................. 10,592 9,620 41,183 37,264
---------- ---------- -------- --------
Net interest income before pro-
vision for loan losses......... 7,994 7,920 32,039 30,775
Provision for loan losses......... 300 175 1,200 550
---------- ---------- -------- --------
Net interest income after provi-
sion for loan losses........... 7,694 7,745 30,839 30,225
Other operating income............ 615 613 2,801 1,995
Operating expenses................ 4,282 4,579 18,863 24,701(3)
---------- ---------- -------- --------
Income before income taxes...... 4,027 3,779 14,777 7,519
Income taxes...................... 1,492 1,433 5,482 2,809
---------- ---------- -------- --------
Net Income...................... $ 2,535 $ 2,346 $ 9,295 $ 4,710
========== ========== ======== ========
Basic earnings per share.......... $ 0.32 $ 0.30 $ 1.17 $ 0.60
========== ========== ======== ========
Diluted earnings per share........ $ 0.31 $ 0.29 $ 1.16 $ 0.59
========== ========== ======== ========
</TABLE>
(Footnotes on following page)
18
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
-----------------------------------------
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31,
----------------------- ---------------
1997(1) 1996(1) 1997(1) 1996
--------- --------- ------- ------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER
DATA:
Return on average assets........... 0.97% 0.95% 0.90% 0.49%
Return on average stockholders' eq-
uity.............................. 10.10 10.22 9.58 5.12
Average stockholders' equity to av-
erage assets...................... 9.56 9.34 9.34 9.52
Stockholders' equity to total as-
sets.............................. 9.69 9.41 9.69 9.41
Interest rate spread............... 2.71 2.92 2.80 2.88
Net interest margin(4)............. 3.17 3.32 3.23 3.30
Operating expenses to average as-
sets(5)........................... 1.55 1.78 1.61 2.42
Net interest income before
provision for loan losses to
operating expenses................ 1.96x 1.81x 1.92x 1.32x
Non-performing loans to total loans
receivable, net................... 0.74 0.94 0.74 0.94
Non-performing assets to total as-
sets.............................. 0.54 0.64 0.54 0.64
Allowance for loan losses to non-
performing loans.................. 140.74 110.58 140.74 110.58
Allowance for loan losses to non-
performing assets................. 106.74 84.08 106.74 84.08
Allowance for loan losses to loans
receivable........................ 1.04 1.04 1.04 1.04
Dividend payout ratio(6)........... 18.38 13.51 17.81 26.29
Average interest earning assets to
average interest-bearing liabili-
ties.............................. 1.11x 1.10x 1.10x 1.11x
Full service offices............... 17(7) 16 17 16
</TABLE>
- --------
(1) The data presented at December 31, 1997, at and for the three months ended
December 31, 1997 and 1996 and for the year ended December 31, 1997 were
derived from unaudited financial statements and reflect, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such
periods. All selected financial ratios and other data relating to operating
results for the three month periods ended December 31, 1997 and December
31, 1996, respectively, are presented on an annualized basis, as
appropriate.
(2) Includes federal funds sold and investment in the stock of the FHLB-NY.
(3) Includes the SAIF special assessment of $5.2 million for the year ended
December 31, 1996.
(4) Calculation is based upon the net interest income before provision for loan
losses divided by interest earning assets.
(5) For purposes of calculating these ratios, operating expenses equal total
operating expenses less amortization of intangibles.
(6) Excludes shares owned by the MHC, for which cash dividends were waived with
regulatory approval, after giving effect to prior stock dividends and the
two-for-one stock split.
(7) The Bank has signed an agreement to sell the branch deposits of its
Eatontown location, which totaled $27.6 million at December 31, 1997, for
approximately $1.2 million. The closing date is scheduled for February
1998.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Assets. Total assets increased by $62.2 million, or 6.3%, to $1.0 billion at
December 31, 1997, from $987.1 million at December 31, 1996. Cash and cash
equivalents increased $5.4 million, or 59.6%, to $14.4 million as of December
31, 1997, from $9.0 million at December 31, 1996. The increase was due
primarily to a temporary increase in the balance of federal funds sold. These
funds were subsequently invested in longer term, higher yielding assets.
Investment securities, including those available for sale, decreased $5.1
million, or 9.4%, to $48.7 million as of December 31, 1997, from $53.8 million
at December 1996. Mortgage-backed securities, including those available for
sale, decreased $18.9 million, or 5.1%, to $354.3 million at December 31, 1997,
from $373.2 million at December 31, 1996. Net loans receivable, inclusive of
those available for sale, grew by
19
<PAGE>
$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 residential single-family,
five-year, adjustable-rate mortgage and construction loans. Premises and
equipment, net increased $2.7 million to $13.1 million at December 31, 1997,
from $10.4 million at December 31, 1996. The increase was primarily due to
costs capitalized in connection with the completion of the Bank's new corporate
headquarters in Woodbridge, New Jersey. Excess of 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 this decrease. In addition, an impairment writedown of the core
deposit intangible totaling $1.3 million was recognized as of September 30,
1997, on deposits acquired from the Resolution Trust Corporation ("RTC") in
1995.
Liabilities. Deposits increased $21.7 million, or 2.7%, to $816.3 million at
December 31, 1997, from $794.6 million at December 31, 1996. Borrowed funds
increased $30.5 million, or 34.6%, to $118.4 million at December 31, 1997, from
$88.0 million at December 31, 1996. The increased deposits and borrowed funds
were used primarily to fund the asset growth detailed above as well as for
normal operations. Advances by borrowers for taxes and insurance increased
$844,000, or 18.4%, to $5.4 million at December 31, 1997, from $4.6 million at
December 31, 1996, primarily due to the timing of these payments as well as an
increase in the residential loan portfolio.
Stockholders' Equity. The Bank's stockholders' equity increased $8.8 million
for the year ended December 31, 1997, due primarily to earnings of $9.3
million, partially offset by dividends of $1.7 million paid during 1997.
The OTS requires that the Bank meet minimum tangible, core, and risk-based
capital requirements. At December 31, 1997, the Bank exceeded all regulatory
capital requirements.
<TABLE>
<CAPTION>
REQUIRED ACTUAL
-------------- ----------------------- EXCESS OF ACTUAL
% OF % OF OVER REGULATORY
AMOUNT ASSETS AMOUNT ASSETS REQUIREMENTS
------- ------ ----------------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible capital........ $15,625 1.50% $ 92,344 8.86% $76,719
Core capital............ 31,251 3.00 92,344 8.86 61,093
Risk-based capital...... 34,866 8.00 97,797 22.44 62,931
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS AND YEARS ENDED DECEMBER
31, 1997 AND DECEMBER 31, 1996.
Results of Operations. Net income for the three months ended December 31,
1997 was $2.5 million, compared to $2.3 million for the same period in 1996.
Basic and diluted earnings per share were $0.32 and $0.31 for the three months
ended December 31, 1997, compared to $0.30 and $0.29 for the same period in
1996. Earnings increased 8.1% during the quarter, primarily because of lower
operating expenses. Net income for the year ended December 31, 1997 was $9.3
million compared to $4.7 million for 1996. Basic earnings per share were $1.17
for 1997 and $0.60 for 1996, while diluted earnings per share were $1.16 for
1997 and $0.59 for 1996. Earnings for 1997 were affected by an impairment
writedown of the core deposit intangible recognized as of September 30, 1997.
An after-tax charge of $867,000 was incurred due to this writedown. The 1996
earnings were affected by non-recurring charges incurred due to the special
assessment to recapitalize the SAIF and also due to benefits payable as a
result of the passing of the Bank's long-time President.
Interest Income. Interest income increased $1.0 million, or 6.0%, to $18.6
million for the quarter ended December 31, 1997, and $5.2 million, or 7.6%, to
$73.2 million for the year ended December 31, 1997, compared to $17.5 million
and $68.0 million for the same respective periods in 1996. Interest on loans
increased $1.3
20
<PAGE>
million, or 12.9%, to $11.4 million for the quarter ended December 31, 1997,
and $5.0 million, or 13.0%, to $43.6 million for the year ended December 31,
1997, compared to $10.1 million and $38.6 million for the same respective
periods in 1996. The increase was due primarily to an increase in the average
size of the loan portfolio to $551.1 million for the year ended December 31,
1997, from $487.6 million for 1996. Interest on mortgage-backed securities held
to maturity decreased $732,000, or 16.4%, to $3.7 million for the quarter ended
December 31, 1997, and $2.8 million, or 14.7%, to $16.3 million for the year
ended December 31, 1997, compared to $4.5 million and $19.1 million for the
same respective periods in 1996. The decrease was due to the decreased average
balance of the mortgage-backed securities held to maturity portfolio for 1997
to $236.4 million, from $282.0 million for 1996, partially offset by an
increase in the yield on the portfolio to 6.91% for 1997, from 6.79% for 1996.
Interest on investment securities held to maturity decreased to $238,000, or
20.8%, to $904,000 for the quarter ended December 31, 1997, and $197,000, or
4.8%, to $3.9 million for the year ended December 31, 1997, compared to $1.1
million and $4.1 million for the same respective periods in 1996. The decrease
was primarily due to a decrease in the average balance of the portfolio that
occurred in the final quarter of 1997. The average balance for the three months
ended December 31, 1997, was $36.5 million, as compared to $40.5 million for
the comparable 1996 period. Interest on investments and mortgage-backed
securities available for sale increased $717,000, or 39.3%, to $2.5 million for
the quarter ended December 31, 1997, and $3.2 million, or 51.1%, to $9.4
million for the year ended December 31, 1997, compared to $1.8 million and $6.2
million for the same respective periods in 1996. The increase was due to an
increase in the average balance of the available for sale portfolio to $149.5
million for the year ended December 31, 1997, from $101.2 million for the same
period of 1996, along with an increase in the yield on the portfolio from 6.27%
for 1997, from 6.13% in 1996.
Interest Expense. Interest expense increased $1.0 million, or 10.1%, to $10.6
million for the quarter ended December 31, 1997, and $3.9 million, or 10.5%, to
$41.2 million for the year ended December 31, 1997, compared to $9.6 million
and $37.3 million for the same respective periods in 1996. Interest expense on
deposits increased $316,000, or 3.8%, to $8.7 million for the quarter ended
December 31, 1997, and $269,000, or 0.8%, to $34.2 million for the year ended
December 31, 1997, compared to $8.4 million and $33.9 million for the same
respective periods in 1996. The increase was primarily due to an increase in
the average balance of deposits during the final quarter of 1997. The average
balance for the three months ended December 31, 1997, was $787.3 million, as
compared to $778.2 million for the comparable 1996 period. Interest expense on
borrowed funds increased $656,000, or 52.8%, to $1.9 million for the quarter
ended December 31, 1997, and $3.7 million, or 108.2%, to $7.0 million for the
year ended December 31, 1997, compared to $1.2 million and $3.4 million for the
same respective periods in 1996. The increase was due primarily to the growth
in the average balance of borrowings, which was $114.6 million for the year
ended December 31, 1997, as compared to $55.2 million for the comparable 1996
period. This increase was attributable to management's strategy to fund the
purchase of investment and mortgage-backed securities through the use of
borrowed funds, where accretive to earnings. The interest expense on borrowings
was also affected by a slight increase in the average cost of borrowings to
6.13% for the year ended December 31, 1997, from 6.10% for 1996.
Provision for Loan Losses. The provision for loan losses increased $125,000,
or 71.4%, to $300,000, for the quarter ended December 31, 1997, and $650,000,
or 118.2%, to $1.2 million for the year ended December 31, 1997, compared to
$175,000 and $550,000 for the same respective periods in 1996. The increase in
the provision was primarily due to the increase in the size of the residential
and commercial loan portfolios and the risks inherent in such portfolios. Net
loans increased $78.6 million between December 31, 1997 and December 31, 1996.
The provision was based upon management's review and evaluation of the loan
portfolio, level of delinquencies, general market and economic conditions, and
asset classification review. In management's opinion, the allowance for loan
losses, totaling $6.1 million, is adequate to cover losses inherent in the
portfolio. Although management considers the allowance for loan losses to be
adequate, there can be no assurances that additional problems will not arise
that would require additional loan loss provisions and asset write-downs.
Other Operating Income. Other operating income increased $2,000, or 0.3%, to
$615,000 for the quarter ended December 31, 1997, and $806,000, or 40.4%, to
$2.8 million for the year ended December 31, 1997,
21
<PAGE>
compared to $613,000 and $2.0 million for the same respective periods in 1996.
Fees and service charges increased $186,000, or 44.6%, to $603,000 for the
quarter ended December 31, 1997, and $287,000, or 18.4%, to $1.8 million for
the year ended December 31, 1997, compared to $417,000 and $1.6 million for the
same respective periods in 1996. The increase was due to a higher number of
demand deposit accounts along with higher service fees. Net gain on loans and
securities available for sale increased $357,000, or 151.3%, to $593,000 for
the year ended December 31, 1997 as compared to $236,000 for 1996. The increase
was due primarily to net gains of $545,000 realized in the third quarter of
1997 and such gains were principally attributable to sales of mortgage-backed
securities available for sale. Net gain on loans and securities available for
sale decreased $97,000, or 100.0%, for the quarter ended December 31, 1997.
There were no sales in the fourth quarter of 1997. The "other, net" category of
other operating income decreased $87,000, or 87.9%, to $12,000 for the quarter
ended December 31, 1997, and increased $162,000, or 80.2%, to $364,000 for the
year ended December 31, 1997, compared to $99,000 and $202,000 for the same
respective periods in 1996. The decrease for the quarter ended December 31,
1997, was due to increased expenses of $95,000 associated with real estate
owned operations. The increase for the year ended December 31, 1997, was due to
increased income of $123,000 realized by the Bank's wholly owned subsidiary,
FSB Financial Corp., reduced expense of $32,000 associated with real estate
owned operations and increased rental income of $19,000.
Operating Expenses. Operating expenses decreased $297,000, or 6.5%, to $4.3
million for the quarter ended December 31, 1997, and $5.8 million, or 23.6%, to
$18.9 million for the year ended December 31, 1997, compared to $4.6 million
and $24.7 million for the same respective periods in 1996. The decrease was
primarily due to the one-time special SAIF assessment of $5.2 million charged
in 1996. Compensation and employee benefits decreased $139,000, or 6.0%, to
$2.2 million for the quarter ended December 31, 1997, and $753,000, or 7.3%, to
$9.5 million for the year ended December 31, 1997, compared to $2.3 million and
$10.3 million for the same respective periods in 1996. The year ended December
31, 1996 included a non-recurring charge to earnings of $1.0 million for
benefits payable as a result of the passing of the Bank's long-time Chairman
and President. Equipment expense increased $51,000, or 18.8%, to $322,000 for
the quarter ended December 31, 1997, and $392,000, or 37.9%, to $1.4 million
for the year ended December 31, 1997, compared to $271,000 and $1.0 million for
the same respective periods in 1996. The increase was due to the write-off of
certain equipment determined to be obsolete and increased depreciation expense
incurred due to an upgrade of the Bank's computer equipment and corporate
headquarters. The Bank incurred reduced FDIC insurance premiums in 1997. The
Bank's special assessment to recapitalize the SAIF of $5.2 million was
reflected as an expense in 1996. The FDIC substantially lowered the SAIF
insurance assessments on SAIF member institutions. Amortization of intangibles
increased $795,000, or 58.9%, to $2.1 million for the year ended December 31,
1997, from $1.3 million for 1996. An impairment write down of the core deposit
intangible totaling $1.3 million was recognized during 1997, regarding deposits
acquired from the RTC in 1995. General and administrative expenses increased
$152,000, or 23.7%, to $793,000 for the quarter ended December 31, 1997, and
$319,000, or 13.0%, to $2.8 million for the year ended December 31, 1997,
compared to $641,000 and $2.5 million for the same respective periods in 1996.
The increase was due to increased expenses associated with legal and consulting
fees, check processing and postage.
Income Tax Expense. Income tax expense increased $59,000, or 4.1%, to $1.5
million for the quarter ended December 31, 1997, and $2.7 million, or 95.2%, to
$5.5 million for the year ended December 31, 1997, compared to $1.4 million and
$2.8 million for the same respective periods in 1996. The increase was due
primarily to an increase in taxable income. Taxable income was affected in the
1996 period by several non-recurring charges.
22
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
COMPETITION
The Bank faces significant competition both in originating loans and in
attracting deposits. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, credit unions, mortgage banking companies and insurance
companies. Its most direct competition for deposits has historically come from
commercial banks, savings banks, savings and loans associations and credit
unions. The Bank faces additional competition for deposits from short-term
money market funds, other corporate and government securities funds and from
other financial institutions such as brokerage firms, mutual funds, and
insurance companies. See "Business of the Bank."
Competitive mortgage lending and deposit conditions in the Bank's primary
market area are likely to exist for the foreseeable future, preventing the
Bank from achieving significant growth within its primary market area. In an
effort to address diminished mortgage loan demand and increased competition
for deposits, the Bank may seek to expand its market area and the loan and
deposit products it offers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Business Strategy," "Business
of the Bank--Lending Activities" and "--Sources of Funds."
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits and borrowed funds. Accordingly, the Bank's
results of operations and financial condition are affected by movements in
market interest rates and its ability to manage its assets and liabilities in
response to such movements. At September 30, 1997, total interest-bearing
liabilities maturing or repricing within one year exceeded total interest-
earning assets maturing or repricing in the same time period by $136.9 million
based upon national interest rate sensitivity assumptions and the Bank's
historical experience. This represents a cumulative one year gap as a
percentage of total assets of negative 13.09%. As a result of its negative gap
position, the yield on interest-earning assets of the Bank will adjust to
changes in interest rates at a slower rate than the cost of the Bank's
interest-bearing liabilities. Consequently, the Bank's net interest income may
be adversely affected during periods of rapidly rising interest rates.
The Bank's interest rate sensitivity is also monitored by management through
the use of an OTS Net Portfolio Value Model which generates estimates of the
change in the Bank's net portfolio value ("NPV") over a range of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The NPV ratio, under any
interest rate scenario, is defined as the NPV in that scenario divided by the
market value of assets in the same scenario. As of September 30, 1997, the
Bank's NPV was $127.4 million, or 11.92% of the market value of assets. A 200
basis point increase in interest rates would result in a decrease in the
Bank's NPV to $104.7 million, representing an 18.0% reduction in the value of
the Bank's discounted cash flows. Conversely, a 200 basis point decrease in
interest rates would result in an increase in the Bank's NPV to $132.7
million, representing only a 4.0% increase in the value of the Bank's
discounted cash flows. Consequently, an increase in interest rates will have a
significantly greater impact on the Bank's NPV than a corresponding decrease
in interest rates.
Increases in market interest rates also can affect the type (fixed-rate or
adjustable-rate) and amount of loans originated by the Bank and the average
life of loans and securities, which can adversely impact the yields earned
23
<PAGE>
on the Bank's loan and securities portfolio. In addition, increases in
interest rates could result in interest rates on the Bank's adjustable-rate
loans increasing, thereby resulting in increased loan payment amounts by the
borrowers which, in turn, may result in higher delinquencies on such loans. In
periods of decreasing interest rates, the average life of loans held by the
Bank may be shortened to the extent increased prepayment activity occurs
during such periods which, in turn, may result in the Bank investing funds
from such prepayments in lower yielding assets. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Management of
Interest Rate Risk."
DEPENDENCE UPON LOCAL ECONOMY
The Bank's market area is concentrated in north and central New Jersey and,
therefore, its results of operations are largely dependent on the economy of
the New Jersey area. In the late 1980s and early 1990s, due in part to the
effects of a prolonged decline in the national and regional economy, layoffs
in the financial services industry and corporate relocations, New Jersey
experienced reduced levels of employment. These events, in conjunction with a
surplus of available commercial and residential properties, resulted in an
overall decline during this period in the underlying values of properties
located in New Jersey.
New Jersey's real estate market has stabilized in recent periods. The
population of Middlesex County is growing, but at a declining rate, and new
housing starts in the Bank's primary market area are still lower than those in
the state of New Jersey generally. For the nine months ended September 30,
1997 and the years ended December 31, 1996 and 1995, the Bank originated $76.2
million, $100.0 million and $75.5 million of one- to four-family residential
loans, respectively. Repayments on total mortgage loans were $48.1 million,
$77.1 million and $52.2 million, respectively, for the same periods. While the
Bank's total loan portfolio has grown in the 1990s in dollar amount, from
$416.0 million at December 31, 1992, to $567.2 million at September 30, 1997,
it has decreased slightly as a percentage of total assets over the same
period. Total loans as a percentage of assets were 54.8% at December 31, 1992,
compared to 54.3% at September 30, 1997. Although the current national and
local economic conditions have significantly improved since the early 1990s,
there can be no assurances that conditions in the local economy, national
economy, or real estate market in general will not deteriorate and adversely
affect the financial condition and results of operations of the Bank.
ESTIMATED PRICE RANGE BELOW MARKET PRICE
The aggregate purchase price of the Conversion Stock to be offered and the
amount of Exchange Shares to be issued in connection with the Conversion and
Reorganization have been determined on the basis of FinPro's independent
appraisal of the estimated pro forma market value of the Bank and the Mutual
Holding Company. The appraised amount was multiplied by the Mutual Holding
Company's percentage interest in the Bank to determine the aggregate amount of
Conversion Stock to be sold in the Offerings, and by the Public Stockholders'
percentage interest to determine the aggregate number of Exchange Shares to be
issued based upon the Purchase Price of $10.00 per share. The final Exchange
Ratio will be based upon the number of shares issued in the Offerings which
results in the Public Stockholders' owning approximately 47.9% of the Company,
as adjusted pursuant to OTS requirements. THE FINAL EXCHANGE RATIO WILL NOT BE
BASED UPON THE TRADING PRICE OF THE PUBLIC BANK SHARES. At the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Price Range, one
Public Bank Share will be exchanged for 2.5151, 2.9590, 3.4028 and 3.9133
shares of Common Stock, respectively. Based upon the $10.00 Purchase Price of
a share of Common Stock in the Offerings and the Exchange Ratio, the Exchange
Shares to be received for one share of Bank Common Stock have a calculated
equivalent value of $25.15, $29.59, $34.03 and $39.13 at the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Price Range,
which may be less than the market value of one share of Bank Common Stock at
the time of the Exchange. The closing price per share of the Bank Common Stock
as of February 11, 1998, was $43.00. There can be no assurance as to the
actual market price of a share of Bank Common Stock at the time of the
Exchange. Further, there can be no assurance as to the actual market value of
a share of Common Stock of the Company after the Conversion and
Reorganization, or that such shares could be sold at or above the $10.00
Purchase Price. See "Summary--Effects of the Reorganization on Public
Stockholders," and "The Conversion and Reorganization--Stock Pricing and
Number of Shares to be Issued in the Conversion and Reorganization."
24
<PAGE>
EFFECT OF PURCHASE LIMITATIONS ON ABILITY OF PUBLIC STOCKHOLDERS TO PURCHASE
CONVERSION SHARES
The OTS has required that the overall maximum purchase limitation contained
in the Plan of Conversion include Exchange Shares to be issued to Public
Stockholders for their Public Bank Shares. As a result, a Public Stockholder
who receives Exchange Shares in an amount equal to or exceeding 2.1% of the
Conversion Stock offered will not be able to subscribe for shares of
Conversion Stock in the Offerings. Specifically, a Public Stockholder who
qualifies as an Eligible Account Holder and receives 302,229 Exchange Shares
at the maximum of the Estimated Price Range, will not be able to participate
in the Subscription Offering. See "The Conversion and Reorganization--
Limitations on Conversion Stock Purchases." Further, due to OTS policy, the
OTS required the establishment of the purchase limitations at a level that
will preclude certain officers and directors of the Bank from purchasing any
Common Stock in the Offerings.
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS
The Company intends to seek stockholder approval of a Stock-Based Incentive
Plan which it intends to adopt for the benefit of non-employee directors,
officers and employees of the Company and the Bank at a meeting of
stockholders following the Conversion and Reorganization, which under current
OTS regulations may be held no earlier than six months after completion of the
Conversion and Reorganization. Assuming the receipt of stockholder approval,
the Company expects to acquire or issue an amount equal to 4% of the
Conversion Stock sold in the Conversion, or 425,502 shares and 575,676 shares
at the minimum and maximum of the Estimated Price Range, respectively. Based
on the Purchase Price of $10 per share, such awards will have a value ranging
from $4.3 million to $5.8 million at the minimum and maximum of the Estimated
Price Range, respectively. These shares will be acquired either through open
market purchases or from authorized but unissued Common Stock. The Company
also intends to acquire or issue an amount equal to 10% of the Conversion
Stock issued, or 1,063,754 shares and 1,439,190 shares at the minimum and
maximum of the Estimated Price Range, respectively, for stock options. The
exercise price will be equal to the fair market value of the underlying Common
Stock on the date of grant. The value of such options cannot be predicted
since any value is dependent on an increase in the price of the Common Stock
from the date of grant. Although no specific award determinations have been
made, the Company anticipates that it will provide awards and options to its
directors and employees to the extent permitted by applicable regulations.
Current OTS regulations provide that no individual may receive more than 25%
of the shares of any plan and non-employee directors may not receive more than
5% individually, or 30% in the aggregate, of the shares or options awarded
under any plan. Stock awards will be granted at no cost to the recipients.
Officers and directors receiving options will not be required to pay for the
shares until the date of exercise. See "Management of the Bank--New Benefits
Resulting from the Conversion and Reorganization."
The foregoing plans are in addition to the First Savings Bank, SLA 1992
Incentive Stock Option Plan and the 1992 Stock Option Plan for Outside
Directors, (collectively, the "1992 Stock Option Plans") which were adopted by
the Bank in connection with the 1992 MHC Reorganization, and to the First
Savings Bank, SLA 1996 Omnibus Incentive Plan ("1996 Incentive Plan") which
was implemented following the Bank's 1995 Secondary Offering, each of which
were subsequently approved by the stockholders of the Bank. These plans will
continue in existence after the Conversion and Reorganization as plans of the
Company. See "Management of the Bank--Benefits" and "The Conversion and
Reorganization--Effect on Existing Compensation Plans." In addition, the
Bank's existing ESOP, which was adopted in connection with the 1992 MHC
Reorganization, intends to purchase 8.0% of the Conversion Stock to be issued
in the Offerings (1,151,352 shares or $11.5 million of Conversion Stock at the
maximum of the Estimated Price Range) with a loan funded by the Company, if
such loan is not made by a third party. See "Use of Proceeds" and "Management
of the Bank--Benefits--Employee Stock Ownership Plan."
Expenses Associated With Stock Benefit Plans. The purchase by the Bank's
ESOP of 8.0% of the Conversion Stock issued and the purchase by the Stock-
Based Incentive Plan of 4.0% of the Conversion Stock issued, assuming receipt
of stockholder approval, will cause the Bank to recognize additional
significant compensation and employee benefits expense. The Bank cannot
predict the actual amount of these new expenses because applicable accounting
practices require that the compensation expense be based on the fair market
value
25
<PAGE>
of the shares of Common Stock when the expenses are recognized. Expenses for
the ESOP would be recognized when shares are committed to be released to
participants' accounts, and expenses for the Stock-Based Incentive Plan would
be recognized over the vesting period of awards made to recipients. These
expenses have been reflected in the pro forma financial information under "Pro
Forma Data" assuming the $10.00 per share Purchase Price as the fair market
value. Actual expenses, however, will be based on the fair market value of the
Common Stock at the time of recognition, which may be higher or lower than
$10.00. For further discussion of these plans, see "Management of the Bank--
Benefits--Employee Stock Ownership Plan" and "--Stock-Based Incentive Plan."
Possible Dilutive Effect of Stock-Based Incentive Plan. Following the
Conversion and Reorganization, the Stock-Based Incentive Plan, if approved by
the stockholders of the Company, will acquire an amount of shares equal to 4%
of the shares of Conversion Stock issued in the Conversion and Reorganization,
either through open market purchases or the issuance of authorized but
unissued shares of Common Stock from the Company. If the Stock-Based Incentive
Plan is funded by the issuance of authorized but unissued shares, the voting
interests of then-existing shareholders will be diluted by 2.2%. In addition,
directors, officers and employees will be granted options to purchase
authorized but unissued shares in an amount equal to 10% of the Conversion
Stock issued in the Conversion and Reorganization, if the Stock-Based
Incentive Plan is approved by the stockholders of the Company. If all of the
options were to be exercised using authorized but unissued Common Stock and
the stock awards were funded with authorized but unissued shares, the voting
interests of then-existing stockholders would be diluted by 5.5%.
The Bank also has adopted and maintains the 1992 Stock Option Plans, which
reserved for issuance 292,820 shares of Bank Common Stock, after giving effect
to four 10% stock dividends and a two-for-one stock split. As of September 30,
1997, 79,584 options remained available for exercise. In addition, the Bank
maintains the 1996 Incentive Plan, which has reserved for issuance 72,600
shares of Bank Common Stock, after giving effect to two 10% stock dividends.
At September 30, 1997, all of the options awarded under this plan remained
available for exercise. Upon consummation of the Conversion and
Reorganization, the 1992 Stock Option Plans and the 1996 Incentive Plan will
become plans of the Company and Common Stock will be issued in lieu of Bank
Common Stock pursuant to the terms of such plans, as adjusted to reflect the
exchange of options in connection with the Conversion and Reorganization. See
"Management of the Bank--Benefit Plans."
Voting Control of Officers and Directors. Directors and executive officers
of the Bank and the Company expect to hold approximately 12.6% or 9.3% of the
shares of Common Stock to be outstanding upon completion of the Conversion and
Reorganization, based upon the minimum and the maximum of the Estimated Price
Range, respectively. When combined with shares that may be attributable to
directors and officers through the existing and future stock benefit plans and
the ESOP, management's potential voting control could, together with
additional stockholder support, defeat stockholder proposals requiring 80%
approval of stockholders. As a result, this potential voting control may
preclude takeover attempts that certain stockholders deem to be in their best
interest and may tend to perpetuate existing management. See "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
EMPLOYMENT CONTRACTS, CHANGE IN CONTROL PROVISIONS AND EMPLOYEE SEVERANCE
COMPENSATION
The Bank and the Mutual Holding Company currently maintain employment
agreements with Messrs. John P. Mulkerin and Christopher P. Martin. In
connection with the Conversion and Reorganization, the Bank and/or the Company
intend to enter into new employment or change in control agreements with
certain executive officers of the Company and the Bank, which agreements will
provide for severance payments if their respective employment is terminated in
connection with a change in control of the Bank or the Company. In addition,
the Bank intends to adopt a severance plan for employees that would provide
for severance payments for employees that are terminated in connection with a
change in control. These provisions may have the effect of increasing the cost
of acquiring the Company, thereby discouraging future attempts to take over
the Company or the Bank. See "Restrictions on Acquisition of the Company and
the Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws," "Management of the Bank--Employment Agreements," "--Change-in-Control
Agreements," "--Employee Severance Compensation Plan."
26
<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Certain provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Stock
Certificate of Incorporation and Bylaws, as well as certain federal
regulations, assist the Company in maintaining its status as an independent
publicly owned corporation. These provisions provide for, among other things,
supermajority voting on certain matters, staggered boards of directors, non-
cumulative voting for directors, limits on the calling of special meetings,
limits on voting shares in excess of 10% of the outstanding shares, and
certain uniform price provisions for certain business combinations. The Bank's
Stock Certificate of Incorporation also prohibits, for five years, the
acquisition or offer to acquire, directly or indirectly, the beneficial
ownership of more than 10% of the Bank's equity securities. Any person
violating this restriction may not vote the Bank's securities in excess of
10%. These provisions in the Bank's and the Company's governing instruments
may discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate current management. For a more
detailed discussion of these provisions, see "Restrictions on Acquisition of
the Company and the Bank."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion and Reorganization may be
increased as a result of an increase in the Estimated Price Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Subscription and Community Offerings. In the event that
the Estimated Price Range is so increased, it is expected that the Company
will issue up to 16,550,374 shares of Conversion Stock at the Purchase Price
for an aggregate purchase price of up to $165.5 million. An increase in the
number of shares issued will decrease pro forma net earnings per share and
stockholders' equity per share for those subscribers who are not already
Public Stockholders of the Bank and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of FinPro that subscription rights granted
to Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members have no value. However, this opinion is not binding on the Internal
Revenue Service ("IRS"). If the subscription rights granted to Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members are
deemed to have an ascertainable value, receipt of such rights could result in
taxable gains to those Eligible Account Holders, Supplemental Eligible Account
Holders or Other Members who receive and/or exercise the subscription rights
in an amount equal to such value. Additionally, the Bank could recognize a
gain for tax purposes on such distribution. Whether subscription rights are
considered to have ascertainable value is an inherently factual determination.
See "The Conversion and Reorganization--Effects of the Conversion and
Reorganization" and "--Tax Aspects."
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION AND REORGANIZATION
At September 30, 1997, the Bank's ratio of stockholders' equity to assets
was 9.50%. The Company's equity position will be significantly increased as a
result of the Conversion and Reorganization. On a pro forma basis, as of
September 30, 1997, assuming the sale of Conversion Stock at the midpoint of
the Estimated Price Range, the Company's ratio of stockholders' equity to
assets would be approximately 20.0%. The Company's ability to deploy this new
capital through investments in interest-earning assets, such as loans and
securities, which bear rates of return comparable to its current investments,
will be significantly affected by industry competition for such investments.
The Company currently anticipates that it will take time to prudently deploy
such capital. As a result, the Company's initial return on equity is expected
to be below its historical return on equity and may be below peer group
institutions after the Conversion and Reorganization.
27
<PAGE>
FIRST SOURCE BANCORP, INC.
The Company was organized in December 1997 at the direction of the Boards of
Directors of the Mutual Holding Company and the Bank for the purpose of
holding all of the capital stock of the Bank. The Company has applied to the
OTS to become a savings and loan holding company, and, as such, will be
subject to regulation by the OTS. See "The Conversion and Reorganization--
General." After completion of the Conversion and Reorganization, the Company
will conduct business initially as a unitary savings and loan holding company.
See "Regulation--Holding Company Regulation." Upon consummation of the
Conversion and Reorganization, the Company's assets will consist of all of the
outstanding shares of the Bank's capital stock and that portion of the net
proceeds of the Offerings retained by the Company. The Company intends to use
part of the net proceeds it retains to loan funds to the ESOP to enable the
ESOP to purchase 8% of the aggregate of the Conversion Stock issued, and to
refinance the MHC's existing loan to the ESOP. Initially, the Company expects
to deposit the remaining proceeds with the Bank. See "Use of Proceeds." The
Company and Bank may, however, alternatively choose to fund the ESOP through a
loan to the ESOP trust by a third party financial institution.
Initially, the Company will neither own nor lease any property, but will
instead use the premises, equipment and furniture of the Bank. At the present
time, the Company does not intend to employ any persons other than the
officers set forth under "Management of the Company," but will utilize the
support staff of the Bank from time to time. Additional employees will be
hired as appropriate to the extent the Company expands its business in the
future. The initial business activities of the Company will consist of
investment in the Bank. The Company may in the future expand its business
activities or services which it provides through existing or newly-formed
subsidiaries or through acquisitions of other financial services providers.
The initial activities of the Company are anticipated to be funded by the net
proceeds retained by the Company and earnings thereon or, alternatively,
through dividends from the Bank.
The Company's executive offices are currently located at 1000 Woodbridge
Center Drive, Woodbridge, New Jersey 07095. Its telephone number is (732) 726-
9700.
FIRST SAVINGS BANCSHARES, MHC
The Mutual Holding Company 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 September 30, 1997, the Mutual Holding
Company's assets consisted of a 51.6% ownership interest in the Bank, $491,000
in cash and certificates of deposit (which will become assets of the Bank upon
consummation of the Conversion and Reorganization), and a loan to the Bank's
ESOP totaling $571,000. The Mutual Holding Company had liabilities of $29,000
at September 30, 1997, and had net income for the nine months ended September
30, 1997 of $10,000. As part of the Conversion and Reorganization, the Mutual
Holding Company will convert from mutual form to a federal interim stock
savings institution and simultaneously merge with and into the Bank, with the
Bank being the surviving entity.
28
<PAGE>
FIRST SAVINGS BANK, SLA
First Savings is a New Jersey-chartered capital stock savings and loan
association headquartered in Woodbridge, New Jersey. First Savings has
operated in its present market area since 1901. Until 1992, the Bank operated
in the mutual form of organization. On July 10, 1992, the Bank, acting on a
Plan of Reorganization approved by its members, reorganized to become a
federally-chartered mutual holding company. In connection with the 1992 MHC
Reorganization, 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. By October 31, 1997, the Public Stockholders' minority
interest in the Bank had increased to 48.4% due to the exercise of options by
Public Stockholders.
The Bank's executive offices are currently located at 1000 Woodbridge Center
Drive, Woodbridge, New Jersey 07095. Its telephone number is (732) 726-9700.
29
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded all regulatory capital
requirements. See "Regulation--Federal Regulation of Savings Institutions--
Capital Requirements." Set forth below is a summary of the Bank's compliance
with regulatory capital standards as of September 30, 1997, on a historical
and pro forma basis assuming that the indicated number of shares were sold as
of such date and receipt by the Bank of 50% of the net proceeds. For purposes
of the table below, the amount expected to be borrowed by the ESOP and the
cost of the shares expected to be acquired by the Stock-Based Incentive Plan
are deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
FIRST SAVINGS BANK, SLA
PRO FORMA AT SEPTEMBER 30, 1997 BASED UPON SALE AT $10.00 PER SHARE
---------------------------------------------------------------------------
16,550,374
10,637,542 12,514,527 14,391,900 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM MAXIMUM
HISTORICAL AT ESTIMATED ESTIMATED OF ESTIMATED OF ESTIMATED
SEPTEMBER 30, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
--------------------- ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
---------- ---------- -------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital........... $ 99,213 9.50% $138,776 12.80% $145,809 13.36% $152,844 13.92% $160,933 14.55%
========== ======== ======== ===== ======== ===== ======== ===== ======== =====
Tangible Capital:
Capital Level......... $ 89,992 8.68% $129,555 12.04% $136,588 12.62% $143,623 13.19% $151,712 13.83%
Requirement........... 15,552 1.50 16,145 1.50 16,251 1.50 16,357 1.50 16,478 1.50
---------- -------- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $ 74,440 7.18% $113,410 10.54% $120,337 11.12% $127,266 11.69% $135,234 12.33%
========== ======== ======== ===== ======== ===== ======== ===== ======== =====
Core Capital:
Capital Level......... $ 89,992 8.68% $129,555 12.04% $136,588 12.61% $143,623 13.17% $151,712 13.81%
Requirement(3)........ 31,104 3.00 32,291 3.00 32,502 3.00 32,713 3.00 32,956 3.00
---------- -------- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $ 58,888 5.68% $ 97,264 9.04% $104,086 9.61% $110,910 10.17% $118,756 10.81%
========== ======== ======== ===== ======== ===== ======== ===== ======== =====
Risk-Based Capital(4):
Capital Level(4)...... $ 95,319 22.38% $134,882 30.27% $141,915 31.59% $148,950 32.90% $157,039 34.38%
Requirement........... 34,070 8.00 35,652 8.00 35,934 8.00 39,215 8.00 36,539 8.00
---------- -------- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $ 61,249 14.38% $ 99,230 22.27% $105,981 23.59% $112,735 24.90% $120,500 26.38%
========== ======== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- --------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of total adjusted
assets. Core capital levels are shown as a percentage of total adjusted
assets. Risk-based capital levels are shown as a percentage of risk-
weighted assets.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Regulation of Savings Institutions--
Capital Requirements."
(4) Assumes net proceeds are invested in assets that carry a 50% risk-
weighting.
30
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Conversion Stock
cannot be determined until the Conversion and Reorganization is completed, it
is presently anticipated that the net proceeds from the sale of the Conversion
Stock will be between $104.7 million and $141.8 million (or $163.2 million if
the Estimated Price Range is increased by 15%). See "Pro Forma Data" and "The
Conversion and Reorganization--Stock Pricing and Exchange Ratio" as to the
assumptions used to arrive at such amounts. The Company will be unable to
utilize any of the proceeds of the Offerings until the consummation of the
Conversion and Reorganization.
The Company will contribute to the Bank 50% of the net proceeds of the
Offerings. Such portion of net proceeds will be added to the Bank's general
funds which the Bank currently intends to utilize for general corporate
purposes, including investment in single-family residential mortgage loans,
commercial real estate loans and other loans, investment in federal funds,
investment grade marketable securities and mortgage-backed securities, the
repayment of borrowings and the funding of the Stock-Based Incentive Plan. The
Bank may also use such funds to expand operations through the establishment or
acquisition of branch offices, and the acquisition of other financial
institutions or other financial services companies, including those located
within the Bank's market area. To the extent the Stock Programs are not funded
with authorized but unissued common stock of the Company, the Company or Bank
may use net proceeds from the Conversion and Reorganization to fund the
purchase of stock to be awarded under such Stock-Based Incentive Plan. See
"Risk Factors--Stock-Based Benefits to Management and Directors" and
"Management of the Bank--Benefits--Stock-Based Incentive Plan."
The Company intends to use a portion of the net proceeds to loan additional
funds to the ESOP to enable the ESOP to purchase 8% of the Conversion Stock
issued in the Conversion and to refinance the MHC's existing loan to the ESOP.
Based upon the issuance of 10,637,542 shares or 14,391,900 shares at the
minimum and maximum, respectively, of the Estimated Price Range, the amount of
the loan to the ESOP would be $8.5 million or $11.5 million, respectively (or
$13.2 million if the Estimated Price Range is increased by 15%) to be repaid
over a 15 year period at a market rate of interest. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust."
The net proceeds retained by the Company may also be used to support the
future expansion of operations through branch acquisitions, the establishment
of branch offices and the acquisition of smaller savings associations and
commercial banks or their assets, including those located within the Bank's
market area or diversification into other banking related businesses. The
Company has no current arrangements, understandings or agreements regarding
any such transactions. Upon completion of the Conversion and Reorganization,
the Company will be a unitary savings and loan holding company, which under
existing laws would generally not be restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender ("QTL"). See "Regulation--Holding Company Regulation"
for a description of certain regulations currently applicable to the Company.
Upon completion of the Conversion and Reorganization, the Board of Directors
of the Company will have the authority to adopt stock repurchase plans,
subject to statutory and regulatory requirements. Unless approved by the OTS,
the Company, pursuant to OTS regulations, will be prohibited from repurchasing
any shares of the Common Stock for three years except (i) for an offer to all
stockholders on a pro rata basis, or (ii) for the repurchase of qualifying
shares of a director. Notwithstanding the foregoing and except as provided
below, beginning one year following completion of the Conversion and
Reorganization, the Company may repurchase its Common Stock so long as: (i)
the repurchases within the following two years are part of an open-market
program not involving greater than 5% of its outstanding capital stock during
a twelve-month period; (ii) the repurchases do not cause the Bank to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and (iii) the Company provides to the Regional Director of the OTS
no later than ten days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken
and such program is not disapproved by the Regional Director. See
"Regulation--Prompt Corrective Regulatory Action."
31
<PAGE>
Based upon facts and circumstances following the Conversion and
Reorganization and subject to applicable regulatory requirements, the Board of
Directors may determine to repurchase stock in the future. Such facts and
circumstances may include but not be limited to: (i) market and economic
factors such as the price at which the stock is trading in the market, the
volume of trading, the attractiveness of other investment alternatives in
terms of the rate of return and risk involved in the investment, the ability
to increase the book value and/or earnings per share of the remaining
outstanding shares, and the opportunity to improve the Company's return on
equity; (ii) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its shareholders. In the
event the Company determines to repurchase stock, such repurchases may be made
at market prices which may be in excess of the Purchase Price in the
Offerings. To the extent that the Company repurchases stock at market prices
in excess of the per share book value, such repurchases may have a dilutive
effect upon existing stockholders.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that
such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the Bank's
current and projected results of operations and asset/liability structure, the
economic environment, tax and other considerations. See "The Conversion and
Reorganization--Certain Restrictions on Purchase or Transfer of Shares After
Conversion."
32
<PAGE>
DIVIDEND POLICY
Since the 1992 MHC Reorganization, the Bank has paid, in the aggregate,
annual cash dividends on the Bank Common Stock ranging from $0.27 per share
for 1993 to $0.43 per share for 1997, as adjusted for stock dividends and a 2-
for-1 stock split. The current quarterly cash dividend is $0.12 per share. The
Bank intends to continue to pay regular quarterly dividends through either the
date of consummation of the Conversion and Reorganization (on a pro rata
basis) or the end of the fiscal quarter during which the consummation of the
Conversion and Reorganization occurs. The table below sets forth the cash and
stock dividends paid by the Bank since January 1, 1995.
<TABLE>
<CAPTION>
ACTUAL
CASH CASH STOCK
DIVIDEND DIVIDEND PAID, DIVIDEND
PAYABLE DATE PAID(1) AS ADJUSTED(2) PAID
------------ -------- -------------- --------
<S> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31, 1997:
Fourth Quarter................... November 28 $0.12 $0.12 -- %
October 30 -- -- 10
Third Quarter.................... August 29 0.12 0.11 --
Second Quarter................... May 30 0.12 0.11 --
First Quarter.................... February 28 0.10 0.09 --
YEAR ENDING DECEMBER 31, 1996:
Fourth Quarter................... December 16 $ -- $ -- 10%
November 29 0.10 0.08 --
Third Quarter.................... August 31 0.10 0.08 --
Second Quarter................... May 31 0.10 0.08 --
First Quarter.................... February 29 0.10 0.08 --
YEAR ENDING DECEMBER 31, 1995:
Fourth Quarter................... November 30 $0.09 $0.07 -- %
Third Quarter.................... August 31 0.09 0.07 --
Second Quarter................... May 31 0.09 0.07 --
First Quarter.................... February 28 0.09 0.07 --
</TABLE>
- --------
(1) The Mutual Holding Company has waived receipt of all cash dividends paid
by the Bank. The aggregate amount of all cash dividends waived by the
Mutual Holding Company as of November 30, 1997 was $7.2 million.
(2) As adjusted for 10% stock dividends paid on December 16, 1996 and October
30, 1997, respectively.
Upon consummation of the Conversion and Reorganization, the Company expects
to pay an initial quarterly dividend of $0.03 per share. Declarations of
dividends by the Company's Board of Directors, however, will depend upon a
number of factors, including the amount of the net proceeds from the Offerings
retained by the Company, investment opportunities available to the Company or
the Bank, capital requirements, regulatory limitations, the Company's and the
Bank's financial condition and results of operations, tax considerations and
general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods. See "Market for
the Common Stock."
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion and Reorganization--
Liquidation Rights." For information concerning federal and state law and
regulations which apply to the Bank in determining the amount of proceeds
which may be retained by the Company and regarding a savings institution's
ability to make capital distributions including payment of dividends to its
holding company, see "Federal and State Taxation--Federal Taxation--
Distributions" and "Regulation--Federal Regulation of Savings Institutions--
Limitation on Capital Distributions."
33
<PAGE>
Unlike the Bank, the Company is not subject to OTS regulatory restrictions
on the payment of dividends to its stockholders, although the source of such
dividends will be dependent on the net proceeds retained by the Company and
earnings thereon and may be dependent, in part, upon dividends from the Bank.
The Company is subject, however, to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of the net assets
of the Company (the amount by which total assets exceed total liabilities)
over its statutory capital (generally defined as the aggregate par value of
the outstanding shares of the Company's capital stock having a par value plus
the amount of the consideration paid for shares of the Company's capital stock
without par value) or, if there is no such excess, to its net profits for the
current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion and Reorganization, the
Company and Bank have committed to the OTS that during the one-year period
following the consummation of the Conversion and Reorganization, the Company
will not take any action to declare an extraordinary dividend to stockholders
which would be treated by recipient stockholders as a tax-free return of
capital for federal income tax purposes without prior approval of the OTS.
34
<PAGE>
MARKET FOR THE COMMON STOCK
Although the Bank Common Stock is traded on the Nasdaq National Market,
there is no established market for the Common Stock of the Company at this
time. The Company will have its Common Stock quoted on the Nasdaq National
Market under the symbol "FSLA." One of the requirements for quotation of the
Common Stock on the Nasdaq National Market is that there be at least three
market makers for the Common Stock. The Company will seek to encourage and
assist at least three market makers to make a market in its Common Stock.
Currently, there are three market makers for the Bank's Common Stock. Making a
market involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
Although under no obligation to do so, Sandler O'Neill has informed the
Company that it intends, upon the completion of the Conversion and
Reorganization, to make a market in the Common Stock by maintaining bid and
ask quotations and trading in the Common Stock so long as the volume of
trading activity and certain other market making considerations justify it
doing so. As of the date hereof, no other broker-dealers have agreed to act as
market makers. While the Company anticipates that prior to the completion of
the Conversion there will be at least two other broker-dealers to act as
market maker for the Common Stock, there can be no assurance there will be
three or more market makers for the Common Stock.
Additionally, the development of a liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not within
the control of the Company, the Bank or any market maker. Accordingly, there
can be no assurance that an active and liquid trading market for the Common
Stock will develop or that, if developed, it will continue.
The following table sets forth the high and low trading prices of the Bank's
Common Stock during the periods indicated as adjusted for stock dividends paid
to shareholders.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1997:
Fourth Quarter................................................... $54.50 $32.27
Third Quarter.................................................... 32.50 26.88
Second Quarter................................................... 29.25 21.00
First Quarter.................................................... 23.50 18.25
YEAR ENDED DECEMBER 31, 1996:
Fourth Quarter................................................... $19.50 $16.50
Third Quarter.................................................... 17.00 15.50
Second Quarter................................................... 16.25 14.50
First Quarter.................................................... 16.50 15.00
YEAR ENDED DECEMBER 31, 1995:
Fourth Quarter................................................... $17.50 $13.25
Third Quarter.................................................... 14.25 13.25
Second Quarter................................................... 15.25 12.50
First Quarter.................................................... 14.50 12.50
</TABLE>
35
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at September 30, 1997, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion and Reorganization, based upon the sale of the number of shares
indicated in the table and the other assumptions set forth under "Pro Forma
Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
----------------------------------------------------------------
16,550,374
SHARES
BANK 10,637,542 12,514,527 14,391,900 (15% ABOVE
HISTORICAL SHARES SHARES SHARES MAXIMUM
AT (MINIMUM (MIDPOINT (MAXIMUM OF OF ESTIMATED
SEPTEMBER 30, OF ESTIMATED OF ESTIMATED ESTIMATED PRICE
1997 PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(1)
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposit accounts(2)....... $809,449 $ 809,449 $ 809,449 $ 809,449 $ 809,449
Borrowed funds............ 123,894 123,894 123,894 123,894 123,894
Debt in connection with
acquisition of shares of
Common Stock by ESOP(3).. 571 571 571 571 571
-------- ------------- ------------- ------------- -------------
Total deposit accounts and
borrowed funds........... $933,914 $ 933,914 $ 933,914 $ 933,914 $ 933,914
======== ============= ============= ============= =============
Stockholders' equity:
Preferred Stock, $.01
par value, 10,000,000
shares authorized; none
to be issued........... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 85,000,000
shares authorized;
shares to be issued as
reflected(4)........... 73 204 240 276 317
Additional paid-in capi-
tal(5)(6).............. 27,856 133,487 152,023 170,562 191,878
Retained earnings....... 71,870 71,870 71,870 71,870 71,870
Net unrealized gain on se-
curities available for
sale..................... 193 193 193 193 193
Less:
Unearned Common Stock
previously acquired by
the ESOP(3)............ (571) (571) (571) (571) (571)
Unearned Common Stock
held by the 1996 Incen-
tive Plan.............. (208) (208) (208) (208) (208)
Common Stock to be ac-
quired by the ESOP(7).. -- (8,510) (10,012) (11,514) (13,240)
Common Stock to be ac-
quired by the Stock-
Based Incentive
Plan(8)................ -- (4,255) (5,006) (5,757) (6,620)
-------- ------------- ------------- ------------- -------------
Total stockholders' equi-
ty....................... $ 99,213 $ 192,210 $ 208,529 $ 224,851 $ 243,619
======== ============= ============= ============= =============
</TABLE>
(footnotes on next page)
36
<PAGE>
- --------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Assumes that the existing loan to the ESOP remains outstanding.
(4) Assumes (i) that the 3,881,539 Public Bank Shares outstanding at October
31, 1997 are converted into 9,762,458, 11,485,473, 13,208,100 and
15,189,626 Exchange Shares at the minimum, midpoint, maximum and 15% above
the maximum of the Valuation Price Range, respectively, and (ii) that no
fractional shares of Exchange Shares will be issued by the Company. No
effect has been given to the issuance of additional shares of Common Stock
pursuant to existing and proposed stock option plans. See "Pro Forma
Data," "Management of the Bank--Benefits."
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Company's Stock-Based Incentive Plan intended to be
adopted by the Company and presented for approval of stockholders at a
meeting of stockholders following the Conversion and Reorganization. If
approved by the stockholders of the Company, an amount equal to 10% of the
shares of Conversion Stock issued in the Conversion and Reorganization
will be reserved for issuance upon the exercise of options to be granted
under the Stock-Based Incentive Plan. See "Risk Factors--Possible Dilutive
Effect of Stock-Based Incentive Plan," Footnote 3 to the tables under "Pro
Forma Data" at or for the nine months ended September 30, 1997 and at or
for the year ended December 31, 1996, respectively, and "Management of the
Bank--Benefits--Stock-Based Incentive Plan."
(6) The additional paid-in capital includes $1.1 million of assets from the
Mutual Holding Company. The pro forma additional paid-in capital and
retained earnings reflect a restriction of the original retained earnings
of the Bank prior to the 1992 MHC Reorganization. The retained earnings of
the Bank will be substantially restricted after the Conversion and
Reorganization by virtue of the liquidation account to be established in
connection with the Conversion and Reorganization. See "The Conversion and
Reorganization--Liquidation Rights" and "Regulation--Federal Regulation of
Savings Institutions--Limitations on Capital Distributions."
(7) Assumes that 8% of the aggregate of the Conversion Stock issued in the
Conversion and Reorganization will be purchased by the ESOP and that the
funds used to acquire such shares will be borrowed from the Company. The
Common Stock acquired by the ESOP is reflected as a reduction of
stockholders' equity. See "Management of the Bank--Benefits--Employee
Stock Ownership Plan and Trust."
(8) Assumes that, subsequent to the Conversion and Reorganization, an amount
equal to 4% of the shares of Conversion Stock issued in the Conversion and
Reorganization is purchased by the Stock-Based Incentive Plan through open
market purchases. The Common Stock purchased by the Stock-Based Incentive
Plan is reflected as a reduction of stockholder's equity. Implementation
of the Stock-Based Incentive Plan is subject to the approval of the
Company's stockholders at a meeting following the Conversion and
Reorganization. See "Risk Factors--Possible Dilutive Effect of Stock-Based
Incentive Plan," Footnote 2 to the tables under "Pro Forma Data" at or for
the nine months ended September 30, 1997 and at or for the year ended
December 31, 1996, respectively, and "Management of the Bank--Benefits--
Stock-Based Incentive Plan."
37
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization is completed. However, net
proceeds are currently estimated to be between $104.7 million and $141.8
million (or $163.2 million in the event the Estimated Price Range is increased
by 15.0%) based upon the following assumptions: (i) 100% of the shares of
Conversion Stock will be sold in the Subscription Offering to Eligible Account
Holders; (ii) directors, officers and employees of the Bank and members of
their immediate families (collectively, "Insiders") will purchase an aggregate
of $600,000 of Common Stock; (iii) Sandler O'Neill will receive a fee equal to
1.15% of the aggregate Purchase Price of shares sold in the Subscription
Offering and in the Community Offering, excluding shares purchased by Insiders
and the ESOP; and (iv) Conversion and Reorganization expenses, excluding the
marketing fees paid to Sandler O'Neill, will be approximately $600,000. Actual
Conversion and Reorganization expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the nine months ended
September 30, 1997, and for the year ended December 31, 1996 have been
calculated as if the Conversion Stock had been sold (and the Exchange Shares
issued) at the beginning of the respective periods and the net proceeds had
been invested at an average yield of 5.42%, the one-year Treasury note rate at
September 30, 1997. The Treasury yield was used on the reinvestment of
proceeds because it reflects a more achievable rate of return than the
arithmetic average of the average yield of the Bank's interest-earning assets
and cost of deposits. The tables below do not reflect the effect of
withdrawals from deposit accounts for the purchase of Conversion Stock or the
effect of any possible use of the net proceeds. The pro forma after-tax yield
for the Company and the Bank is assumed to be 3.41% for both the nine months
ended September 30, 1997 and the year ended December 31, 1996 based on an
effective tax rate of 37%.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that
would be available for distribution to stockholders in the event of
liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the nine months ended September 30, 1997 and the
year ended December 31, 1996 based on the assumptions set forth above and in
the tables and should not be used as a basis for projections of market value
of the Common Stock following the Conversion and Reorganization. The tables
below give effect to the Stock-Based Incentive Plan, which is expected to be
adopted by the Company following the Conversion and Reorganization and
presented to stockholders for approval at a meeting of stockholders. See
Footnotes 2 and 3 to the tables and "Management of the Bank--Benefits--Stock-
Based Incentive Plan." No effect has been given in the tables to the possible
issuance of additional shares reserved for future issuance pursuant to the
Stock-Based Incentive Plan to be adopted by the Board of Directors of the
Company and presented to stockholders for approval at a meeting of
stockholders, nor does book value give any effect to the liquidation account
to be established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders or, in the event of liquidation of the Bank, to the
tax effect of the bad debt reserve and other factors. See Footnote 3 to the
tables below, "The Conversion and Reorganization--Liquidation Rights" and
"Management of the Bank--Benefits--Stock-Based Incentive Plan."
38
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------
10,637,542 12,514,527 14,391,900 16,550,374
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(7)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross Proceeds.......... $106,375 $125,145 $143,919 $165,504
Less: Offering expenses
and commission......... (1,719) (1,917) (2,116) (2,344)
-------- -------- -------- --------
Estimated net proceeds.. 104,656 123,228 141,803 163,160
Less: Common Stock pur-
chased by the ESOP..... (8,510) (10,012) (11,514) (13,240)
Common Stock pur-
chased by Stock-
Based
Incentive Plan....... (4,255) (5,006) (5,757) (6,620)
-------- -------- -------- --------
Estimated net pro-
ceeds, as adjusted... $ 91,891 $108,210 $124,532 $143,300
======== ======== ======== ========
Consolidated net earn-
ings:
Historical............ $ 6,760 $ 6,760 $ 6,760 $ 6,760
Pro forma earnings on
net proceeds......... 2,350 2,767 3,185 3,665
Less: Pro forma ESOP
adjustment(1)........ (268) (315) (363) (417)
Pro forma Stock-
Based Incentive
Plan(2)........... (402) (473) (544) (626)
-------- -------- -------- --------
Pro forma net earn-
ings.............. $ 8,440 $ 8,739 $ 9,038 $ 9,382
======== ======== ======== ========
Per share net earn-
ings(3):
Historical............ $ 0.35 $ 0.30 $ 0.26 $ 0.22
Pro forma earnings on
net proceeds......... 0.12 0.12 0.12 0.12
Less: Pro forma ESOP
adjustment(1)........ (0.01) (0.01) (0.01) (0.01)
Pro forma Stock-
Based Incentive
Plan(2)........... (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Pro forma net earn-
ings per share.... $ 0.44 $ 0.39 $ 0.35 $ 0.31
======== ======== ======== ========
Stockholders' equity:
Historical............ $ 99,213 $ 99,213 $ 99,213 $ 99,213
Estimated net pro-
ceeds................ 104,656 123,228 141,803 163,160
Plus: Assets consoli-
dated from MHC....... 1,106 1,106 1,106 1,106
Less: Common Stock
acquired by
ESOP(1).............. (8,510) (10,012) (11,514) (13,240)
Common Stock ac-
quired by Stock-
Based Incentive
Plan(2)........... (4,255) (5,006) (5,757) (6,620)
-------- -------- -------- --------
Pro forma stock-
holders' equi-
ty(2)(4)(5)....... $192,210 $208,529 $224,851 $243,619
======== ======== ======== ========
Stockholders' equity per
share(6):
Historical............ $ 4.86 $ 4.13 $ 3.59 $ 3.13
Estimated net pro-
ceeds................ 5.13 5.13 5.14 5.14
Plus: Assets consoli-
dated from MHC....... 0.05 0.05 0.04 0.03
Less: Common Stock
acquired by
ESOP(1).............. (0.42) (0.42) (0.42) (0.42)
Common Stock ac-
quired by Stock-
Based Incentive
Plan(2)........... (0.21) (0.21) (0.21) (0.21)
-------- -------- -------- --------
Pro forma stock-
holders' equity
per
share(2)(4)(5).... $ 9.41 $ 8.68 $ 8.14 $ 7.67
======== ======== ======== ========
Offering price as a
percentage of pro
forma stockholders'
equity per share..... 106.3% 115.2% 122.9% 130.4%
Offering price to pro
forma net earnings
per share............ 17.1x 19.2x 21.4x 24.2x
</TABLE>
(footnotes on following page)
39
<PAGE>
- --------
(1) It is assumed that 8% of the shares of Common Stock issued in the
Conversion and Reorganization will be purchased by the ESOP. For purposes
of this table, the funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Bank intends to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total annual
payment of the ESOP debt is based upon 15 equal annual installments of
principal, with an assumed interest rate at 7.00%. The pro forma net
earnings assume: (i) that the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the nine months ended
September 30, 1997, and was made at the end of the period; (ii) that
42,550, 50,058, 57,568 and 66,201 shares at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, were committed to be
released during the nine months ended September 30, 1997 at an average
fair value of $10.00 per share in accordance with Statement of Position
("SOP") 93-6; and (iii) only the ESOP shares committed to be released were
considered outstanding for purposes of the net earnings per share
calculations. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
(2) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion and presented for approval at a
meeting of stockholders. The Stock-Based Incentive Plan intends to acquire
an amount of Common Stock equal to 4% of the shares of Common Stock sold
in the Conversion or 425,501, 500,581, 575,675 and 662,014 shares of
Common Stock at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of
Common stock or treasury stock of the Company, if any. Funds used by the
Stock-Based Incentive Plan to purchase the shares will be contributed to
the Stock-Based Incentive Plan by the Bank. In calculating the pro forma
effect of the Stock-Based Incentive Plan, it is assumed that the shares
were acquired by the Stock-Based Incentive Plan at the beginning of the
period presented in open market purchases at the Purchase Price and that
15% of the amount contributed was an amortized expense during such period.
The issuance of authorized but unissued shares of the Company's Common
Stock to the Stock-Based Incentive Plan instead of open market purchases
would dilute the voting interests of existing stockholders by
approximately 2.2% and pro forma net earnings per share would be $0.43,
$0.38, $0.34, and $0.31, at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, and pro forma shareholders' equity
per share would be $9.23, $8.51, $7.98 and $7.52 at the minimum, midpoint,
maximum, and 15% above the maximum of the range, respectively. There can
be no assurance that stockholder approval of the Stock-Based Incentive
Plan will be obtained, or that the actual purchase price of the shares
will be equal to the Purchase Price. See "Management of the Bank--
Benefits--Stock-Based Incentive Plan."
(3) Historical and pro forma net earnings per share have been divided by the
total number of shares to be outstanding upon consummation of the
Conversion and Reorganization, as adjusted to give effect to the purchase
of shares by the ESOP during the period, or 19,386,918, 22,808,152,
26,229,364, and 30,163,786 shares at the minimum, midpoint, maximum, and
maximum, as adjusted, of the Estimated Price Range, respectively.
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the options provided for in the Stock-Based Incentive
Plan expected to be adopted by the Company following the Conversion and
Reorganization or to the exercise of existing stock options. The Company
expects to present the Stock-Based Incentive Plan for approval at a
meeting of stockholders. An amount equal to 10% of the Common Stock issued
in the Conversion or 1,063,754, 1,251,452, 1,439,190 and 1,655,037 shares
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, will be reserved for future issuance
upon the exercise of options to be granted under the Stock-Based Incentive
Plan. The issuance of Common Stock pursuant to the exercise of options
under the Stock-Based Incentive Plan will result in the dilution of
existing stockholders' interests by approximately 5.5%. Assuming all
options were exercised at the end of the period at an exercise price of
$10.00 per share, the pro forma net earnings per share would be $0.41,
$0.36, $0.33, and $0.29, respectively, and the pro forma stockholders'
equity per share would be $9.45, $8.75, $8.24, and $7.79, respectively.
See "Management of the Bank--Benefits--Stock-Based Incentive Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion and Reorganization. See "Dividend Policy,"
"The Conversion--Liquidation Rights" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."
(6) Historical and pro forma shareholders' equity per share have been divided
by the total number of shares to be outstanding upon consummation of the
Conversion and Reorganization, or 20,400,000, 24,000,000, 27,600,000 and
30,174,000 shares at the minimum, midpoint, maximum, and maximum, as
adjusted, of the Estimated Price Range, respectively.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
40
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
10,637,542 12,514,527 14,391,900 16,550,374
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(7)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $106,375 $125,145 $143,919 $165,504
Less: Offering expenses
and commissions....... (1,719) (1,917) (2,116) (2,344)
-------- -------- -------- --------
Estimated net proceeds.. 104,656 123,228 141,803 163,160
Less: Common Stock
purchased by ESOP..... (8,510) (10,012) (11,514) (13,240)
Common Stock purchased
by Stock-Based
Incentive Plan... (4,255) (5,006) (5,757) (6,620)
-------- -------- -------- --------
Estimated net proceeds,
as adjusted........... $ 91,891 $108,210 $124,532 $143,300
======== ======== ======== ========
Consolidated net
earnings:
Historical............. $ 4,710 $ 4,710 $ 4,710 $ 4,710
Pro forma earnings on
net proceeds, as
adjusted.............. 3,133 3,690 4,247 4,887
Less: Pro forma ESOP
adjustment(1)......... (357) (421) (484) (556)
Pro forma Stock-Based
Incentive Plan
adjustment(2).... (536) (631) (725) (834)
-------- -------- -------- --------
Pro forma net
earnings.............. $ 6,950 $ 7,348 $ 7,748 $ 8,207
======== ======== ======== ========
Per share net
earnings(3)
Historical............. $ 0.24 $ 0.21 $ 0.18 $ 0.16
Pro forma earnings on
net proceeds, as
adjusted.............. 0.16 0.16 0.16 0.16
Less: Pro forma ESOP
adjustment(1)......... (0.02) (0.02) (0.02) (0.02)
Pro forma Stock-Based
Incentive Plan
adjustment(2).... (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- --------
Pro forma net earnings
per share............. $ 0.35 $ 0.32 $ 0.29 $ 0.27
======== ======== ======== ========
Stockholders' equity:
Historical............. $ 92,863 $ 92,863 $ 92,863 $ 92,863
Estimated net
proceeds.............. 104,656 123,228 141,803 163,160
Plus: Assets
consolidated from
MHC................... 1,106 1,106 1,106 1,106
Less: Common Stock
acquired by ESOP(1)... (8,510) (10,012) (11,514) (13,240)
Common Stock acquired by
Stock-Based
Incentive
Plan(2).......... (4,255) (5,006) (5,757) (6,620)
-------- -------- -------- --------
Pro forma stockholders'
equity(2)(4)(5)....... $185,860 $202,179 $218,501 $237,269
======== ======== ======== ========
Stockholders' equity per
share(6):
Historical............. $ 4.55 $ 3.87 $ 3.36 $ 2.93
Estimated net
proceeds.............. 5.13 5.13 5.14 5.14
Plus: Assets
consolidated from
MHC................... 0.05 0.05 0.04 0.03
Less: Common Stock
acquired by ESOP(1)... (0.42) (0.42) (0.42) (0.42)
Common Stock acquired by
Stock-Based
Incentive
Plan(2).......... (0.21) (0.21) (0.21) (0.21)
-------- -------- -------- --------
Pro forma stockholders'
equity per
share(2)(4)(5)........ $ 9.10 $ 8.42 $ 7.91 $ 7.47
======== ======== ======== ========
Offering price as a
percentage of pro forma
stockholders' equity
per share.............. 109.9% 118.8% 126.4% 133.9%
Offering price to pro
forma net earnings per
share.................. 28.6x 31.3x 34.5x 37.0x
</TABLE>
(footnotes on following page)
41
<PAGE>
- --------
(1) It is assumed that 8% of the shares of Conversion Stock issued in the
Conversion and Reorganization, will be purchased by the ESOP. For purposes
of this table, the funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Bank intends to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total annual
payment of the ESOP debt is based upon 15 equal annual installments of
principal, with an assumed interest rate at 7.00%. The pro forma net
earnings assumes: (i) that the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the year ended December 31,
1996, and was made at the end of the period; (ii) that 56,734, 66,744,
76,757, and 88,269 shares at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, were committed to be released
during the year ended December 31, 1996, at an average fair value of
$10.00 per share in accordance with the SOP 93-6; and (iii) only the ESOP
shares committed to be released were considered outstanding for purposes
of the net earnings per share calculations. See "Management of the Bank--
Benefits--Employee Stock Ownership Plan and Trust."
(2) Gives effect to the Stock-Based Incentive Plan expected to be adopted by
the Company following the Conversion and Reorganization and presented for
approval at a meeting of stockholders. If the Stock-Based Incentive Plan
is approved by stockholders, the Stock-Based Incentive Plan intends to
acquire an amount of Conversion Stock equal to 4% of the shares of Common
Stock issued in the Conversion and Reorganization, or 425,501, 500,581,
575,675, and 662,014 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or
from authorized but unissued shares of Common Stock or treasury stock of
the Company, if any. Funds used by the Stock-Based Incentive Plan to
purchase the shares will be contributed to the Stock-Based Incentive Plan
by the Bank. In calculating the pro forma effect of the Stock-Based
Incentive Plan, it is assumed that the required stockholder approval has
been received, that the shares were acquired by the Stock-Based Incentive
Plan at the beginning of the period presented in open market purchases at
the Purchase Price and that 20% of the amount contributed was an amortized
expense during such period. The issuance of authorized but unissued shares
of the Company's Common Stock to the Stock-Based Incentive Plan instead of
open market purchases would dilute the voting interests of existing
stockholders by approximately 2.2% and pro forma net earnings per share
would be $0.36, $0.32, $0.30 and $0.27 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, and pro forma
stockholders' equity per share would be $8.92, $8.25, $7.75 and $7.32 at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that stockholder approval of the
Stock-Based Incentive Plan will be obtained, or that the actual purchase
price of the shares will be equal to the Purchase Price. See "Management
of the Bank--Benefits--Stock-Based Incentive Plan."
(3) Historical and pro forma net earnings per share have been divided by the
total number of shares to be outstanding upon consummation of the
Conversion and Reorganization, as adjusted to give effect to the purchase
of shares by the ESOP during the period, or 19,401,102, 22,824,838,
26,248,553 and 30,185,853 shares of Common Stock at the minimum, midpoint,
maximum, and maximum, as adjusted, of the Estimated Price Range,
respectively.
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the options provided for under the Stock-Based Incentive
Plan expected to be adopted by the Company following the Conversion and
Reorganization or to the exercise of existing stock options. The Company
expects to present the Stock-Based Incentive Plan for approval at a
meeting of stockholders. If the Stock-Based Incentive Plan is approved by
stockholders, an amount equal to 10% of the Conversion Stock issued in the
Conversion, or 1,063,754, 1,251,452, 1,439,190 and 1,655,037 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Stock-Based Incentive Plan.
The issuance of Common Stock pursuant to the exercise of options under the
Stock-Based Incentive Plan will result in the dilution of existing
stockholders' interests by approximately 5.5%. Assuming stockholder
approval of the Stock-Based Incentive Plan and all options were exercised
at the end of the period at an exercise price of $10.00 per share, the pro
forma net earnings per share would be $0.34, $0.31, $0.28 and $0.26,
respectively, and the pro forma stockholders' equity per share would be
$9.15, $8.50, $8.02 and $7.60, respectively. See "Management of the Bank--
Benefits--Stock-Based Incentive Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion
and Reorganization--Liquidation Rights" and "Regulation--Federal
Regulation of Savings Institutions--Limitation on Capital Distributions."
(6) Historical and pro forma stockholders' equity per share have been divided
by the total number of shares to be outstanding upon consummation of the
Conversion and Reorganization, or 20,400,000, 24,000,000, 27,600,000 and
30,174,000 shares at the minimum, midpoint, maximum, and maximum, as
adjusted, of the Estimated Price Range, respectively.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
42
<PAGE>
FIRST SAVINGS BANK, SLA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank and Subsidiaries
for each of the years in the three-year period ended December 31, 1996 have
been audited by KPMG Peat Marwick LLP, independent certified public
accountants, whose report thereon is included elsewhere in this Prospectus.
With respect to the information for the nine months ended September 30, 1997
and 1996, which is unaudited, in the opinion of management, all adjustments
necessary for a fair presentation of such interim periods have been included
and are of a normal recurring nature. Results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ended December 31, 1997. These Consolidated
Statements of Income should be read in conjunction with the Consolidated
Financial Statements and notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans...................... $ 32,216 $ 28,489 $ 38,596 $ 35,245 $ 32,095
Mortgage-backed
securities................ 12,598 14,680 19,147 22,140 15,115
Investment securities and
other..................... 2,993 2,952 4,094 4,671 2,179
Investment and mortgage-
backed securities and
loans available for sale.. 6,829 4,378 6,202 2,517 3,520
--------- --------- --------- --------- ---------
Total interest income..... 54,636 50,499 68,039 64,573 52,909
--------- --------- --------- --------- ---------
Interest expense:
Deposits:
NOW and money market
demand.................... 4,142 3,809 5,122 5,090 4,348
Savings.................... 2,462 2,665 3,514 3,568 3,609
Certificates of deposit.... 18,863 19,040 25,256 24,997 15,738
--------- --------- --------- --------- ---------
25,467 25,514 33,892 33,655 23,695
Borrowed funds............. 5,124 2,130 3,372 2,036 1,440
--------- --------- --------- --------- ---------
Total interest expense.... 30,591 27,644 37,264 35,691 25,135
--------- --------- --------- --------- ---------
Net interest income before
provision for loan
losses.................... 24,045 22,855 30,775 28,882 27,774
Provision for loan losses.. 900 375 550 310 300
--------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses.................... 23,145 22,480 30,225 28,572 27,474
--------- --------- --------- --------- ---------
Other operating income:
Fees and service charges... 1,241 1,140 1,557 1,604 1,587
Net gain on sales of loans
and securities............ 593 139 236 751 40
Other, net................. 352 103 202 (184) 107
--------- --------- --------- --------- ---------
Total other operating
income................... 2,186 1,382 1,995 2,171 1,734
--------- --------- --------- --------- ---------
Operating expenses:
Compensation and employee
benefits.................. 7,342 7,956 10,283 8,531 8,189
Occupancy.................. 1,491 1,517 2,048 2,056 1,875
Equipment.................. 1,103 762 1,033 1,186 1,288
Advertising................ 439 313 445 563 426
Federal deposit insurance
premium................... 285 1,394 1,860 1,701 1,569
Special SAIF assessment.... -- 5,220 5,220 -- --
Amortization of
intangibles............... 1,932 1,138 1,349 1,066 223
General and
administrative............ 1,989 1,822 2,463 2,727 2,451
--------- --------- --------- --------- ---------
Total operating expenses.. 14,581 20,122 24,701 17,830 16,021
--------- --------- --------- --------- ---------
Income before income tax
expense.................... 10,750 3,740 7,519 12,913 13,187
Income tax expense.......... 3,990 1,376 2,809 4,611 4,912
--------- --------- --------- --------- ---------
Net income.................. $ 6,760 $ 2,364 $ 4,710 $ 8,302 $ 8,275
========= ========= ========= ========= =========
Basic earnings per share.... $ 0.86 $ 0.31 $ 0.60 $ 1.06 $ 1.06
========= ========= ========= ========= =========
Diluted earnings per share.. $ 0.83 $ 0.29 $ 0.59 $ 1.04 $ 1.03
========= ========= ========= ========= =========
Weighted average shares
outstanding including
common stock equivalents... 8,025,954 8,023,369 7,986,590 7,974,548 7,997,935
========= ========= ========= ========= =========
</TABLE>
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The earnings of the Bank depend primarily on its level of net interest and
dividend income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of mortgage and consumer loans,
mortgage-backed securities, U.S. Government and agency obligations, and the
interest paid on interest-bearing liabilities, which consist of savings
deposits and borrowings from the FHLB and primary brokers/dealers. Net
interest income is a function of the Bank's interest rate spread, which is the
difference between the average yield on interest-earning assets and the
average rate paid on interest-bearing liabilities, as well as a function of
the average balance of interest-earning assets as compared to interest-bearing
liabilities. The Bank's earnings are also affected by its level of noninterest
income, including primarily loan fees and service charges, gains (losses) on
sales of securities available for sale, sales of real estate acquired in
settlement of loans, income from real estate operations and by its level of
noninterest expense, including primarily compensation and employee benefits,
occupancy, equipment, SAIF deposit premiums, and other operating expenses.
Earnings of the Bank are also affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of the Bank.
The Offerings will have a pronounced effect on the Company's and Bank's
financial condition in several ways. Liquidity will be greatly enhanced by the
net proceeds provided, accompanied by the leverage that will be available
through the investment of the funds obtained in the Offerings. The Company and
the Bank will benefit from the returns provided by the capital raised in the
Offerings with investments in loans, mortgage-backed securities, and possible
branch and business acquisitions in the Bank's surrounding markets. The Bank
will also invest a portion of the net proceeds in improving the Bank's
delivery systems through its branch network and lending areas in an effort to
expand its market share and enhance its product line diversification. Although
the capital raised from the stock offering will initially provide the Bank
with higher capital levels, the Bank will continue to exercise prudent
underwriting and credit policies which do not, in the opinion of management,
expose the Bank, its capital or its earnings to undue risk.
BUSINESS STRATEGY
The Bank's business strategy is to preserve asset quality, to maintain a
strong capital position by continuing to emphasize single-family lending and
to seek controlled growth. The Bank's strategy emphasizes customer service and
convenience, and the Bank attributes the loyalty of its customer base to its
commitment to maintaining customer satisfaction. The Bank attempts to set
itself apart from its competitors by providing the type of personalized
service not generally available from larger banks while offering a greater
variety of products and services than is typically available from smaller,
local depository institutions.
The Bank's principal business has historically been, and, to a large degree,
continues to be, attracting retail deposits from the general public and
investing those deposits, together with funds generated from operations and
borrowings, primarily in single-family residential mortgage loans, real estate
construction loans, commercial real estate loans, home equity loans and lines
of credit and multi-family residential mortgage loans. The Bank maintains a
significant portfolio of mortgage-backed securities and also invests in U.S.
Government, federal agency and corporate debt securities and other marketable
securities. The Bank's revenues are derived principally from interest on its
mortgage loan and mortgage-backed securities portfolios and interest and
dividends on its investment securities. The Bank's primary sources of funds
are deposits, proceeds from principal and interest payments on loans and
mortgage-backed securities; sales of loans, mortgage-backed securities and
investments available for sale; maturities of investment securities and short-
term investments; and, to an increasing extent, advances from the Federal Home
Loan Bank of New York ("FHLB-NY"), reverse repurchase agreements and other
borrowed funds.
44
<PAGE>
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 intends to hire additional
lending personnel with expertise in commercial real estate lending to
facilitate growth in this area. It is also the Bank's intention to increase
lending volumes through the use of third-party correspondent lending, without
compromising credit quality, as the correspondents selected will be using the
Bank's underwriting guidelines and approved appraisers.
As part of the Bank's asset/liability management strategy, and as a means of
enhancing profitability, the Bank also invests in securities. More recently,
the Bank has begun to increase its borrowings as a means of funding asset
growth. The average balance of borrowings outstanding for the year ended
December 31, 1996 was $55.2 million, compared to $111.0 million for the nine
months ended September 30, 1997. To the extent the Bank continues to increase
its utilization of borrowings, it may incur an increase in the average cost of
funds, and a corresponding decrease in its net interest margin.
The Bank is in the process of redesigning its retail delivery system to
facilitate the transition from deposit gathering to active sales promotion and
tracking. The Bank has also invested in a Marketing Customer Information File
marketing system to provide better target marketing and develop product and
customer profitability levels. This strategy is intended to enable the Bank to
reach new and existing customers with products and services which match their
profile, and result in more effective use of the Bank's marketing initiatives.
The desired results of the revamping of the retail branch network 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 and
the Company may use a portion of the net Conversion and Reorganization
proceeds to open additional branch offices or acquire other financial
institutions. However, neither the Company nor the Bank have any pending
agreements or understandings regarding acquisitions of any specific financial
institutions or branch offices.
The Bank emphasizes its attention to quality service, but also monitors its
operating expenses to maintain its profitability. As business lines and
products are added, the Bank develops break-even levels and budgetary
constraints to make sure the service or product offered is enhancing returns
and meeting growth targets. The Bank regularly reviews its retail operations
to verify that they maintain lending and retail deposit growth initiatives and
retention targets. As a result of this review, the Bank entered into an
agreement with a commercial bank to sell its Eatontown branch, which at
September 30, 1997, had total deposits of $28.2 million. The Bank determined
that this branch, acquired from the RTC in 1991 in a cluster of three branches
of another financial institution, had not performed to the Bank's targeted
retail lending and cost of funds levels. This transaction is scheduled to
close in February 1998.
YEAR 2000 COMPLIANCE ISSUES
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 millennium. As recommended by the Federal Financial Institutions
Examination Council, the Year 2000 Compliance Plan encompasses the following
45
<PAGE>
phases: Awareness, Assessment, Renovation, Validation and Implementation.
These phases will enable the Bank to identify risks, develop an action plan,
perform adequate testing and complete certification that its processing
systems will be Year 2000 compliant. Execution of the plan is currently on
target and no material expenses have been identified to date. The Bank is
currently in Phase 2--Assessment, which will identify and inventory all
hardware, software, networks and forms affected by the Year 2000 change.
Prioritization of the most critical applications has been addressed, along
with contract and service agreements. The Bank is identifying if there are any
areas where technical expertise would be necessary. The Renovation Phase will
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. No assurances can be given, however,
that execution of the plan will be completed successfully by the year 2000, in
which event the Bank could incur significant costs.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises primarily from interest rate risk
inherent in its lending, investment and deposit taking activities. The Bank's
profitability is affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Bank's
earnings to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent or on the same basis. To
that end, management actively monitors and manages its interest rate risk
exposure.
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors'
approved guidelines. Through such management, the Bank seeks to minimize the
vulnerability of its operations to changes in interest rates. The Bank's Board
of Directors reviews the Bank's interest rate risk position quarterly. The
Bank's Asset/Liability Committee is comprised of the Bank's senior management
under the direction of the Board of Directors, with senior management
responsible for reviewing with the Board of Directors its activities and
strategies, the effect of those strategies on the Bank's net interest margin,
the market value of the portfolio and the effect that changes in interest
rates will have on the Bank's portfolio and the Bank's exposure limits. In
addition, the Bank has established an Asset/Liability Strategy Committee
("ALSCO"), a subcommittee of the Asset/Liability Committee, which is charged
with establishing and maintaining a monitoring system for all marketing
initiatives providing management reports, and formulating and recommending
strategies to the Asset/Liability Committee. The ALSCO meets at least twice
monthly. See "Risk Factors--Potential Impact of Changes in Interest Rates."
The Bank utilizes the following strategies to manage interest rate risk: (1)
emphasizing the origination and retention of fixed-rate mortgage loans having
terms to maturity of not more than 20 years, adjustable-rate loans and
consumer loans consisting primarily of home equity loans and lines of credit;
(2) selling substantially all fixed-rate conforming mortgage loans with terms
of thirty years without recourse and on a servicing-retained basis; and (3)
investing primarily in adjustable-rate mortgage-backed securities, which may
generally bear lower yields as compared to longer term investments, but which
better position the Bank for increases in market interest rates, and holding
the majority of these securities as available for sale. The Bank currently
does not participate in hedging programs, interest rate swaps or other
activities involving the use of off-balance sheet derivative financial
instruments, but may do so in the future to mitigate interest rate risk.
Net Portfolio Value. The Bank's interest rate sensitivity is monitored by
management through the use of the OTS model which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest
46
<PAGE>
rate scenarios, and the Federal Home Loan Bank of Atlanta Asset/Liability
Model. The NPV is defined as the current market value of assets, minus the
current market value of liabilities, plus or minus the current value of off-
balance sheet items. The market values are estimated through two cash flow-
based valuation methodologies and an option-based valuation model: (1) static
discounted cash flow analysis, (2) an option-based pricing analysis (modified
discounted cash flow analysis to value embedded options), and (3) the Black-
Scholes model to value off-balance sheet items. The change in NPV measures an
institution's vulnerability to changes in interest rates by estimating the
change in the market value of an institution's assets, liabilities, and off-
balance sheet contracts in response to an instantaneous change in the general
level of interest rates.
The OTS uses, as a critical point, a change of plus or minus 200 basis
points in order to set its "normal" institutional results and peer
comparisons. The greater the change, positive or negative, in NPV, the more
interest rate risk is assumed to exist within the institution. The following
table lists the Bank's percentage change in NPV assuming an immediate change
of plus or minus of up to 400 basis points from the level of interest rates at
September 30, 1997, as calculated by the OTS. As the table shows, increases in
interest rates would result in decreases in the Bank's NPV, while decreases in
interest rates would result in increases in the Bank's NPV. All market risk
instruments presented in this table are held to maturity or available for
sale. The Bank has no trading securities.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES -------------------------------- -------------------------
IN BASIS POINTS NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE(1)
--------------- ---------- ------------ -------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $ 72,140 $ (55,218) (43.0) 7.30% (461)
300 89,115 (38,243) (30.0) 8.81 (310)
200 104,705 (22,653) (18.0) 10.14 (178)
100 117,921 (9,437) (7.0) 11.20 (71)
Static 127,358 -- -- 11.92 --
(100) 131,681 4,323 3.0 12.19 27
(200) 132,680 5,322 4.0 12.19 27
(300) 135,050 7,692 6.0 12.28 37
(400) 140,536 13,178 10.0 12.63 71
</TABLE>
- --------
(1) Expressed in basis points.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest
income models provide an indication of the Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to and do
not provide a precise forecast of the effect of changes in market interest
rates on the Bank's net interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends on the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
47
<PAGE>
Average Balance Sheet. The following table sets forth certain information
relating to the Bank's average balance sheet and reflects the average yield on
assets and average cost of liabilities for the periods indicated and the
average yields earned and rates paid. Such yields and costs are derived by
dividing annualized income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
AT SEPTEMBER 30, -----------------------------------------------------
1997 1997 1996
----------------- --------------------------- -------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------ ---------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable,
net(1).................. $ 567,197 7.84% $ 540,782 $32,216 7.94% $480,638 $28,489 7.90%
Mortgage-backed securi-
ties.................... 228,158 7.33 243,273 12,598 6.90 289,080 14,680 6.77
Investment securities.... 40,959 7.23 41,236 2,258 7.30 35,665 2,002 7.48
Investment and mortgage-
backed securities and
loans available for
sale.................... 140,395 6.77 144,510 6,829 6.30 95,717 4,378 6.10
Other interest-earning
investments(2).......... 25,970 6.09 17,163 735 5.71 24,642 950 5.14
---------- ---------- ------- -------- -------
Total interest-earning
assets.................. 1,002,679 7.50 986,964 54,636 7.38 925,742 50,499 7.27
Non-interest earning as-
sets..................... 41,834 46,474 39,524
---------- ---------- --------
Total assets.............. $1,044,513 $1,033,438 $965,266
========== ========== ========
LIABILITIES AND STOCKHOLD-
ERS' EQUITY:
Interest-bearing liabili-
ties:
NOW and money market ac-
counts.................. $ 195,003 2.93 $ 191,758 4,142 2.88 $177,228 3,809 2.87
Passbook and statement
savings................. 123,384 2.54 129,334 2,462 2.54 141,031 2,665 2.52
Certificate accounts..... 464,652 5.54 463,939 18,863 5.42 470,523 19,040 5.40
Borrowed funds........... 124,465 5.98 110,954 5,124 6.16 46,978 2,130 6.05
---------- ---------- ------- -------- -------
Total interest-bearing
liabilities............. 907,504 4.63 895,985 30,591 4.55 835,760 27,644 4.41
-------
Non-interest-bearing de-
posits................... 26,410 21,109 19,667
Other liabilities......... 11,386 20,147 18,677
---------- ---------- --------
Total liabilities......... 945,300 937,241 874,104
Stockholders' equity...... 99,213 96,197 91,162
---------- ---------- --------
Total liabilities and
stockholders' equity..... $1,044,513 $1,033,438 $965,266
========== ========== ========
Net interest
income/interest rate
spread(3)................ 2.87% $24,045 2.83% $22,855 2.86%
==== ======= ==== ======= ====
Net interest-earning
assets/net interest rate
margin(4)................... $ 90,979 3.25% $ 89,982 3.29%
========== ==== ======== ====
Ratio of interest-earning
assets to interest-bear-
ing liabilities.......... 1.10x 1.11x
========== ========
</TABLE>
- --------
(1) Loans receivable, net includes non-accrual loans.
(2) Includes federal funds sold and FHLB-NY stock.
(3) Interest rate spread represents the difference between the average 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.
48
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Loans receivable,
net(1)................ $487,619 $38,596 7.92% $457,802 $35,245 7.70% $413,314 $32,095 7.77%
Mortgage-backed
securities............ 282,021 19,147 6.79 332,167 22,140 6.67 267,274 15,115 5.66
Investment securities.. 36,810 2,741 7.45 44,334 3,171 7.15 24,954 1,410 5.65
Investment and
mortgage-backed
securities and loans
available for sale.... 101,244 6,202 6.13 42,425 2,517 5.93 56,270 3,520 6.26
Other interest-earning
investments(2)........ 23,525 1,353 5.75 21,069 1,500 7.12 12,948 769 5.94
-------- ------- -------- ------- -------- -------
Total interest-earning
assets............... 931,219 68,039 7.31 897,797 64,573 7.19 774,760 52,909 6.83
------- ------- -------
Non-interest earning
assets................ 34,360 16,030 22,407
-------- -------- --------
Total assets.......... $965,579 $913,827 $797,167
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
NOW and money market
accounts.............. $178,176 5,122 2.87 $179,978 5,090 2.83 $168,168 4,348 2.59
Passbook and statement
savings............... 139,045 3,514 2.53 140,122 3,568 2.55 143,738 3,609 2.51
Certificate accounts... 468,894 25,256 5.39 453,655 24,997 5.51 361,589 15,738 4.35
Borrowed funds......... 55,241 3,372 6.10 33,575 2,036 6.06 29,896 1,440 4.82
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.......... 841,356 37,264 4.43 807,330 35,691 4.42 703,391 25,135 3.57
------- ------- -------
Non-interest-bearing
deposits.............. 19,491 16,610 14,002
Other liabilities...... 12,799 8,029 8,638
-------- -------- --------
Total liabilities..... 873,646 831,969 726,031
Stockholders' equity... 91,933 81,858 71,136
-------- -------- --------
Total liabilities and
stockholders'
equity............... $965,579 $913,827 $797,167
======== ======== ========
Net interest
income/interest rate
spread(3)............. $30,775 2.88% $28,882 2.77% $27,774 3.26%
======= ==== ======= ==== ======= ====
Net interest-earning
assets/net interest
margin(4)............. $ 89,863 3.30% $ 90,467 3.22% $ 71,369 3.58%
======== ==== ======== ==== ======== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 1.11x 1.11x 1.10x
======== ======== ========
</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.
49
<PAGE>
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing volume or amount of these assets and liabilities. The following table
represents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have
affected the Bank's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to (i)
changes attributable to changes in volume (change in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (change in rate
multiplied by prior volume), and (iii) the net change. Changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
COMPARED TO COMPARED TO COMPARED TO
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ------------------------ ------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
------------- --------------- ---------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------- ---- ------- ------- ------ ------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net.. $ 3,582 $145 $ 3,727 $ 2,329 $1,022 $ 3,351 $3,441 $ (291) $ 3,150
Mortgage-backed securi-
ties.................. (2,527) 445 (2,082) (3,387) 394 (2,993) 4,049 2,976 7,025
Investment securities.. 333 (77) 256 (558) 128 (430) 1,312 449 1,761
Investment and mort-
gage-backed securities
and loans available
for sale.............. 2,303 148 2,451 3,597 88 3,685 (826) (177) (1,003)
Other interest earning
investments........... (363) 148 (215) 162 (309) (147) 555 176 731
------- ---- ------- ------- ------ ------- ------ ------- -------
Total.................. 3,328 809 4,137 2,143 1,323 3,466 8,531 3,133 11,664
------- ---- ------- ------- ------ ------- ------ ------- -------
INTEREST-BEARING LIABIL-
ITIES:
Deposits:
NOW and money market
accounts.............. 319 14 333 (46) 78 32 320 422 742
Passbook and statement
savings............... (237) 34 (203) (27) (27) (54) (95) 54 (41)
Certificates of depos-
it.................... (289) 112 (177) 819 (560) 259 4,521 4,738 9,259
Borrowed funds.......... 2,955 39 2,994 1,322 14 1,336 193 403 596
------- ---- ------- ------- ------ ------- ------ ------- -------
Total.................. 2,748 199 2,947 2,068 (495) 1,573 4,939 5,617 10,556
------- ---- ------- ------- ------ ------- ------ ------- -------
Net change in net inter-
est income............. $ 580 $610 $ 1,190 $ 75 $1,818 $ 1,893 $3,592 $(2,484) $ 1,108
======= ==== ======= ======= ====== ======= ====== ======= =======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
Assets. Total assets increased by $57.4 million, or 5.8%, to $1.0 billion at
September 30, 1997, from $987.1 million at December 31, 1996. Cash and cash
equivalents increased $14.8 million, or 163.2%, to $23.8 million as of
September 30, 1997, from $9.0 million at December 31, 1996. The increase was
due primarily to a temporary increase in the balance of federal funds sold.
These funds were subsequently invested in longer term, higher yielding assets.
Investment securities, including those available for sale, increased $5.2
million, or 9.7%, to $59.0 million as of September 30, 1997, from $53.8
million at December 31, 1996. Mortgage-backed securities, including those
available for sale, decreased $22.7 million, or 6.1%, to $350.5 million at
September 30, 1997, from $373.2 million at December 31, 1996. The primary
source of the asset growth was increased lending. Net loans receivable,
inclusive of those available for sale, grew by $57.3 million, or 11.2%, to
$567.2 million at September 30, 1997, from $509.9 million at December 31,
1996. The increase in loans was due to management's strategic decision to
maintain a higher percentage of loans as a balance sheet component. Management
emphasized the origination of residential single-family five-year adjustable
rate mortgages and construction loans. Loan originations totaled $105.2
million for the nine months ended September 30, 1997 as compared to $97.3
million for the same period in 1996. Repayment of principal on loans totaled
$51.0 million for the nine months ended September 30, 1997 as compared to
$59.7 million for the same period in 1996. Over
50
<PAGE>
the 1997 period, principal repayments and sales of mortgage backed securities
were primarily used to fund loan growth. Premises and equipment, net increased
$2.9 million to $13.3 million at September 30, 1997, from $10.4 million at
December 31, 1996. The increase was primarily due to costs capitalized in
conjunction with the completion of the Bank's new corporate headquarters in
Woodbridge, New Jersey. Excess of cost over fair value of net assets acquired
decreased $1.9 million to $9.0 million at September 30, 1997, from $11.0
million at December 31, 1996. Normal amortization accounted for $635,000 of
this decrease. In addition, an impairment writedown of the core deposit
intangible totaling $1.3 million was recognized as of September 30, 1997, on
deposits acquired from the RTC in 1995.
Liabilities. Deposits increased $14.9 million, or 1.9%, to $809.4 million at
September 30, 1997, from $794.6 million at December 31, 1996. Borrowed funds
increased $35.9 million, or 40.8%, to $123.9 million at September 30, 1997,
from $88.0 million at December 31, 1996. The increased deposits and borrowed
funds were used primarily to fund the asset growth detailed above as well as
for normal operations. Advances by borrowers for taxes and insurance increased
$782,000, or 17.0%, to $5.4 million at September 30, 1997, from $4.6 million
at December 31, 1996, primarily due to the timing of these payments as well as
an increase in the residential loan portfolio.
Stockholders' Equity. The Bank's stockholders' equity increased $6.4 million
for the nine months ended September 30, 1997, due primarily to earnings of
$6.8 million, partially offset by dividends of $1.2 million declared and paid
during the first nine months of 1997. Stockholder's equity was also positively
affected by an increase in the market value of securities available for sale
which resulted in an increase in the value of such investments of $196,000,
net of applicable income tax effect. Proceeds from stock options exercised
during the first nine months of 1997 totaled $430,000.
The OTS requires that the Bank meet minimum tangible, core, and risk-based
capital requirements. At September 30, 1997, the Bank exceeded all regulatory
capital requirements.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Assets. The Bank's assets at December 31, 1996, totaled $987.1 million, an
increase of $42.1 million, or 4.5% from December 31, 1995. Cash and cash
equivalents decreased $17.5 million, or 65.9%, to $9.0 million at December 31,
1996 from $26.5 million at December 31, 1995. The decrease was due primarily
to federal funds being utilized to fund loan production. Investment
securities, including those available for sale, increased $12.7 million, or
31.0%, to $53.8 million at December 31, 1996, from $41.1 million at December
31, 1995. The increase was due primarily to purchases of investment securities
of $52.7 million, partially offset by sales, calls, and maturities of
investment securities of $39.8 million. FHLB-NY stock increased $1.2 million,
or 18.4%, to $7.4 million at December 31, 1996, due to an additional purchase
of stock as required by FHLB-NY. Loans receivable, net increased $51.9
million, or 11.3%, to $509.6 million at December 31, 1996 from $457.8 million
at December 31, 1995. The Bank originated $124.1 million in loans during 1996,
compared to $95.7 million for 1995. The Bank also purchased $10.1 million of
first mortgage loans secured by one- to four-family properties in New Jersey
from third-party correspondents during 1996, compared with $5.2 million during
1995. The Bank will continue to originate residential and commercial mortgage
loans through its retail outlets, in-house originators, brokers and third-
party correspondents. The Bank will also continue to warehouse and sell its
30-year fixed-rate conforming mortgage loans. The Bank provided $550,000 for
loan losses during 1996, compared to $310,000 for 1995. Although non-
performing loans decreased to $4.8 million at December 31, 1996, from $6.0
million at December 31, 1995, the Bank's loan portfolio growth warranted an
increase in the provision. Real estate owned ("REO") decreased $1.6 million to
$1.5 million at December 31, 1996, from $3.1 million at December 31, 1995. The
Bank acquired $2.5 million in properties, provided $105,000 for losses on REO,
while selling $4.2 million during 1996. Mortgage-backed securities, including
those available for sale, totaled $373.2 million at December 31, 1996,
compared to $377.5 million at December 31, 1995. The available for sale
portfolio increased $31.5 million, while the held to maturity portfolio
decreased $35.8 million, as the Bank continued to more actively manage its
mortgage-backed securities portfolio. Premises and equipment, net increased
$1.0 million, or 10.8%, to $10.4 million at December 31, 1996, as the Bank was
renovating its new corporate
51
<PAGE>
headquarters. Excess of cost over fair value of net assets acquired decreased
$1.3 million, or 11.0%, to $11.0 million at December 31, 1996, from $12.3
million at December 31, 1995, as the Bank recognized an impairment writedown
totaling $334,000 on deposits acquired from the RTC in 1991, along with normal
amortization of core deposit premiums.
Liabilities. Deposits decreased $11.7 million, or 1.5%, to $794.6 million at
December 31, 1996, from $806.3 million at December 31, 1995. The decrease was
primarily due to a reduction in the dependence on higher rate certificates of
deposits, accompanied by the outflow of funds into other investment vehicles,
specifically mutual funds and the equity markets. Borrowed funds, which
consist of FHLB-NY advances and repurchase agreements, increased $49.2
million, or 127.1%, to $88.0 million at December 31, 1996, from $39.0 million
at December 31, 1995. The Bank repaid $37.2 million in borrowings, while
proceeds on new borrowings totaled $86.4 million during 1996. Due to the
decline in deposits, funding for continued loan production was attained
through borrowings. ESOP debt decreased $100,000 to $646,000 at December 31,
1996, as a result of principal payments during 1996. Advances by borrowers for
taxes and insurance increased $787,000, or 20.6%, to $4.6 million at December
31, 1996, as a direct correlation with the growth of the loan portfolio. Other
liabilities increased $765,000, or 13.5%, to $6.4 million at December 31,
1996, from $5.7 million at December 31, 1995, primarily as a result of an
increase in accrued liabilities.
Stockholders' Equity. Stockholders' equity increased $3.2 million, or 3.5%,
to $92.9 million at December 31, 1996, from $89.7 million at December 31,
1995. The increase was primarily attributable to earnings for the year ended
December 31, 1996, of $4.7 million, offset by cash dividends of $1.2 million,
the acquisition of shares for the Recognition and Retention Plan ("RRP")
totaling $310,000, and a net change in unrealized loss on securities available
for sale of $168,000. Proceeds from stock options exercised during 1996
totaled $32,000.
The OTS requires that the Bank meet minimum tangible, core, and risk-based
capital requirements. At December 31, 1996, the Bank exceeded all regulatory
capital requirements.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND SEPTEMBER 30, 1996
Results of Operations. Net income for the nine months ended September 30,
1997 was $6.8 million, or basic earnings per share of $0.86, compared with
$2.4 million, or basic earnings per share of $0.31, for the corresponding 1996
period. The earnings for 1997 were affected by an impairment writedown of the
core deposit intangible recognized as of September 30, 1997. An after tax
charge of $867,000 was incurred due to this writedown. Net income for the nine
months ended September 30, 1997, excluding this charge, was $7.6 million, or
basic earnings per share of $0.97. The 1996 period was affected by non-
recurring charges incurred due to the special assessment to recapitalize the
SAIF and also due to benefits payable as a result of the passing of the Bank's
long-time President. Earnings for the 1996 period would have been $6.6
million, or basic earnings of $0.84 per share, without these non-recurring
charges. These non-recurring charges in 1996 and 1997 resulted in a lower
return on average assets and equity in both years.
Interest income. Interest income increased by $4.1 million, or 8.2%, to
$54.6 million for the nine months ended September 30, 1997, compared to $50.5
million for the same period in 1996. Interest on loans increased $3.7 million,
or 13.1%, to $32.2 million for the nine months ended September 30, 1997, from
$28.5 million for the same period in 1996. The increase was due primarily to
an increase in the average size of the loan portfolio to $540.8 million for
the nine-month period ended September 30, 1997, from $480.6 million for the
same period in 1996. Interest on mortgage-backed securities held to maturity
decreased $2.1 million, or 14.2%, to $12.6 million for the nine months ended
September 30, 1997, compared to $14.7 million for the same period in 1996. The
decrease was due to the decreased average balance of the mortgage-backed
securities held to maturity portfolio for the nine months of 1997 to $243.3
million, from $289.1 million for the same period in 1996, partially offset by
an increase in the yield on the portfolio to 6.90% for 1997 from 6.77% for
1996. The decrease in mortgage-backed securities held to maturity balances was
due primarily to principal repayments on existing mortgage-backed securities
held to maturity being utilized to fund loan production. The majority of
mortgage-
52
<PAGE>
backed securities purchased over the period were classified as available for
sale. Interest and dividends on investment securities increased $41,000, or
1.4%, for the nine months ended September 30, 1997. Interest on investments
and mortgage-backed securities available for sale increased $2.5 million, or
56.0%, to $6.8 million for the nine months ended September 30, 1997, as
compared to $4.4 million for the same period in 1996. The increase was due to
an increase in the average balance of the available for sale portfolio to
$144.5 million for the nine months ended September 30, 1997, from $95.7
million for the same period of 1996 along with an increase in the yield on the
portfolio to 6.30% for 1997 from 6.10% in 1996.
Interest Expense. Interest expense increased $2.9 million, or 10.7%, to
$30.6 million for the nine months ended September 30, 1997, compared to $27.6
million for the same period in 1996. Interest expense on deposits decreased
$47,000, or 0.2%, to $25.5 million for the nine month period ended September
30, 1997. Interest expense on borrowed funds increased $3.0 million, or
140.6%, to $5.1 million for the nine months ended September 30, 1997, compared
to $2.1 million for the same period in 1996. The increase was due primarily to
the growth in the average balance of borrowings, which was $111.0 million for
the nine months ended September 30, 1997, as compared to $47.0 million for the
comparable 1996 period. This increase was attributable to management's
strategy to fund the purchase of investment and mortgage-backed securities
through the use of borrowed funds, where accretive to earnings. The interest
expense on borrowings was also affected by an increase in the average cost of
borrowings to 6.16% for the nine months ended September 30, 1997, from 6.05%
for the comparable 1996 period.
Net Interest Income Before Provision for Loan Losses. Net interest income
before provision for loan losses increased $1.2 million, or 5.2%, to $24.0
million for the nine months ended September 30, 1997, compared to $22.9
million for the same period in 1996. The increase was due to the changes in
interest income and interest expense described above.
Provision for Loan Losses. The provision for loan losses increased $525,000,
or 140.0%, to $900,000 for the nine months ended September 30, 1997, compared
to $375,000 for the same period in 1996. The increase in the provision was
primarily due to the increase in the balance of single family residential loan
portfolio and, to a lesser degree, commercial real estate and construction
lending, and the risks inherent in those loan portfolios. Net loans increased
$68.6 million between September 30, 1997 and September 30, 1996. The provision
was based upon management's review and evaluation of the loan portfolio, level
of delinquencies, general market and economic conditions, and asset
classification review. In management's opinion, the allowance for loan losses,
totaling $6.0 million, is adequate to cover losses inherent in the portfolio.
Although management considers the allowance for loan losses to be adequate,
additional problems could develop and lead to additional loan loss provisions
and asset write-downs.
Other Operating Income. Other operating income increased $804,000, or 58.2%,
to $2.2 million for the nine months ended September 30, 1997, compared to $1.4
million for the same period in 1996. Fees and service charges increased
$101,000, or 8.9%, to $1.2 million for the nine months ended September 30,
1997, from $1.1 million for the same period in 1996. This increase was due to
a higher number of demand deposit accounts along with higher service fees. The
overall increase in other operating income was due primarily to an increase of
$454,000 in gains on sales of loans and securities available for sale to
$593,000 for the nine months ended September 30, 1997, from $139,000 for the
comparable 1996 period. The increase was due primarily to net gains of
$545,000 recognized in the third quarter of 1997 and such gains were
principally attributable to sales of mortgage-backed securities available for
sale. The "other, net" category of other operating income increased $249,000,
or 241.7%, to $352,000 for the nine months ended September 30, 1997, from
$103,000 for the same period in 1996. The changes in that category were
primarily due to reduced expense of $131,000 associated with REO operations
and increased income of $121,000 realized by the Bank's wholly owned
subsidiary, FSB Financial Corp., which markets annuities and other financial
products to customers of the Bank and receives commissions on sales.
Operating Expenses. Operating expenses decreased $5.5 million, or 27.5%, to
$14.6 million for the nine months ended September 30, 1997, from $20.1 million
for the same period in 1996. The decrease was primarily
53
<PAGE>
due to the SAIF assessment and employee benefit costs. Compensation and
employee benefits decreased $614,000, or 7.7%, to $7.3 million for the nine
months ended September 30, 1997, compared to $8.0 million for the same period
in 1996. The 1996 period included a non-recurring charge to earnings of $1.0
million for benefits payable as a result of the passing of the Bank's long-
time Chairman and President. Equipment expense increased $341,000, or 44.8%,
to $1.1 million for the nine months ended September 30, 1997, from $762,000
million for the same period in 1996. The increase was due to the write off of
certain equipment determined to be obsolete and increased depreciation expense
incurred due to an upgrade of the Bank's computer equipment. The Bank incurred
reduced FDIC insurance premiums in 1997. On September 30, 1996, the President
signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act")
which, among other things, imposed a one-time special assessment on SAIF
member institutions, including the Bank, to recapitalize the SAIF. The Bank's
special assessment of $5.2 million was reflected as an expense in the 1996
period. As a result of the Funds Act, the FDIC substantially lowered the SAIF
insurance assessments on SAIF member institutions. The Bank's assessment rate
has now been reduced to 6.4 basis points from 23 basis points and the
corresponding FDIC expense decreased $1.1 million, or 80%, to $285,000 for the
nine months ended September 30, 1997, from $1.4 million for the comparable
1996 period. Amortization of intangibles increased $794,000, or 69.8%, to $1.9
million for the nine months ended September 30, 1997, from $1.1 million for
the same period in 1996. An impairment writedown of the core deposit
intangible totaling $1.3 million was recognized as of September 30, 1997,
regarding deposits acquired from the RTC in 1995.
Income Tax Expense. Income tax expense totaled $4.0 million for the nine
months ended September 30, 1997, compared to $1.4 million for the comparable
1996 period, which represented an increase of $2.6 million, or 190.0%. The
increase was due primarily to an increase in taxable income. Taxable income
was affected in the 1996 period by several non-recurring charges.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Results of Operations. Net income for the year ended December 31, 1996,
totaled $4.7 million, a 43.4% decrease from the $8.3 million earned in 1995.
The decrease was primarily attributable to non-recurring charges for the
special assessment to recapitalize the SAIF and the expenses resulting from
the passing of the Bank's long-time President. Return on average stockholders'
equity was adversely affected in 1995 by the Bank's 1995 Secondary Offering
completed in July 1995, which raised $7.2 million in capital.
Interest Income. Interest income for the year ended December 31, 1996,
totaled $68.0 million, an increase of $3.5 million, or 5.4%, from $64.6
million for the year ended December 31, 1995. The increase was due primarily
to an increase in the average balance of interest-earning assets to $931.2
million for 1996, from $897.8 million for 1995. Interest income on loans
increased $3.4 million, or 9.5%, to $38.6 million for the year ended December
31, 1996, compared to $35.2 million for 1995. The increase was due primarily
to the increase in the average balance of the loan portfolio to $487.6 million
for the year ended December 31, 1996, from $457.8 million for 1995. Interest
on mortgage-backed securities held to maturity decreased $3.0 million, or
13.5%, to $19.1 million for the year ended December 31, 1996, from $22.1
million for 1995. The decrease was primarily due to a reduction in the average
size of the mortgage-backed securities held to maturity portfolio to $282.0
million for the year ended December 31, 1996, from $332.2 million for 1995, as
the cash flows from mortgage-backed securities held to maturity were used to
provide funding for loan production and the purchase of investment securities
and mortgage-backed securities available for sale. Interest on investment
securities decreased $577,000, or 12.4%, to $4.1 million for the year ended
December 31, 1996, from $4.7 million for 1995. The decrease was primarily due
to a reduction in the average size of the investment securities portfolio to
$36.8 million for the year ended December 31, 1996, from $44.3 million in
1995, offset slightly by an increase in the average yield on the investment
portfolio to 7.45% for 1996, from 7.15% for 1995. Interest on investment
securities and mortgage-backed securities available for sale increased $3.7
million, or 146.4%, to $6.2 million for the year ended December 31, 1996, from
$2.5 million for 1995. The increase was primarily due to the increased average
size of the available for sale portfolio to $101.2 million for 1996, from
$42.4 million for 1995, accompanied by an increase in the average yield to
6.13% for 1996, from 5.93% for 1995. The increased average
54
<PAGE>
size was due to the reclassification from held to maturity to available for
sale of $77.5 million in investment and mortgage-backed securities in December
1995, (see Note 1, "Summary of Significant Accounting Policies" in the
consolidated financial statements) accompanied by the Bank's positioning more
securities in the available for sale category to manage the portfolio more
effectively.
Interest Expense. Total interest expense increased $1.6 million, or 4.4%, to
$37.3 million for the year ended December 31, 1996, compared to $35.7 million
for 1995. Interest expense on deposits increased $237,000, or 0.7%, to $33.9
million for the year ended December 31, 1996. Interest expense on borrowed
funds increased $1.3 million, or 65.6%, to $3.4 million for the year ended
December 31, 1996, from $2.0 million for 1995. The increase was due primarily
to an increase in the average balance of FHLB-NY advances and other borrowings
to $55.2 million for 1996, from $33.6 million for 1995, accompanied by a
slight increase in the average rate paid on borrowings to 6.10% for 1996, from
6.06% for 1995. The Bank continued to utilize borrowings for funding of loan
production and investment securities purchases.
Net Interest Income Before Provision for Loan Losses. Net interest income
increased $1.9 million, or 6.6%, totaling $30.8 million for the year ended
December 31, 1996, compared to $28.9 million for 1995. The average interest
rate spread for the year ended December 31, 1996, was 2.88%, compared to 2.77%
for 1995. The average yield on interest-earning assets increased 12 basis
points, while average interest expense increased only 1 basis point from 1995
to 1996.
Provision for Loan Losses. The Bank provided $550,000 for loan losses in
1996, as compared to $310,000 in 1995. The increase in the provision was based
upon management's review and evaluation of the loan portfolio, the level of
growth within the portfolio and the risks inherent in the portfolio, as well
as the 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
were secured by first mortgage liens on single-family residential properties.
Non-performing loans decreased $1.2 million, or 20.3%, to $4.8 million at
December 31, 1996, compared to $6.0 million at December 31, 1995.
Other Operating Income. Other operating income, consisting primarily of
deposit product fees, loan servicing fees, gains and losses on loans and
securities sold, and real estate owned operating income and expenses, totaled
$2.0 million for the year ended December 31, 1996, compared to $2.2 million
for 1995, which represented a decrease of $176,000, or 8.1%. Net gains on
sales of loans and securities available for sale totaled $236,000 for the year
ended December 31, 1996, from $751,000 for 1995. Although volume of sales
increased during 1996, the Bank continued to minimize its exposure to rising
rates by limiting the duration of the available for sale portfolio, in order
to provide a consistent funding source for continued loan production. Other
income, consisting primarily of income from the Bank's operating subsidiaries,
FSB Financial Corp. and 1000 Woodbridge Center Drive, Inc., gains and losses
on sales of REO, rental income, and REO expenses, totaled $202,000 for the
year ended December 31, 1996, compared to a net expense of $184,000 for the
year ended December 31, 1995, representing an increase of $386,000, or 209.8%.
The increase was due to decreased REO expenses and provisions for possible
losses on REO, increased income from operating subsidiaries, and increased
profits on the sale of REO.
Operating Expenses. 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 to earnings of $1.0 million for
benefits payable as a result of the passing of the Bank's President,
accompanied by increased salary and benefit costs. Occupancy expense decreased
$8,000 to $2.0 million for the year ended December 31, 1996. The decrease was
due primarily to the closing of a branch of the Bank in November 1996.
Equipment expense decreased $153,000, or 12.9%, to $1.0 million for the year
ended December 31, 1996.
55
<PAGE>
Advertising expense decreased $118,000, or 21.0%, to $445,000 for the year
ended December 31, 1996, from $563,000 for 1995. The decrease was due
primarily to reduced generic marketing as loan production was attained without
additional marketing efforts. Federal deposit insurance premiums increased
$159,000, or 9.3%, to $1.9 million for the year ended December 31, 1996, from
$1.7 million for 1995. The increase was due primarily to an increase in the
average level of insurance-assessable deposits to $813.3 million for 1996,
from $796.1 million for 1995. The Funds Act, which was signed into law on
September 30, 1996, imposed a one-time special assessment of $5.2 million on
the Bank to recapitalize the SAIF (see Note 15, "Special SAIF Assessment" in
the consolidated financial statements). Amortization of intangibles increased
$283,000, or 26.5%, to $1.3 million for the year ended December 31, 1996, from
$1.1 million for 1995. The increase was due primarily to an impairment
writedown of the core deposit intangible totaling $334,000 regarding deposits
acquired from the RTC in 1991. General and administrative expenses decreased
$264,000, or 9.7%, to $2.5 million for the year ended December 31, 1996, from
$2.7 million for 1995. The decrease was due primarily to lower outside service
bureau expenses.
Income Tax Expense. Income tax expense totaled $2.8 million for the year
ended December 31, 1996, compared to $4.6 million for 1995, which represented
a decrease of $1.8 million, or 39.1%. The decrease was due primarily to a
reduction in taxable income due to the special SAIF assessment and one-time
charges resulting from the passing of the Bank's President in 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Results of Operations. Net income for the year ended December 31, 1995,
totaled $8.3 million, unchanged from the $8.3 million earned in 1994. The
Bank's earnings were primarily achieved by an increase in net interest income
and other operating income, offset by higher operating expenses due primarily
to the expenses relating to the acquisition of branches from the RTC,
partially reduced by lower income tax expense.
Interest Income. Interest income for the year ended December 31, 1995,
totaled $64.6 million, an increase of $11.7 million, or 22.1%, from $52.9
million for 1994. The increase was primarily due to an increase in the average
balance of interest-earning assets to $897.8 million for 1995, from $774.8
million for 1994, combined with an increase in the average yield on interest-
earning assets to 7.19% for the year ended December 31, 1995, from 6.83% for
1994. Interest income on loans increased $3.1 million, or 9.7%, to $35.2
million for the year ended December 31, 1995, compared to $32.1 million for
1994. The increase was due primarily to an increase in the average balance of
the loan portfolio to $457.8 million in 1995, from $413.3 million in 1994.
Interest on mortgage-backed securities held to maturity increased $7.0
million, or 46.4%, to $22.1 million for the year ended December 31, 1995,
compared to $15.1 million for 1994. The increase is due primarily to an
increase in the average size of the mortgage-backed securities held to
maturity portfolio to $332.2 million in 1995, from $267.3 million for 1994, as
the proceeds of the branch acquisitions were used to purchase mortgage-backed
securities held to maturity, accompanied by the increase in the average yield
earned on mortgage-backed securities held to maturity to 6.67% during 1995
from 5.66% during 1994 as a result of upward adjustments on adjustable-rate
mortgage-backed securities. Interest on investment securities increased $2.5
million, or 113.6%, to $4.7 million for the year ended December 31, 1995, as
compared to $2.2 million for 1994. The increase was due primarily to the
increase in the average balance of the investment securities portfolio with
cash flow provided from the branch acquisition during 1995, accompanied by an
increase in the average yield to 7.15% for 1995 from 5.65% for 1994, as a
result of purchases of investment securities in the first half of 1995 when
rates were higher. Interest on investments, mortgage-backed securities and
loans available for sale totaled $2.5 million for the year ended December 31,
1995, as compared to $3.5 million for 1994, which represents a decrease of
$1.0 million, or 28.6%. The decrease was due primarily to the average yield on
the available for sale portfolio decreasing to 5.93% for the year ended
December 31, 1995, from 6.26% for 1994, and a corresponding decrease in the
average balance of the available for sale portfolio during 1995. On December
15, 1995, the Bank reassessed its classifications of all of its securities in
accordance with the SFAS 115 (see Note 1, "Summary of Significant Accounting
Policies" in the consolidated financial statements). The Bank classified an
additional $77.5 million in investment and mortgage-backed securities from
held to maturity to available for sale.
56
<PAGE>
Interest Expense. Total interest expense increased $10.6 million, or 42.2%,
to $35.7 million for the year ended December 31, 1995, as compared to $25.1
million for 1994. The increase in interest expense on deposits to $33.7
million for the year ended December 31, 1995, from $23.7 million for 1994, was
mainly attributable to an increase in the average deposit balance outstanding
to $773.8 million for 1995, from $673.5 million for 1994, accompanied by
higher interest rates paid on deposits, causing average interest cost to
increase to 4.35% for 1995, from 3.52% for 1994. General market interest rates
began a trend upward in 1994 and continued increasing through June, 1995.
Interest rates subsequently trended downward, which enabled the Bank to
reprice certificates of deposits accordingly. Interest expense on borrowed
funds increased $596,000, or 41.4%, during 1995, and was due to increased
borrowings accompanied by higher interest rates paid on borrowings. The
average cost of borrowed funds increased to 6.06% for 1995, from 4.82% for
1994.
Net Interest Income Before Provision for Loan Losses. Net interest income
increased slightly during 1995, totaling $28.9 million for the year ended
December 31, 1995, as compared to $27.8 for 1994, a $1.1 million, or 4.0%
increase. The average interest rate spread for the year ended December 31,
1995, was 2.77%, compared to 3.26% for 1994. The spread compression was due to
the upward repricing of certificates of deposit during 1995 outpacing the
repricing of adjustable rate assets, which are subject to interest rate caps
and margins. The average yield on interest-earning assets increased 36 basis
points, but the average interest expense increased 85 basis points from 1994
to 1995.
Provision for Loan Losses. The Bank provided $310,000 for loan losses in
1995, as compared to $300,000 in 1994. The provision was based upon
management's review and evaluation of the loan portfolio, level of
delinquencies, general market and economic conditions, and the risks inherent
in the Bank's loan portfolio. The related allowance for loan losses totaled
$5.2 million, and was 89.9% of nonaccrual loans at December 31, 1995. This
compares to a $5.7 million allowance for loan losses at December 31, 1994,
which was 65.3% of nonaccrual loans. Substantially all of the nonaccrual loans
were secured by first mortgage liens on single-family residential properties.
Non-performing loans decreased $3.0 million, or 33.3%, to $6.0 million at
December 31, 1995, compared to $9.0 million at December 31, 1994.
Other Operating Income. Other operating income, totaled $2.2 million for the
year ended December 31, 1995, as compared to $1.7 million for 1994, which
represented an increase of $500,000, or 29.4%. The increase was due primarily
to net gains on sales of loans and securities sold to $751,000 for the year
ended December 31, 1995, increased from $40,000 for 1994, as some of the
securities purchased with the proceeds from both the branch acquisitions and
the 1995 Secondary Offering were placed in the available for sale portfolio
and subsequently sold. Also included in the net gains on sales of securities
available for sale was the sale of securities which were transferred in
accordance with the reassessment of the securities portfolio as allowed by the
SFAS 115 (see Note 1, "Summary of Significant Accounting Policies" in the
consolidated financial statements). Other income totaled a net expense of
$184,000 for the year ended December 31, 1995, as compared to income of
$107,000 for 1994. This decrease was due primarily to increased REO expenses
and provisions for possible losses on REO.
Operating Expenses. Operating expenses increased $1.8 million, or 11.3%, to
$17.8 million for the year ended December 31, 1995, as compared to $16.0
million for 1994. The increase was due primarily to increased costs due to the
branch acquisitions during 1995. Compensation and employee benefits increased
$342,000, or 4.2%, to $8.5 million for the year ended December 31, 1995, as
compared to $8.2 million for 1994. Occupancy expenses increased $181,000, or
9.5%, to $2.1 million for the year ended December 31, 1995, compared to $1.9
million for 1994, due to new branch location costs. Advertising expense
increased $137,000, or 32.2% to $563,000 for 1995, compared to $426,000 for
1994, due to increased advertising to maintain loan volume. Federal deposit
insurance premiums increased $132,000, or 8.3%, to $1.7 million for 1995,
compared to $1.6 million for 1994, due primarily to the increase in the
deposit base as a result of the acquisition from the RTC. Amortization of
intangibles totaled $1.1 million for the year ended December 31, 1995, as
compared to $223,000 for 1994, as a result of the $12.6 million premium paid
on the deposits acquired from the RTC during 1995. General and administrative
expenses increased $276,000, or 11.0%, to $2.7 million for the year ended
December 31, 1995. The increase was due primarily to certain one-time costs
related to the conversion of the deposit data from the acquired branches to
the Bank's data processing system, and increased expenses in operating
subsidiaries.
57
<PAGE>
Income Tax Expense. Income tax expense totaled $4.6 million for the year
ended December 31, 1995, compared to $4.9 million for 1994, which represented
a decrease of $300,000, or 6.1%. The decrease was due primarily to a reduction
in taxable income because of allowable deductions for increases in specific
loan and REO reserves and charge-offs.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's liquidity is a measure of its ability to generate sufficient cash
flows to meet all of its current and future financial obligations and
commitments. The Bank's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and mortgage-backed securities; sales
of loans, mortgage-backed securities and investments available for sale;
maturities of investment securities and short-term investments; and, to an
increasing extent, advances from the FHLB-NY, reverse repurchase agreements
and other borrowed funds. While maturities and scheduled amortization of loans
and mortgage-backed securities are a predictable source of funds, deposit cash
flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The primary investing activity of the Bank is the origination of one- to
four-family mortgage loans. During the nine months ended September 30, 1997
and 1996, and years ended December 31, 1996, 1995, and 1994, the originated
mortgage loans in the amounts of $104.6 million, $100.9 million, $127.1
million, $98.5 million and $81.8 million, respectively. The Bank originated
other loans totaling $3.4 million, $2.3 million, $3.8 million, $3.8 million
and $2.3 million for the nine months ended September 30, 1997 and 1996, and
years ended December 31, 1996, 1995, and 1994, respectively. The Bank also
purchased loans and mortgage-backed and investment securities to reduce excess
liquidity not otherwise used for lending activities. Purchases of mortgage
loans totaled $4.7 million and $4.6 million for the nine months ended
September 30, 1997 and 1996, respectively, and $10.1 million and $5.2 million
for the years ended December 31, 1996 and 1995, respectively. There were no
mortgage loans purchased in 1994. Purchases of mortgage-backed securities,
including those available for sale, totaled $160.7 million, $141.4 million,
$191.3 million, $215.3 million and $146.6 million for the nine months ended
September 30, 1997 and 1996, and years ended December 31, 1996, 1995, and
1994, respectively. Purchases of investment securities, including those
available for sale, totaled $27.0 million, $44.8 million, $52.7 million, $48.0
million and $37.7 million for the nine months ended September 30, 1997 and
1996, and years ended December 31, 1996, 1995, and 1994, respectively. Other
investing activities include investment in FHLB-NY stock and federal funds.
The investing activities were funded primarily from principal repayments on
loans and mortgage-backed securities of $117.3 million, $139.2 million, $178.6
million, $119.8 million and $149.4 million for the nine months ended September
30, 1997 and 1996, and years ended December 31, 1996, 1995, and 1994,
respectively. Additionally, proceeds from sales of loans, mortgage-backed
securities and investment securities totaling $128.0 million, $90.2 million,
$124.2 million, $114.8 million and $89.1 million for the nine months ended
September 30, 1997 and 1996, and years ended December 31, 1996, 1995, and
1994, and, to a lesser extent, called or maturing investment securities
totaling $14.0 million, $13.0 million, $19.0 million, $19.0 million and $11.0
million for the nine months ended September 30, 1997 and 1996, and years ended
December 31, 1996, 1995, and 1994, respectively, provided additional
liquidity.
The Bank has several other sources of liquidity, including FHLB-NY advances,
which, at September 30, 1997, totaled $33.0 million, of which $15.0 million
were due within the following twelve months. If necessary, the Bank has
additional borrowing capacity with the FHLB-NY, including an available
overnight line of credit of up to $48.9 million. The Bank also has other
borrowings that provided additional liquidity, totaling $90.9 million at
September 30, 1997, $25.9 million of which is due in 1998. Other sources of
liquidity are investment and mortgage-backed securities available for sale,
totaling $140.4 million at September 30, 1997.
The Bank, in the normal course of conducting business, extends credit to
meet the financing needs of its customers through commitments and letters of
credit. At September 30, 1997, the Bank had commitments to originate and
purchase mortgage loans of $25.8 million and to purchase mortgage-backed and
investment securities of $16.9 million. At that date, there were also
commitments under unfunded credit lines totaling $43.0
58
<PAGE>
million and standby letters of credit totaling $2.1 million. Certificates of
deposit that are scheduled to mature in one year or less totaled $348.3
million at September 30, 1997. Based on historical experience, management
estimates that a significant portion of such deposits will remain with the
Bank. The Bank anticipates that it will have sufficient funds available to
meet its current commitments.
The Bank is required to maintain an average daily balance of liquid assets
as defined by OTS regulations. This ratio is based upon a percentage of
deposits and short-term borrowings. The required minimum ratio has been
reduced to 4.00%, from 5.00% at September 30, 1997. The Bank's liquidity ratio
at September 30, 1997, was 8.17%. The Bank's most liquid assets are cash and
cash equivalents, which include investments in highly liquid, short-term
investments. The level of these assets is dependent upon the Bank's operating,
financing, and investing activities during any given period. As of September
30, 1997, cash and investments qualifying for liquidity purposes totaled $80.0
million.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Bank and notes thereto, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact
of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all of the assets and liabilities of
the Bank are monetary. As a result, interest rates have a greater impact on
the Bank's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. These standards are based on a consistent
application of a financial components approach that focuses on control. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 is effective for
transfers that occur after December 31, 1996 and will be applied prospectively
except for certain provisions that were deferred until January 1, 1998, by
Statement 127 "Deferral of the Effective Date of Certain Provisions of FASB
No. 125" issued in December 1996. The adoption of SFAS 125 did not have a
material effect on the Bank's financial position or results of operations.
Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125. In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" ("SFAS 127"),
an amendment of SFAS 125. SFAS 127 defers for one year the effective date of
portions of SFAS 125 that address secured borrowings and collateral for all
transactions. Additionally, SFAS 127 defers for one year the effective date of
transfers of financial assets that are part of repurchase agreements,
securities lending and similar transactions. The adoption is not expected to
have a material effect on the Bank's financial position or results of
operations.
Earnings Per Share. In February 1997, the FASB issued Statement 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 supersedes APB Opinion No. 15,
"Earnings Per Share" and specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock. SFAS 128 replaces
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS,
respectively. SFAS 128 requires dual presentation of Basic and Diluted EPS on
the face of the income statement for entities with complex capital structures
and a reconciliation of information utilized to
59
<PAGE>
calculate Basic EPS to that used to calculate Fully Diluted EPS. SFAS 128 is
effective for financial statement periods ending after December 15, 1997.
Earlier application is not permitted. After adoption, all prior EPS are
required to be restated to conform with SFAS 128. The Bank adopted SFAS 128 on
December 31, 1997 and all earnings per share data have been restated to
conform to the provisions of SFAS 128.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Under SFAS 130, comprehensive
income is divided into net income and other comprehensive income. Other
comprehensive income includes items previously recorded directly in equity,
such as unrealized gains or losses on securities available for sale. SFAS 130
is effective for interim periods and annual periods beginning after December
15, 1997. Comparative financial statements for earlier periods are required to
be reclassified to reflect application of the provisions of SFAS 130. The Bank
has not determined the impact, if any, SFAS 130 will have on the Bank's
financial statement presentation.
Disclosures About Segments of an Enterprise and Related Information. In June
1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected financial information about operating segments in interim
financial reports to shareholders. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Bank has not yet
determined the impact, if any, SFAS 131 will have on the Bank's financial
statement presentation.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business has been, and continues to be, attracting
retail deposits from the general public and investing those deposits, together
with funds generated from operations and borrowings, primarily in single-
family residential mortgage loans, real estate construction loans, commercial
real estate loans, home equity loans and lines of credit and multi-family
residential mortgage loans. The Bank maintains a significant portfolio of
mortgage-backed securities and also invests in U.S. Government, federal agency
and corporate debt securities and other marketable securities. The Bank's
revenues are derived principally from interest on its mortgage loan and
mortgage-backed securities portfolios, and interest and dividends on its
investment securities. The Bank's total loan portfolio amounted to $573.0
million at September 30, 1997. Single-family residential loans accounted for
78.1% of total loans, while home equity loans and lines of credit were 7.3% of
total loans. Real estate construction, commercial real estate and multi-family
residential mortgage loans represented in the aggregate 9.8% of total loans.
The Bank also offers a variety of consumer loans. In addition, the Bank had
investments in mortgage-backed securities totaling $350.5 million, or 33.6% of
total assets at September 30, 1997.
MARKET AREA AND COMPETITION
The Bank has 17 branch offices in central New Jersey, 13 of which are
located in Middlesex County, three in Monmouth county and one in Union County.
The Bank's deposit gathering base is concentrated in the communities
surrounding its offices. The majority of the Bank's loan originations are
derived from north and central New Jersey, which is a part of the New York
City metropolitan area and which has historically benefitted from having a
large number of corporate headquarters and a concentration of financial
services-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
60
<PAGE>
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.
LENDING ACTIVITIES
Loan and Mortgage-Backed Securities Portfolio Compositions. The Bank's loan
portfolio consists primarily of conventional first mortgage loans secured by
one- to four-family residences and, to a lesser extent, multi-family
residences and commercial real estate. At September 30, 1997, the Bank's loan
portfolio totalled $573.0 million, of which $468.8 million, or 81.8% were one-
to four-family residential mortgage loans. At that date, the Bank's loan
portfolio also included $41.9 million of home equity loans and lines of credit
generally secured by second liens on one- to four-family residential
properties, $18.3 million of construction loans, $31.6 million of commercial
real estate loans, and $6.2 million of multi-family residential mortgage
loans, which represented 7.3%, 3.2%, 5.5% and 1.1%, respectively, of total
loans receivable. Of the mortgage loan portfolio outstanding at that date,
36.0% were fixed-rate loans and 64.0% were ARM loans. Other loans held by the
Bank, which consist of loans on deposit accounts, commercial business,
personal, automobile and credit card loans, totalled $6.2 million, or 1.1% of
total loans outstanding at September 30, 1997. The Bank does not anticipate
maintaining a credit card portfolio in the foreseeable future.
The majority of the loans originated by the Bank are held for investment.
However, the Bank sells 30 year, fixed-rate, conforming loans to the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and institutional investors
from time to time, and retains servicing rights. All loans are sold without
recourse. At September 30, 1997, the Bank's servicing portfolio was $94.5
million.
The Bank also invests in mortgage-backed securities and other mortgage-
backed products such as collateralized mortgage obligations ("CMOs"). At
September 30, 1997, mortgage-backed securities aggregated $350.5 million, or
33.6% of total assets, of which 59.4% were secured by ARM loans. The majority
of the Bank's mortgage-backed securities are insured or guaranteed by Freddie
Mac, the Government National Mortgage Association ("GNMA"), or Fannie Mae
("FNMA"). CMOs totalled $61.7 million, or 17.7% of the Bank's total mortgage-
backed securities portfolio at September 30, 1997, the majority of which were
backed or guaranteed by federal agencies. At September 30, 1997, the Bank had
$228.2 million in mortgage-backed securities held for investment, $4.1 million
of which had contractual maturities of less than one year. The actual maturity
of a mortgage-backed security varies, depending on when the underlying
mortgages are repaid or prepaid. Prepayments of the underlying mortgages may
shorten the life of the investment, thereby affecting its yield to maturity
and the related market value of the mortgage-backed security. The actual
prepayments of the underlying mortgages depend on many factors, including the
type of mortgages, the coupon rates, the age of the mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages, levels of market interest rates, and general economic conditions.
As part of the Bank's asset/liability management strategy and for increased
liquidity, the Bank holds a portion of its mortgage-backed securities
portfolio available for sale. At September 30, 1997, mortgage-backed
securities available for sale had an amortized cost of $122.0 million and a
market value of approximately $122.4 million.
61
<PAGE>
The following table sets forth the composition of the Bank's loan and
mortgage-backed securities portfolio in dollar amounts and as a percentage of
the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------------ ----------------- ----------------- ------------------ ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage
loans(1):
One-to-four fam-
ily............. $468,829 81.82% $428,463 83.14% $390,641 84.20% $363,449 85.98% $366,914 86.56% $370,280 87.30%
Home equity
loans........... 41,895 7.31 39,140 7.60 33,456 7.21 30,768 7.28 27,676 6.53 25,734 6.07
Construction(2).. 18,255 3.19 12,871 2.50 7,612 1.64 3,177 0.75 3,920 0.92 5,514 1.30
Commercial real
estate.......... 31,569 5.51 21,209 4.11 17,322 3.73 13,370 3.16 12,559 2.96 8,585 2.02
Multi-family.... 6,225 1.09 7,876 1.53 9,675 2.09 7,779 1.84 7,335 1.73 7,436 1.75
A.I.D.(3)....... -- -- -- -- 165 0.04 178 0.04 191 0.05 202 0.05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans........... 566,773 98.92 509,559 98.88 458,871 98.91 418,721 99.05 418,595 98.75 417,751 98.49
Other loans...... 6,208 1.08 5,772 1.12 5,055 1.09 4,027 0.95 5,306 1.25 6,410 1.51
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans re-
ceivable........ 572,981 100.00% 515,331 100.00% 463,926 100.00% 422,748 100.00% 423,901 100.00% 424,161 100.00%
====== ====== ====== ====== ====== ======
Less:
Net deferred loan
fees and premiums
and discounts.... (198) 95 499 953 1,397 2,375
Allowance for
loan losses...... 5,982 5,322 5,247 5,745 5,899 5,751
-------- -------- -------- -------- -------- --------
Total loans re-
ceivable, net... $567,197 $509,914 $458,180 $416,050 $416,605 $416,035
======== ======== ======== ======== ======== ========
Mortgage loans:
ARM............. $362,631 63.98% $309,600 60.76% $275,109 59.95% $242,499 57.91% $240,424 57.44% $256,248 61.34%
Fixed-rate...... 204,142 36.02 199,959 39.24 183,762 40.05 176,222 42.09 178,171 42.56 161,503 38.66
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans........... $566,773 100.00% $509,559 100.00% $458,871 100.00% $418,721 100.00% $418,595 100.00% $417,751 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage-backed
securities(4):
CMOs............ $ 61,670 17.73% $ 40,095 10.81% $ 65,399 17.41% $ 81,009 26.30% $ 74,523 27.64% $ 51,397 19.89%
FHLMC........... 199,984 57.50 248,525 67.00 259,994 69.22 198,377 64.41 166,245 61.66 182,278 70.54
GNMA............ 18,509 5.32 27,999 7.54 31,570 8.41 10,029 3.26 13,578 5.04 18,664 7.22
FNMA............ 67,623 19.45 54,339 14.65 18,644 4.96 18,573 6.03 15,280 5.66 6,065 2.35
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-
backed securi-
ties............ 347,786 100.00% 370,958 100.00% 375,607 100.00% 307,988 100.00% 269,626 100.00% 258,404 100.00%
====== ====== ====== ====== ====== ======
Net premiums and
discounts........ 2,414 2,094 1,634 1,153 2,238 1,055
Net unrealized
gain (loss) on
mortgage-backed
securities
available for
sale............. 329 128 241 (1,511) 637 --
-------- -------- -------- -------- -------- --------
Net mortgage-
backed securi-
ties............. $350,529 $373,180 $377,482 $307,630 $272,501 $259,459
======== ======== ======== ======== ======== ========
</TABLE>
- ----
(1) Includes $287,000, $424,000, $148,000, $1.6 million and $2.3 million in
mortgage loans available for sale for 1996, 1995, 1994, 1993 and 1992,
respectively.
(2) Net of loans in process of $26.2 million, $12.3 million, $3.8 million,
$3.9 million, $6.3 million and $4.6 million at September 30, 1997,
December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
(3) Agency for International Development. Represented a participation interest
in a $15.0 million aggregate loan to the Korea National Housing
Corporation, a government-sponsored housing development project.
(4) Includes $122.4 million, $120.8 million, $89.3 million, $24.4 million,
$28.3 million and $3.5 million in mortgage-backed securities available for
sale at September 30, 1997 and December 31, 1996, 1995, 1994, 1993 and
1992, respectively.
62
<PAGE>
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------- ----------------------------------
1997 1996 1996 1995 1994
--------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans(1):
At beginning of
period................ $ 504,142 $ 453,125 $ 453,125 $ 412,023 $ 411,299
Mortgage loans
originated:
One- to four-family... 76,212 78,523 99,956 75,505 64,976
Home equity loans..... 11,253 12,649 15,290 10,679 9,549
Construction.......... 5,383 4,938 5,258 5,262 5,355
Commercial real
estate............... 11,550 1,066 4,943 5,043 1,334
Multi-family.......... 167 3,743 1,650 1,976 547
--------- --------- ---------- ---------- ----------
Total mortgage loans
originated......... 104,565 100,919 127,097 98,465 81,761
Mortgage loans
purchased............. 4,665 4,631 10,118 5,181 --
--------- --------- ---------- ---------- ----------
Total mortgage loans
originated and
purchased............. 109,230 105,550 137,215 103,646 81,761
Mortgage loans sold.... (3,036) (6,198) (6,932) (6,343) (5,387)
Principal repayments... (48,095) (57,321) (77,060) (52,193) (73,883)
Decrease in
premiums/discounts and
deferred loan fees.... 293 247 404 454 444
Net (increase) decrease
in allowance for loan
losses................ (660) 156 (75) 498 154
Mortgage loans
transferred to real
estate owned.......... (885) (2,105) (2,535) (4,960) (2,365)
--------- --------- ---------- ---------- ----------
At end of period........ $ 560,989 $ 493,454 $ 504,142 $ 453,125 $ 412,023
========= ========= ========== ========== ==========
Other loans:
At beginning of
period................ $ 5,772 $ 5,055 $ 5,055 $ 4,027 $ 5,306
Other loans
originated............ 3,364 2,343 3,835 3,828 2,278
Other loans sold....... -- -- -- -- (238)
Principal repayments... (2,928) (2,380) (3,118) (2,800) (3,319)
--------- --------- ---------- ---------- ----------
At end of period....... $ 6,208 $ 5,018 $ 5,772 $ 5,055 $ 4,027
========= ========= ========== ========== ==========
Mortgage-backed
securities(2):
At beginning of
period................ $ 373,180 $ 377,482 $ 377,482 $ 307,630 $ 272,501
Mortgage-backed
securities purchased.. 160,663 141,397 191,327 215,292 146,629
Mortgage-backed
securities sold....... (116,430) (73,011) (96,147) (81,792) (35,905)
Amortization of
premium............... (794) (756) (977) (615) (1,227)
Net change in
unrealized gain (loss)
on mortgage-backed
securities available
for sale.............. 202 (1,362) (113) 1,752 (2,148)
Principal repayments... (66,292) (79,493) (98,392) (64,785) (72,220)
--------- --------- ---------- ---------- ----------
At end of period....... $ 350,529 $ 364,257 $ 373,180 $ 377,482 $ 307,630
========= ========= ========== ========== ==========
</TABLE>
- --------
(1) Includes $149,000, $287,000, $424,000 and $148,000 in mortgage loans
available for sale for the nine months ended September 30, 1996, and the
years ended December 31, 1996, 1995 and 1994, respectively.
(2) Includes $122.4 million, $93.4 million, $120.7 million, $89.1 million and
$25.9 million in mortgage-backed securities available for sale for the
nine months ended September 30, 1997 and 1996, and for the years ended
December 31, 1996, 1995 and 1994, respectively.
63
<PAGE>
Loan Maturity. The following table sets forth the maturity or period of
repricing of the Bank's loan portfolio at September 30, 1997. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due within one year. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than in which they contractually mature, and fixed rate loans
are included in the period in which the final contractual repayment is due.
The table does not include the effect of future principal prepayments.
Principal prepayments and scheduled principal amortization on loans totalled
$51.0 million, $80.2 million and $55.0 million for the nine months ended
September 30, 1997 and the years ended December 31, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------------------------------------------------
ONE YEAR THREE FIVE YEARS TEN YEARS TWENTY
ONE YEAR TO THREE YEARS TO TO TEN TO TWENTY YEARS OR
OR LESS YEARS FIVE YEARS YEARS YEARS MORE TOTAL
-------- -------- ---------- ---------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.... $101,491 $89,064 $ 97,755 $ 98,545 $67,589 $14,385 $468,829
Home equity loans...... 13,786 1,057 4,957 9,544 12,551 -- 41,895
Construction(1)........ 18,255 -- -- -- -- -- 18,255
Commercial real es-
tate.................. 3,259 5,427 2,518 3,765 15,342 1,258 31,569
Multi-family........... -- 352 4,689 536 648 -- 6,225
-------- ------- -------- -------- ------- ------- --------
Total mortgage loans.. 136,791 95,900 109,919 112,390 96,130 15,643 566,773
Other loans............ 2,983 1,876 978 -- 371 -- 6,208
-------- ------- -------- -------- ------- ------- --------
Total loans........... $139,774 $97,776 $110,897 $112,390 $96,501 $15,643 $572,981
======== ======= ======== ======== ======= =======
Net deferred loan fees and unearned discounts..................................... 198
Allowance for loan losses......................................................... (5,982)
--------
Loans receivable, net.............................................................. $567,197
========
</TABLE>
- --------
(1) Net of loans in process of $26.2 million.
The following table sets forth at September 30, 1997 the dollar amount of
loans contractually due or repricing after September 30, 1998, and whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE OR REPRICING AFTER SEPTEMBER 30, 1998
-------------------------------------------
FIXED ADJUSTABLE TOTAL
------------- -----------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.............. $ 148,842 $ 218,496 $ 367,338
Multi-family..................... 162 6,063 6,225
Home equity loans................ 28,109 -- 28,109
Commercial real estate........... 24,400 3,910 28,310
Other loans...................... 3,225 -- 3,225
------------- ------------- -------------
Total loans receivable............ 204,738 228,469 433,207
Mortgage-backed securities(1)..... 125,405 221,709 347,114
------------- ------------- -------------
Total loans receivable and mort-
gage-backed securities........... $ 330,143 $ 450,178 $ 780,321
============= ============= =============
</TABLE>
- --------
(1) Includes $122.0 million in mortgage-backed securities available for sale,
at amortized cost.
One- to Four-Family Mortgage Loans. The Bank offers fixed- and adjustable-
rate first mortgage loans secured by one- to four-family residences in New
Jersey. Typically, such residences are single family homes that serve as the
primary residence of the owner. Loan originations are generally obtained from
existing or past customers, members of the local community, and referrals from
attorneys, established builders, and realtors within the Bank's market area.
In addition, one- to four-family residential mortgage loans are also
originated in
64
<PAGE>
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 September 30, 1997, 81.8% of total loans receivable consisted of one- to
four-family residential loans. The Bank currently offers ARM loans, with an
initial fixed rate for one, three, five, seven or ten year periods, which it
then converts into a one-year ARM. The Bank's ARM loans may carry an initial
interest rate which is less than the fully-indexed rate for the loan. The
initial discounted rate is determined by the Bank in accordance with market
and competitive factors. The majority of the Bank's ARM loans adjust by a
maximum of 2.00% per year, with a lifetime cap on increases of up to 6.00%.
ARM loans are originated for a term of up to 30 years. In the past, the Bank
offered three year ARM loans that reset every three years at a margin over the
three year U.S. Treasury Index. Interest rates charged on fixed-rate loans are
competitively priced based on market conditions and the Bank's cost of funds.
The Bank's fixed-rate mortgage loans currently are made for terms of 10
through 30 years. In previous years, the Bank offered balloon mortgages of
five and seven years.
Generally, ARM loans pose credit risks different than risks inherent in
fixed-rate loans, primarily because as interest rates rise, the payments of
the borrower rise, thereby increasing the potential for delinquency and
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In order to minimize risks,
borrowers of one-year ARM loans are qualified at the starting interest rate
plus 2.00% or the fully-indexed rate, whichever is lower. The Bank does not
originate ARM loans which provide for negative amortization. At present, the
Bank offers Limited Documentation loans that do not require income
verification but do require full asset verification.
The Bank generally originates one- to four-family residential mortgage loans
in amounts up to 95% of the appraised value or selling price of the mortgaged
property, whichever is lower. The Bank requires private mortgage insurance for
all loans originated with loan-to-value ratios exceeding 80%. Generally, the
minimum one- to four-family loan amount is $25,000, and the maximum loan
amount is $500,000. The Bank typically charges an origination fee of up to
3.00% on one- to four-family residential loans.
Home Equity Loans and Lines of Credit. The Bank originates home equity loans
secured by one- to four-family residences. These loans generally are
originated as fixed-rate loans with terms from five to 15 years. Home equity
loans are primarily made on owner-occupied, one- to four-family residences and
primarily to the Bank's first mortgage customers. These loans are generally
subject to a 80% loan-to-value limitation, including any other outstanding
mortgages or liens where the first mortgage lien is held by the Bank, and 75%
on all other loans. The Bank currently offers home equity loans for qualified
borrowers with a loan-to-value ratio of up to 90%. The Bank obtains private
mortgage insurance for some of these types of loans, depending on the
underwriting and first lien position. The Bank is currently offering "Helping
Hand" home equity loans for low income borrowers, with maximum terms of five
years, with loan-to-value ratios of up to 90% and a maximum loan amount of
$10,000. Generally, the Bank's minimum equity loan is $5,000 and the maximum
equity loan is $200,000. As of September 30, 1997, the Bank had $28.2 million
in fixed-rate home equity loans outstanding.
The Bank also offers a variable rate home equity line of credit which
extends a credit line based on the applicant's income and equity in the home.
Generally, the credit line, when combined with the balance of the first
mortgage lien, may not exceed 80% of the appraised value of the property at
the time of the loan commitment where the first mortgage lien is held by the
Bank, and 75% on all other loans. Home equity lines of credit are secured by a
mortgage on the underlying real estate. The Bank presently charges no
origination fees for these loans. A borrower is required to make monthly
payments of principal and interest, at a minimum of $100.00 plus interest,
based upon a 15 or 20 year amortization period. Generally, the interest rate
charged is the prime rate of interest (as published in The Wall Street
Journal) plus up to 2.0%. The loans have a 6.0% lifetime cap on the amount the
interest rate may increase. During 1996, the Bank introduced a credit line
product which is based on a 10 year amortization and the interest rate charged
is the prime rate of interest. These loans also
65
<PAGE>
have a 6.0% lifetime cap. The Bank offers a teaser-rate on both home equity
line of credit products. The Bank's home equity lines of credit outstanding at
September 30, 1997 totalled $13.7 million against total available credit lines
of $14.3 million.
Construction Lending. At September 30, 1997, construction loans totalled
$18.3 million, or 3.2%, of the Bank's total loans outstanding. Construction
loans, in the form of lines of credit, are primarily made to developers known
by the Bank. Available credit lines totalled $26.2 million at September 30,
1997. The current policy of the Bank is to charge interest rates on its
construction loans which float at margins of up to 2.0% above the prime rate
(as published in The Wall Street Journal). The Bank's construction loans
improve the interest rate sensitivity of its earning assets. The Bank's
construction loans typically have original principal balances that are larger
than its one- to four-family mortgage loans, with the majority of the loans
ranging from available lines of credit of $125,000 to $6.2 million. At
September 30, 1997, the Bank had 21 construction loans, six of which had a
principal balance outstanding of $1.0 million or more, with the largest loan
balance being $4.5 million. At September 30, 1997, all of the Bank's
construction lending portfolio consisted of loans secured by property located
in the State of New Jersey, for the purpose of constructing one- to four-
family homes.
The Bank will originate construction loans on unimproved land in amounts up
to 60% of the lower of the appraised value or the cost of the land. The Bank
also originates loans for site improvements and construction costs in amounts
up to 75% of actual costs or sales price where contracts for sale have been
executed. Generally, construction loans are offered for one year terms with up
to four six-month options to extend the original term. Typically, additional
loan origination fees are charged for each extension granted, although in some
cases these fees have been waived. The Bank requires an appraisal of the
property, credit reports, and financial statements on all principals and
guarantors, among other items, on all construction loans.
Construction lending, by its nature, entails additional risks as compared
with one- to four-family mortgage lending, attributable primarily to the fact
that funds are advanced upon the security of the project under construction
prior to its completion. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent on the success of
the ultimate project and the ability of the borrower or guarantor to repay the
loan. Because of these factors, the analysis of prospective construction loan
projects requires an expertise that is different in significant respects from
that which is required for residential mortgage lending. The Bank addresses
these risks through its underwriting procedures. At September 30, 1997, none
of the Bank's construction loans were classified as substandard. See "--
Delinquencies and Classified Assets--Non-performing Assets" for further
discussion.
Commercial Real Estate. At September 30, 1997, the Bank had 53 loans secured
by commercial real estate, totaling $31.6 million, or 5.5%, of the Bank's
total loan portfolio. Commercial real estate loans are generally originated in
amounts up to 70% of the appraised value of the mortgaged property. The Bank's
commercial real estate loans are permanent loans secured by improved property
such as office buildings, retail stores, including small shopping centers,
medical offices, small industrial facilities, warehouses and other non-
residential buildings. The largest commercial real estate loan at September
30, 1997 was a participation loan originated in 1995 on a medical arts
building with a balance of $3.8 million at that date. All commercial real
estate loans in 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 September
30, 1997, as its maximum commercial real estate loan amount.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment
of such loans may be subject, to a greater extent, to adverse conditions in
the real estate market or the economy. The Bank seeks to
66
<PAGE>
minimize these risks by limiting the number of such loans, lending only to
established customers and borrowers otherwise known or recommended to the
Bank, generally restricting such loans to New Jersey, and obtaining personal
guarantees, if possible.
Multi-Family Mortgage Loans. The Bank originates multi-family mortgage loans
in its primary lending area. As of September 30, 1997, $6.2 million, or 1.1%,
of the Bank's total loan portfolio consisted of multi-family residential
loans. Substantially all of the Bank's multi-family loan portfolio is
comprised of loans on garden apartments and participations in senior citizen
homes with the Thrift Institutions Community Investment Corp ("TICIC"). The
largest multi-family loan at September 30, 1997 had an outstanding balance of
$1.9 million. The second largest multi-family loan at that date had an
outstanding balance of $1.4 million. Large multi-family loans, such as these
two loans, are originated on the basis of the Bank's underwriting standards
for commercial real estate loans. The Bank also participates with other
savings institutions to provide financing for projects within the state of New
Jersey via the TICIC. The Bank has four participation loans outstanding with
the TICIC at September 30, 1997, totaling $2.2 million, which are secured by
four senior citizen complexes.
Other Lending. The Bank also offers other loans, primarily loans secured by
savings accounts and commercial, business, personal and automobile loans. At
September 30, 1997, $6.2 million, or 1.1%, of the loan portfolio consisted of
such other loans.
Loan Approval Authority and Underwriting. All loans secured by real estate
must have the approval or ratification of the members of the Loan Committee,
which consists of two directors and at least two senior officers engaged in
the lending area. The Loan Committee meets at least monthly to review and
ratify management's approval of loans made within the scope of its authority
since the last committee meeting, and to approve mortgage loans made in the
excess of $750,000, but not greater than $1.0 million. Real estate loans in
excess of $1.0 million require prior Board approval. Prior Board approval is
also required for the origination of consumer and business loans in excess of
$100,000 for unsecured loans, and $500,000 for secured loans.
One- to four-family residential mortgage loans are generally underwritten
according to Freddie Mac guidelines, except as to loan amount and certain
documentation. For all loans originated by the Bank, upon receipt of a
completed loan application from a prospective borrower, a credit report is
then requested, income, assets and certain other information are verified and,
if necessary, additional financial information is requested. An appraisal of
the real estate intended to secure the proposed loan is required, which is
currently performed by appraisers designated and approved by the Board of
Directors. It is the Bank's policy to obtain appropriate insurance
protections, including title and flood insurance, on all real estate first
mortgage loans. Borrowers must also obtain hazard insurance prior to closing.
Borrowers generally are required to advance funds for certain items such as
real estate taxes, flood insurance and private mortgage insurance, when
applicable.
Loan Servicing. The Bank generally retains the servicing rights on loans it
has sold. The Bank receives fees for these servicing activities, which include
collecting and remitting loan payments, inspecting the properties and making
certain insurance and tax payments on behalf of the borrowers. The Bank was
servicing $94.5 million and $101.2 million of mortgage loans for others at
September 30, 1997 and December 31, 1996, respectively. The Bank received
$218,000 and $325,000 in servicing fees for the nine months ended September
30, 1997 and the year ended December 31, 1996, respectively.
Loan Purchases and Sales. The Bank is a Freddie Mac qualified servicer in
good standing, and may sell any of its conforming loans originated, subject to
Freddie Mac requirements, and retain the servicing rights. As a part its
asset/liability management, the Bank will sell loans, on occasion, in order to
reduce or minimize potential interest rate and credit risk. To account for
such sales, the Bank has established an available for sale category and
carries loans available for sale at the lower of cost or market. As of
September 30, 1997, the Bank did not have any mortgage loans classified as
available for sale. Mortgage loans sold totalled $3.0 million and $6.9 million
for the nine months ended September 30, 1997 and the year ended December 31,
1996, respectively. From time to time, the Bank may also purchase mortgage
loans in order to maintain stable interest income, if
67
<PAGE>
and when management believes it is prudent to do so. The Bank purchased $4.7
million and $10.1 million in mortgage loans from third-party correspondents
for the nine months ended September 30, 1997 and the year ended December 31,
1996, respectively. The Bank underwrote the loans and verified documentation
prior to purchase and has representations and warranties on same for a one
year period, including repayment of remaining premiums if a loan prepays
within the first 12 months.
DELINQUENCIES AND CLASSIFIED ASSETS
Delinquent Loans. In the late 1980s and early 1990s, the Bank experienced an
increase in loans delinquent 90 days or more. The increase occurred primarily
with single family residential loans, which the Bank attributes, in large
part, to the decline in economic conditions in the Northeast, the weakness of
the New Jersey real estate market and the national recession. Since 1992,
delinquent loans have decreased, due to an improving economy and continued
stabilization of the New Jersey real estate market. The aggregate principal
balances of one- to four-family loans delinquent 90 days or more had declined
to $3.9 million, at September 30, 1997, from $4.6 million at September 30,
1996. At September 30, 1997, one- to four- family loans delinquent 90 days or
more consisted of 42 loans. There can be no assurances, however, that such
declines will continue, or that increases will not occur.
The following table sets forth information regarding non-accrual loans,
loans delinquent 90 days or more, and REO. At September 30, 1997, REO totaled
$1.4 million and consisted of 14 properties. It is the policy of the Bank to
cease accruing interest on loans 90 days or more past due with loan-to-value
ratios in excess of 55% and to charge off all accrued interest. For the nine
months ended September 30, 1997, the amount of additional interest income that
would have been recognized on nonaccrual loans if such loans had continued to
perform in accordance with their contractual terms was $198,000.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------ -----------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- ------ ------ ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual mortgage
loans.................. $ 3,547 $ 4,538 $4,716 $5,838 $ 8,636 $10,631 $14,564
Non-accrual other
loans.................. 14 6 4 -- 160 453 150
-------- -------- ------ ------ ------- ------- -------
Total non-accrual
loans................ 3,561 4,544 4,720 5,838 8,796 11,084 14,714
-------- -------- ------ ------ ------- ------- -------
Loans 90 days or more
delinquent and still
accruing............... 379 72 93 200 248 463 1,120
-------- -------- ------ ------ ------- ------- -------
Total non-performing
loans................ 3,940 4,616 4,813 6,038 9,044 11,547 15,834
-------- -------- ------ ------ ------- ------- -------
Total real estate
owned, net of related
allowance for loss... 1,398 1,918 1,517 3,131 1,633 2,039 1,282
-------- -------- ------ ------ ------- ------- -------
Total non-performing as-
sets................... $ 5,338 $ 6,534 $6,330 $9,169 $10,677 $13,586 $17,116
======== ======== ====== ====== ======= ======= =======
Non-performing loans to
total loans receivable,
net.................... 0.69% 0.93% 0.94% 1.32% 2.17% 2.77% 3.81%
Total non-performing
assets to total
assets................. 0.51% 0.67% 0.64% 0.97% 1.34% 1.73% 2.25%
</TABLE>
Classification of Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful," or "loss" assets. An
asset is considered "substandard" if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the Bank will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as
68
<PAGE>
"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.
The following table sets forth the aggregate amount of the Bank's special
mention and classified assets at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
----------------- ---------------------
1997 1996 1996 1995 1994
-------- -------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Special mention........................ $ 811 $ 242 $ 290 $1,348 $ 747
Substandard assets..................... 5,720 6,983 6,037 6,287 10,117
Doubtful assets........................ 121 181 167 253 78
-------- -------- ------ ------ -------
Total special mention and classified
assets.............................. $ 6,652 $ 7,406 $6,494 $7,888 $10,942
======== ======== ====== ====== =======
</TABLE>
As of September 30, 1997, the Bank had no single special mention or
classified asset with a balance of greater than $240,000.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in its loan portfolio, review of individual loans for adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and consideration of current economic conditions. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers the fair value of the underlying
collateral, economic conditions, historical loan loss experience, and other
factors that warrant recognition in providing for an adequate loan loss
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses and valuation of real estate owned. Such agencies may require the Bank
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
The Bank provided $900,000 and $375,000 in provision for loan losses for the
nine months ended September 30, 1997 and 1996, respectively. The Bank provided
$550,000 to the allowance for loan losses for 1996, compared with $310,000 in
1995. The Bank determined, after performing its asset classification review,
that the allowance was adequate and within industry standards. At September
30, 1997, the total allowance was $6.0 million, which amounted to 1.1% of
total loans receivable, net and 112.1% of nonperforming assets. Management
will continue to maintain an allowance for loan losses consistent with
regulatory expectations for non-performing assets, and will also adhere to the
Bank's policy of evaluating the risks inherent in its loan portfolio and the
New Jersey economy. The Bank will continue to monitor the level of its
allowance for loan losses in order to maintain it at a level which management
considers adequate to provide for potential loan losses.
69
<PAGE>
The following table sets forth activity in the Bank's allowance for loan losses
for the periods indicated.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
-------------- --------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $5,322 $5,247 $5,247 $5,745 $5,899 $5,751 $3,865
Provision for loan loss-
es..................... 900 375 550 310 300 1,200 2,400
Charge-offs............. (240) (534) (585) (1,044) (490) (1,087) (520)
Recoveries.............. -- 3 110 236 36 35 6
------ ------ ------ ------ ------ ------ ------
Balance at end of peri-
od..................... $5,982 $5,091 $5,322 $5,247 $5,745 $5,899 $5,751
====== ====== ====== ====== ====== ====== ======
</TABLE>
70
<PAGE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
----------------------------------------------------- --------------------------
1997 1996 1996
-------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- -------- ------ ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-
family........... $3,592 60.05% 81.82% $3,465 68.06% 83.35% $3,641 68.42% 83.14%
Home equity
loans............ 442 7.39 7.31 310 6.09 7.73 437 8.21 7.60
Construction..... 791 13.22 3.19 597 11.73 2.49 577 10.84 2.50
Commercial real
estate........... 540 9.03 5.51 322 6.32 4.25 347 6.52 4.11
Multi-family..... 64 1.07 1.09 89 1.75 1.18 89 1.67 1.53
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage
loans........... 5,429 90.76 98.92 4,783 93.95 99.00 5,091 95.66 98.88
Consumer loans... 192 3.21 1.08 157 3.09 1.00 174 3.27 1.12
Other............ 64 1.07 -- 16 0.31 -- 13 0.24 --
Unallocated...... 297 4.96 -- 135 2.65 -- 44 0.83 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan
losses.......... $5,982 100.00% 100.00% $5,091 100.00% 100.00% $5,322 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
-------------------------- -------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <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% $4,148 72.13% 87.30%
Home equity
loans............ 348 6.63 7.21 301 5.24 7.28 219 3.71 6.53 201 3.50 6.07
Construction..... 301 5.74 1.64 181 3.15 0.75 566 9.59 0.92 661 11.49 1.30
Commercial real
estate........... 173 3.30 3.73 100 1.74 3.16 44 0.75 2.96 30 0.52 2.02
Multi-family..... 97 1.85 2.09 55 0.96 1.84 26 0.44 1.73 26 0.45 1.75
A.I.D............ -- -- 0.04 -- -- 0.04 -- -- 0.05 -- -- 0.05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage
loans........... 4,761 90.74 98.91 5,045 87.82 99.05 5,093 86.33 98.75 5,066 88.09 98.49
Consumer loans... 147 2.80 1.09 208 3.62 0.95 263 4.46 1.25 217 3.77 1.51
Other............ 49 0.93 -- 14 0.24 -- 145 2.46 -- 135 2.35 --
Unallocated...... 290 5.53 -- 478 8.32 -- 398 6.75 -- 333 5.79 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan
losses.......... $5,247 100.00% 100.00% $5,745 100.00% 100.00% $5,899 100.00% 100.00% $5,751 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
71
<PAGE>
INVESTMENT ACTIVITIES
The Investment Policy of the Bank, which is established by the Board of
Directors and reviewed by the Investment Committee, is designed primarily to
provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk and to complement the
Bank's lending activities. The Policy currently provides for investment,
available for sale and trading portfolios. In order to enhance the Bank's
liquidity and flexibility, total return, or minimize interest rate risk,
securities may be acquired for the available for sale portfolio. Investment
securities and mortgage-backed securities, other than those designated as
available for sale or trading, are comprised of debt securities that the Bank
has the positive intent and ability to hold to maturity. Investment securities
held to maturity are carried at cost, adjusted for amortization of premiums
and accretion of discounts using the level-yield method over the estimated
lives of the securities. At September 30, 1997, the Bank had investment
securities held to maturity in the aggregate amount of $41.0 million, with a
market value of $41.1 million.
New Jersey state-chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and loans on federal funds. Subject to
various restrictions, state-chartered savings institutions may also invest a
portion of their assets in commercial paper, corporate debt securities and
asset-backed securities.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
"Special Report--A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which provided the Bank
with an opportunity to reassess the appropriateness of the classifications of
all its securities, and on December 15, 1995, the Bank reclassified $13.0
million in amortized cost of investment securities from held to maturity to
available for sale. At September 30, 1997, investment securities available for
sale had a net unrealized loss of $27,000.
Investments Available for Sale. The Bank maintains a portfolio of
investments available for sale to reduce interest rate and market value risk.
These investments, designated as available for sale at purchase, are marked to
market in accordance with SFAS No. 115. The Bank's Investment Policy
designates what type of securities may be contained in the available for sale
portfolio. This portfolio of available for sale investments is reviewed and
priced at least monthly. As of September 30, 1997, the market value of
investment securities available for sale was $18.0 million, with an amortized
cost basis of $18.1 million, and was composed of U.S. Treasury and agencies
securities, and corporate debt obligations. The available for sale portfolio
had a weighted average contractual maturity of 4.75 years. A substantial
portion of the investment portfolio is comprised of callable agency notes,
which have a variety of call options available to the issuer at predetermined
dates. The investment portfolio's yield is enhanced by the addition of
callable agency notes, due to the issuer's flexibility in repricing their
funding source, while creating reinvestment risk to the Bank. At September 30,
1997, $52.0 million, or 88.2% of the total investment portfolio, including
securities available for sale, were callable.
72
<PAGE>
Investment Portfolio. The following table sets forth certain information
regarding the carrying and market values of the Bank's investment portfolio at
the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, -----------------------------------------------------
1997 1996 1995 1994
----------------- ----------------- ----------------- -----------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
held to maturity:
U.S. Government and
agency obligations.... $40,959 $41,108 $38,955 $38,980 $39,003 $39,617 $23,997 $22,774
======= ======= ======= ======= ======= ======= ======= =======
Investment securities
available for sale:
U.S. Government and
agency obligations.... $13,972 $13,943 $12,964 $12,836 $ 1,000 $ 996 $13,884 $13,206
Corporate
obligations........... 4,079 4,081 2,000 1,995 1,041 1,062 -- --
------- ------- ------- ------- ------- ------- ------- -------
Total investment
securities available
for sale............ $18,051 $18,024 $14,964 $14,831 $ 2,041 $ 2,058 $13,884 $13,206
======= ======= ======= ======= ======= ======= ======= =======
Other interest-earning
investments:
Federal funds sold..... $17,925 $17,925 $ 1,850 $ 1,850 $17,875 $17,875 $ 4,375 $ 4,375
FHLB-NY stock.......... 8,045 8,045 7,428 7,428 6,276 6,276 5,691 5,691
------- ------- ------- ------- ------- ------- ------- -------
Total other interest-
earning
investments......... $25,970 $25,970 $ 9,278 $ 9,278 $24,151 $24,151 $10,066 $10,066
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
73
<PAGE>
The table below sets forth certain information regarding the contractual
maturities, amortized costs, market values and weighted average yields for the
Bank's investment portfolio at September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------ ------------------ ---------------------- ---------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED MARKET
COST YIELD COST YIELD COST YIELD COST YIELD COST VALUE
--------- -------- --------- -------- ----------- --------- ---------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment secu-
rities held to
maturity:
U.S. Government
and Agency
obligations..... $ -- -- % $14,991 6.81% $ 19,972 7.31% $ 5,996 8.02% $40,959 $41,108
------- ---- ------- ---- ----------- -------- ---------- -------- ------- -------
Total investment
securities held
to maturity..... $ -- -- % $14,991 6.81% $ 19,972 7.31% $ 5,996 8.02% $40,959 $41,108
======= ==== ======= ==== =========== ======== ========== ======== ======= =======
Investment secu-
rities available
for sale:
U.S. Government
and Agency
obligations..... $ -- -- % $10,972 6.11% $ 3,000 6.75% $ -- -- % $13,972 $13,943
Corporate
obligations..... -- -- 2,000 5.95 2,079 6.15 -- -- 4,079 4,081
------- ---- ------- ---- ----------- -------- ---------- -------- ------- -------
Total investment
securities
available for
sale............ $ -- -- % $12,972 6.09% $ 5,079 6.51% $ -- -- % $18,051 $18,024
======= ==== ======= ==== =========== ======== ========== ======== ======= =======
Other interest-
earning invest-
ments:
Federal funds
sold............ $17,925 5.79% $ -- -- % $ -- -- % $ -- -- % $17,925 $17,925
FHLB-NY
stock(1)........ 8,045 6.75 -- -- -- -- -- -- 8,045 8,045
------- ---- ------- ---- ----------- -------- ---------- -------- ------- -------
Total other
interest-earning
investments..... $25,970 6.09% $ -- -- % $ -- -- % $ -- -- % $25,970 $25,970
======= ==== ======= ==== =========== ======== ========== ======== ======= =======
<CAPTION>
WEIGHTED
AVERAGE
YIELD
--------
<S> <C>
Investment secu-
rities held to
maturity:
U.S. Government
and Agency
obligations..... 7.23%
--------
Total investment
securities held
to maturity..... 7.23%
========
Investment secu-
rities available
for sale:
U.S. Government
and Agency
obligations..... 6.25%
Corporate
obligations..... 6.05
--------
Total investment
securities
available for
sale............ 6.20%
========
Other interest-
earning invest-
ments:
Federal funds
sold............ 5.79%
FHLB-NY
stock(1)........ 6.75
--------
Total other
interest-earning
investments..... 6.09%
========
</TABLE>
- ----
(1) FHLB-NY stock does not have a stated maturity.
74
<PAGE>
SOURCES OF FUNDS
General. The Bank's primary source of funds are deposits; proceeds from
principal and interest payments on loans and mortgage-backed securities; sales
of loans, mortgage-backed securities and investments available for sale;
maturities of investment securities and short-term investment; and, to an
increasing extent, advances from the FHLB-NY, reverse repurchase agreements
and other borrowed funds.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits principally consist of fixed-
term certificates, passbook savings, money market, Individual Retirement
Accounts ("IRAs") and Negotiable Order of Withdrawal ("NOW") accounts. The
flow of deposits is significantly influenced by general economic conditions,
changes in money market and prevailing interest rates and competition. The
Bank's deposits are typically obtained from the areas in which its offices are
located. The Bank relies primarily on customer service and long-standing
relationships to attract and retain these deposits. At September 30, 1997,
$121.9 million of the Bank's deposit balance consisted of IRAs. Also at that
date, $76.5 million, or 9.45%, of the Bank's deposit balance consisted of
deposit accounts with a balance greater than $100,000. The Bank does not
currently accept brokered deposits.
The Bank seeks to maintain a high level of stable core deposits by providing
convenient and high quality service through its extended branch network. To
further this objective, the Bank acquired six branch offices from the RTC in
1991 for a deposit premium of $509,000, which was written off in 1996. Of
those six offices, the Bank continues to operate four of the offices, and
transferred the deposits of the other two offices into existing First Savings
branches. During October 1997, the Bank entered into an agreement to sell its
Eatontown branch, with the transfer of deposit liabilities and physical branch
location scheduled for late February 1998. The Bank acquired two additional
branches from the RTC in 1995 with deposits of approximately $112.8 million
for a premium of $12.6 million. The Bank's strategy was to strengthen its
market area within Middlesex County, and to provide better service to those
communities within which these branches reside. During the years 1995 and
1994, the Bank's deposit base grew $11.9 million and $2.7 million,
respectively, excluding the $112.8 million in deposits acquired in 1995. The
percentage increase for those periods was 1.7% and 0.4%, respectively. During
1996, deposits decreased $11.7 million, or 1.5%, to $794.6 million. The
decrease was due to increased competition and premium interest rates being
paid by other institutions. For the nine months ended September 30, 1997,
deposits increased $14.9 million, or 1.9%, due to partial retention of
interest credited.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits................ $ 1,234,631 $ 1,197,644 $ 1,672,325 $ 1,374,946 $ 1,295,191
Withdrawals............. (1,245,329) (1,229,251) (1,718,034) (1,396,632) (1,316,030)
Deposits acquired in
purchase(1)............ -- -- -- 112,785 --
----------- ----------- ----------- ----------- -----------
Withdrawals less than
(in excess of)
deposits............... (10,698) (31,607) (45,709) 91,099 (20,839)
Interest credited....... 25,552 25,710 33,966 33,626 23,491
----------- ----------- ----------- ----------- -----------
Total increase (de-
crease) in deposits.... $ 14,854 $ (5,897) $ (11,743) $ 124,725 $ 2,652
=========== =========== =========== =========== ===========
</TABLE>
- --------
(1) Purchase of deposits from the Resolution Trust Corporation.
75
<PAGE>
The following table presents, by various categories, the amount of
certificate accounts outstanding at September 30, 1997 and 1996, and the time
to maturity of the certificate accounts outstanding at September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, MATURITY AT SEPTEMBER 30, 1997
----------------- ----------------------------------------
WITHIN ONE THROUGH
1997 1996 ONE YEAR THREE YEARS THEREAFTER TOTAL
-------- -------- -------- ----------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less......... $ 2,800 $ 3,448 $ 2,800 $ -- $ -- $ 2,800
4.00% to 4.49%........ 91 16,242 91 -- -- 91
4.50% to 4.99%........ 21,879 153,445 18,687 3,192 -- 21,879
5.00% to 5.49%........ 252,318 156,071 239,457 6,414 6,447 252,318
5.50% to 5.99%........ 123,762 44,162 70,659 38,693 14,410 123,762
6.00% to 6.49%........ 23,056 35,379 3,107 4,990 14,959 23,056
6.50% to 6.99%........ 34,628 49,583 10,288 12,698 11,642 34,628
7.00% to 7.49%........ 2,594 2,702 2,486 -- 108 2,594
7.50% to 7.99%........ 2,890 2,837 341 1,232 1,317 2,890
8.00% and greater..... 634 656 388 246 -- 634
-------- -------- -------- ------- ------- --------
Total............... $464,652 $464,525 $348,304 $67,465 $48,883 $464,652
======== ======== ======== ======= ======= ========
</TABLE>
At September 30, 1997, the Bank had $45.3 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
--------------- --------------
(IN THOUSANDS)
<S> <C>
Three months or less......................................... $ 8,328
Over 3 through 6 months...................................... 6,673
Over 6 through 12 months..................................... 20,239
Over 12 months............................................... 10,101
-------
Total...................................................... $45,341
=======
</TABLE>
76
<PAGE>
The following table sets forth the distribution of the Bank's average
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
NINE MONTHS ENDED --------------------------------------------------------------------------------
SEPTEMBER 30, 1997 1996 1995 1994
-------------------------- -------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest
bearing demand... $ 21,109 2.62% -- % $ 19,491 2.42% -- % $ 16,610 2.10% -- % $ 14,002 2.04% -- %
Money market
accounts......... 134,681 16.71 3.30 124,097 15.40 3.28 129,426 16.37 3.20 124,917 18.17 2.79
Savings
accounts......... 129,334 16.04 2.54 139,045 17.26 2.53 140,122 17.73 2.55 143,738 20.91 2.51
NOW accounts..... 57,077 7.08 1.90 54,079 6.71 1.96 50,552 6.40 1.89 43,251 6.29 2.00
-------- ------ -------- ------ -------- ------ -------- ------
Total........... 342,201 42.45 2.56 336,712 41.79 2.57 336,710 42.60 2.57 325,908 47.41 2.44
-------- ------ -------- ------ -------- ------ -------- ------
Certificate
accounts:
Less than six
months........... 143,604 17.81 5.05 142,332 17.67 4.85 128,984 16.32 5.05 110,320 16.04 3.26
Over 6 through 12
months........... 167,818 20.82 5.32 166,356 20.65 5.34 157,267 19.90 5.51 110,130 16.02 3.70
Over 12 through
36 months........ 54,425 6.75 5.74 59,192 7.35 5.65 67,921 8.59 5.22 52,264 7.60 4.64
Over 36 months... 98,092 12.17 6.05 101,014 12.54 6.16 99,483 12.59 6.41 88,875 12.93 6.43
-------- ------ -------- ------ -------- ------ -------- ------
Total
certificate
accounts........ 463,939 57.55 5.42 468,894 58.21 5.39 453,655 57.40 5.53 361,589 52.59 4.35
-------- ------ -------- ------ -------- ------ -------- ------
Total average
deposits........ $806,140 100.00% 4.21 $805,606 100.00% 4.22 $790,365 100.00% 4.27 $687,497 100.00% 3.46
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
77
<PAGE>
BORROWINGS
The Bank's policy has been to utilize borrowings as an alternative and/or
less costly source of funds. The Bank obtains advances from the FHLB-NY, which
are collateralized by the capital stock of the FHLB-NY held by the Bank, and
certain mortgage loans and mortgage-backed securities of the Bank. The Bank
also borrows funds via reverse repurchase agreements with the FHLB-NY and
primary broker/dealers. Advances from the FHLB-NY are made pursuant to several
different credit programs, each of which has its own interest rate and
maturity. The maximum amount that the FHLB-NY will advance to member
institutions, including the Bank, for purposes of other than meeting
withdrawals, fluctuates from time to time in accordance with the policies of
the FHLB-NY and the OTS. The maximum amount of FHLB-NY advances permitted to a
member institution generally is reduced by borrowings from any other source.
At September 30, 1997, the Bank's FHLB-NY advances totalled $33.0 million,
representing 3.5% of total liabilities.
During 1997, the Bank continued to borrow funds from primary broker/dealers.
The borrowings are collateralized by designated mortgage-backed and investment
securities. The total of these borrowings at September 30, 1997 was $90.9
million, representing 9.6% of total liabilities. The Bank has the right to
freely substitute collateral as long as the margin is at least 95% of all
outstanding borrowings, including accrued interest.
The Bank also has an available overnight line-of-credit with the FHLB-NY for
a maximum of $48.9 million. The fee for the line-of-credit for the nine months
ended September 30, 1997 was $500. The Bank may continue to increase
borrowings in the future to fund asset growth. To the extent it does so, the
Bank may experience an increase in its cost of funds.
The Bank, as part of the 1992 MHC Reorganization, established, for eligible
employees, an ESOP which became effective at completion of the 1992 MHC
Reorganization. As part of the initial minority stock offering conducted in
connection with the 1992 MHC Reorganization, the Bank's ESOP borrowed funds
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 September 30, 1997 and December 31, 1996 and 1995, was $571,000,
$646,000 and $746,000, respectively, and bears an interest rate equal to the
prime rate less 1.50%, as published in The Wall Street Journal, with principal
and interest payable in quarterly installments over a ten-year period. During
the nine months ended September 30, 1997, and the year ended December 31,
1996, $25,000 of dividends paid on ESOP shares during each of the periods was
used to pay down ESOP debt. Total interest paid on ESOP debt for the nine
months ended September 30, 1997 and 1996, was $33,000 and $37,000,
respectively, and for the years ended December 31, 1996, 1995 and 1994 was
$48,000, $41,000 and $26,000, respectively. In July 1995, the Bank completed
its 1995 Secondary Offering, whereby the ESOP purchased an additional 42,000
shares of Common Stock at $13 per share, totaling $546,000. The funds to
purchase those shares were borrowed from the Mutual Holding Company. The
borrowing is currently secured by 80,102 shares of the Bank's Common Stock, as
adjusted for the 10% stock dividend declared on September 24, 1997.
Upon consummation of the Conversion and Reorganization, it is expected that
the Mutual Holding Company's loan to the ESOP will be assumed by the Company,
and that the Company will lend additional funds to the ESOP to enable it to
acquire 8% of the Conversion Stock. See "Management of the Bank--Executive
Compensation--Employee Stock Ownership Plan."
78
<PAGE>
The following table sets forth certain information regarding the Bank's
borrowed funds on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED AT OR FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ----------------------------
1997 1996 1996 1995 1994
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB-NY advances:
Average balance outstand-
ing....................... $ 36,200 $ 19,400 $ 21,846 $ 21,231 $ 29,538
Maximum amount outstanding
at any month-end during
the period................ 40,000 22,000 30,000 34,000 37,000
Balance outstanding at end
of period................. 33,000 20,000 30,000 19,000 34,000
Weighted average interest
rate during the period.... 6.18% 6.18% 6.13% 5.72% 4.74%
Weighted average interest
rate at end of period..... 6.06% 6.17% 6.06% 6.13% 5.22%
Repurchase agreements:
Average balance outstand-
ing....................... $ 74,138 $ 26,862 $ 32,691 $ 11,834 $ --
Maximum amount outstanding
at any month-end during
the period................ 90,894 49,437 57,994 24,864 --
Balance outstanding at end
of period................. 90,894 49,437 57,994 19,750 --
Weighted average interest
rate during the period.... 6.14% 5.91% 6.05% 6.50% -- %
Weighted average interest
rate at end of period..... 5.94% 6.04% 6.02% 6.13% -- %
ESOP debt:
Average balance outstand-
ing....................... $ 616 $ 716 $ 704 $ 510 $ 358
Maximum amount outstanding
at any month-end during
the period................ 646 746 746 796 400
Balance outstanding at end
of period................. 571 671 646 746 300
Weighted average interest
rate during the period.... 7.03% 6.84% 7.74% 8.08% 7.25%
Weighted average interest
rate at end of period..... 7.00% 6.75% 6.75% 7.00% 8.50%
Total borrowings:
Average balance outstand-
ing....................... $ 110,954 $ 46,978 $ 55,241 $ 33,575 $ 29,896
Maximum amount outstanding
at any month-end during
the period................ 124,465 70,108 88,640 59,661 37,325
Balance outstanding at end
of period................. 124,465 70,108 88,640 39,496 34,300
Weighted average interest
rate during the period.... 6.16% 6.05% 6.10% 6.06% 4.82%
Weighted average interest
rate at end of period..... 5.98% 6.08% 6.04% 6.15% 5.24%
</TABLE>
SUBSIDIARY ACTIVITIES
FSB Financial Corp. FSB Financial Corp. is a wholly owned subsidiary of the
Bank and provides a line of fixed and variable rate annuity products, along
with mutual funds and term life insurance. For the nine months ended September
30, 1997, FSB Financial Corp. had net income of $140,000.
1000 Woodbridge Center Drive, Inc. 1000 Woodbridge Center Drive, Inc. is a
wholly owned subsidiary of the Bank. 1000 Woodbridge Center Drive, Inc. is the
owner of the Bank's corporate center. For the year ended December 31, 1996,
1000 Woodbridge Center Drive, Inc. had a net loss of $110,000. The subsidiary
was inactive as of September 30, 1997.
PROPERTIES
The Bank conducts its business through its main office and 17 full service
branch offices, all located in central New Jersey. The following table sets
forth certain information concerning the main office and each branch office of
the Bank at September 30, 1997. The aggregate net book value of the Bank's
premises and equipment was $13.3 million at September 30, 1997.
79
<PAGE>
<TABLE>
<CAPTION>
DATE LEASED NET BOOK VALUE AT
LOCATION OR ACQUIRED SEPTEMBER 30, 1997 LEASED OR OWNED
- -------- ----------- ------------------ ---------------
<S> <C> <C> <C>
MAIN OFFICE:
339 State Street 4/29 $1,306,297 Owned
Perth Amboy, NJ 08861(1)
CORPORATE HEADQUARTERS:
1000 Woodbridge Avenue 5/94 5,500,548 Owned
Woodbridge, NJ 07095
BRANCH OFFICES:
158 Wyckoff Road 7/93 105,135 Leased
Eatontown, NJ 07724(2)
980 Amboy Avenue 6/74 673,607 Owned
Edison, NJ 08837
2100 Oak Tree Road 4/84 312,974 Owned
Edison, NJ 08820
206 South Avenue 9/91 373,090 Owned
Fanwood, NJ 07023
Lafayette Road & Ford Avenue 4/84 54,524 Leased
Fords, NJ 08863
Rt. 35 & Bethany Road 1/91 15,755 Leased
Hazlet, NJ 07730
101 New Brunswick Avenue 6/76 63,240 Leased
Hopelawn, NJ 08861
1220 Green Street 11/84 644,436 Owned
Iselin, NJ 08830
599 Middlesex Avenue 1/95 44,382 Leased
Metuchen, NJ 08840(3)
1580 Rt. 35 South 4/95 226,162 Leased
Middletown, NJ 07748
97 North Main Street 1/95 1,050,927 Owned
Milltown, NJ 08850(3)
Rt. 9 & Ticetown Road 6/79 7,306 Leased
Old Bridge, NJ 08857
100 Stelton Road 9/91 298,274 Leased
Piscataway, NJ 08854(4)
325 Amboy Avenue 1/70 236,732 Owned
Woodbridge, NJ 07095
Rt. 1 & St. Georges Avenue 6/80 570 Leased
Woodbridge, NJ 07095
</TABLE>
- --------
(1) Includes an adjacent administrative building with a net book value of
$942,000.
(2) An agreement has been signed to sell the Eatontown branch. The transaction
is anticipated to close in February 1998.
(3) Acquired/leased in conjunction with purchase of deposits from the RTC on
January 20, 1995.
(4) Includes property acquired in 1994 for future branch.
80
<PAGE>
LEGAL PROCEEDINGS
The Bank is involved in various legal actions arising in the normal course
of its business. In the opinion of management, the resolution of these legal
actions are not expected to have a material adverse effect on the Bank's
results of operations.
PERSONNEL
As of September 30, 1997, the Bank had 208 full-time employees and 33 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good.
See "Management of the Bank--Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Bank and the Company will report their income on a calendar
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank was last audited by the IRS in
1984 and has not been audited by the New Jersey Division of Taxation ("DOT")
in the past five years.
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the percentage of taxable income method.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). The Bank has
previously recorded a deferred tax liability equal to the bad debt recapture
and as such, the new rules will have no effect on net income or federal income
tax expense.
For the tax years beginning after December 31, 1995, the Bank is not
permitted to maintain a tax reserve for bad debts. As of September 30, 1997,
the Bank had an excess amount subject to recapture equal to $12.7 million. The
new rules allow an institution to suspend the bad debt reserve recapture for
the 1996 and 1997 tax years if the institution's lending activity for those
years is equal to or greater than the institution's average mortgage lending
activity for the six taxable years preceding 1996. For this purpose, only home
purchase and home improvement loans are included and the institution can elect
to have the tax years with the highest and lowest lending activity removed
from the average calculation. If an institution is permitted to postpone the
reserve recapture, it must begin its six year recapture no later than the 1998
tax year. The unrecaptured base year reserves will not be subject to recapture
as long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, or (ii) from the supplemental
81
<PAGE>
reserve for losses on loans ("Excess Distributions"), then an amount based on
the amount distributed will be included in the Bank's taxable income. Non-
dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, distributions in redemption of stock,
and distributions in partial or complete liquidation. However, dividends paid
out of the Bank's current or accumulated earnings and profits, as calculated
for federal income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserve. Thus, any dividends to the
Company that would reduce amounts appropriated to the Bank's bad debt reserve
and deducted for federal income tax purposes would create a tax liability for
the Bank. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "non-dividend distribution," then approximately
one and one-half times the amount so used would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "Regulation" and "Dividend Policy"
for limits on the payment of dividends of the Bank. The Bank does not intend
to pay dividends that would result in a recapture of any portion of its bad
debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). The Bank does not expect to be
subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
STATE AND LOCAL TAXATION
State of New Jersey. The Bank files New Jersey income tax returns. For New
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank
is not currently under audit with respect to its New Jersey income tax
returns.
The Company will be required to file a New Jersey income tax return because
it will be doing business in New Jersey. For New Jersey tax purposes, regular
corporations are presently taxed at a rate equal to 9% of taxable income. For
this purpose, "taxable income" generally means Federal taxable income subject
to certain adjustments (including addition of interest income on state and
municipal obligations).
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
82
<PAGE>
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the Department, as its chartering agency, the OTS, as its federal banking
regulator, and the FDIC, as the deposit insurer. The Bank is a member of the
FHLB System. The Bank's deposit accounts are insured up to applicable limits
by the SAIF managed by the FDIC. The Bank must file reports with the
Commissioner of the Department (the "Commissioner"), the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the Department, the OTS and the FDIC to test the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the Department, the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Bank and their operations.
The Company, as a savings and loan holding company, will also be required to
file certain reports with, and otherwise comply with the rules and regulations
of the OTS and of the Securities and Exchange Commission (the "SEC") under the
federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Department, the OTS, the FDIC or the Congress,
could have a material impact on the Company, the Bank, their operations or the
Conversion and Reorganization. Congress has been considering various proposals
to eliminate the federal thrift charter and abolish the OTS. The outcome of
such legislation is uncertain. Therefore, the Bank is unable to determine the
extent to which legislation, if enacted, would affect its business and what
charter alternatives will be available at that time. See "Risk Factors--
Financial Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank and the Company and is
qualified in its entirety by reference to such statutes and regulations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act ("FDI Act") and the regulations issued by
the agencies to implement these statutes. These laws and regulations delineate
the nature and extent of the activities in which savings associations may
engage.
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial
instruments and bullion. At September 30, 1997, the Bank's general policy is
to limit loans-to-one borrower to $13.5 million. At September 30, 1997, the
Bank's largest aggregate amount of loans-to-one borrower totalled $11.1
million.
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
83
<PAGE>
certain restrictions. As of September 30, 1997, the Bank maintained 88.8% of
its portfolio assets in qualified thrift investments and, therefore, met the
QTL test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered as "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level and
supervisory condition. An institution, such as the Bank, that exceeds all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that
it is in need of more than normal supervision, could, after prior notice to,
but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event the Bank's capital fell below
its capital requirements or the OTS notified it that it was in need of more
than normal supervision, the Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Bank's average liquidity ratio at
September 30, 1997 was 8.17%, which exceeded the applicable requirements. The
Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Assessments. Savings institutions are required by regulation to pay
assessments to the FDIC, the OTS and the New Jersey Department of Banking to
fund the various agency's operations and periodic Bank examinations. The
assessments paid by the Bank to these agencies for the nine months ended
September 30, 1997 and for the years ended December 31, 1996 and 1995 totalled
$251,000, $271,000 and $217,000, respectively.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish)
is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and
also limits the aggregate amount of transactions with all affiliates to 20% of
the savings institution's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in Section 23A and the purchase of low quality assets from
affiliates 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
84
<PAGE>
the Bank may make to insiders based, in part, on the Bank's capital position,
and requires certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate
in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive
or cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage (core capital) ratio and an 8% risk based capital
standard. Core capital is defined as common stockholder's equity (including
retained earnings), certain non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank. In addition, the
OTS prompt corrective action regulation provides that a savings institution
that has a leverage capital ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by
the OTS capital regulation based on the risks OTS believes are inherent in the
type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and, within specified limits, the allowance
for loan and lease losses. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
At September 30, 1997, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. See "Regulatory Capital Compliance" for
a table which sets forth in terms of dollars and percentages the
85
<PAGE>
OTS tangible, leverage and risk-based capital requirements, the Bank's
historical amounts and percentages at September 30, 1997, and pro forma
amounts and percentages based upon the issuance of the shares within the
Estimated Price Range and assuming that a portion of the net proceeds are
retained by the Company.
THRIFT RECHARTERING
Recently enacted legislation provides that the BIF (the deposit insurance
fund that covers most commercial bank deposits) and the SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and the OTS. A bill recently reported by
the House Banking Committee would require federal thrifts to become national
banks or state banks or savings banks within two years after enactment or they
would, by operation of law, become national banks. A national bank resulting
from a converted federal thrift could continue to engage in activities,
including holding any assets, in which it was lawfully engaged on the day
before the date of enactment. Branches operated on the day before enactment
could be retained regardless of their permissibility for national banks.
Subject to a grandfathering provision, all savings and loan holding companies
would become subject to the same regulation and activities restrictions as
bank holding companies. The grandfathering could be lost under certain
circumstances, such as a change in control of the holding company. The
legislative proposal would also abolish the OTS and transfer its functions to
the federal bank regulators with respect to the institutions and to the Board
of Governors of the Federal Reserve Board with respect to the regulation of
holding companies. The Bank is unable to predict whether the legislation will
be enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also unable to
predict whether the SAIF and BIF will eventually be merged.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An
institution is also placed in one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information that the FDIC
determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned with the most well capitalized, healthy institutions receiving the
lowest rates.
86
<PAGE>
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. Until recently, members of the SAIF and BIF were
paying average deposit insurance assessments of between 24 and 25 basis
points. The BIF met the required reserve in 1995, whereas the SAIF was not
expected to meet or exceed the required level until 2002 at the earliest. This
situation was primarily due to the statutory requirement that SAIF members
make payments on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank, could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act,
the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996. The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter
ended September 30, 1996 and was tax deductible. The SAIF Special Assessment
recorded by the Bank amounted to $5.2 million on a pre-tax basis and $3.3
million on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
were assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay
6.48 basis points. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable
to that of BIF members. SAIF members will also continue to make the FICO
payments described above. The FDIC also lowered the SAIF assessment schedule
for the fourth quarter of 1996 to 18 to 27 basis points. Management cannot
predict the level of FDIC insurance assessments on an on-going basis, whether
the federal thrift charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
The Bank's assessment rate for the nine months ended September 30, 1997 was
6.48 basis points and the regular premium expense for this period was
$285,000.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to
87
<PAGE>
acquire and hold shares of capital stock in the FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20
of its advances (borrowings) from the FHLB, whichever is greater. The Bank was
in compliance with this requirement with an investment in FHLB stock at
September 30, 1997 of $8.0 million. FHLB advances must be secured by specified
types of collateral and all long-term advances may only be obtained for the
purpose of providing funds for residential housing finance. At September 30,
1997, the Bank had $33.0 million in FHLB advances and $38.2 million in
repurchase agreements with the FHLB.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the nine months ended September 30, 1997 and
the years ended December 31, 1996 and 1995, dividends from FHLB stock to the
Bank amounted to $382,000, $469,000 and $475,000, respectively. If dividends
were reduced, the Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of recent or future
legislation on the FHLBs will not also cause a decrease in the value of the
FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $47.8 million or
less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $47.8 million, the reserve
requirement is $1.479 million (subject to adjustment by the Federal Reserve
Board between 8% and 14%) against that portion of total transaction accounts
in excess of $47.8 million. The first $4.7 million of otherwise reservable
balances (subject to adjustment by the Federal Reserve Board) are exempted
from the reserve requirements. The Bank is in compliance with the foregoing
requirements. Because required reserves must be maintained in the form of
either vault cash, a noninterest-bearing account at a Federal Reserve Bank or
a pass-through account as defined by the Federal Reserve Board, the effect of
this reserve requirement is to reduce the Bank's interest-earning assets. FHLB
System members are also authorized to borrow from the Federal Reserve
"discount window," but Federal Reserve Board regulations require institutions
to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
NEW JERSEY LAW
The Commissioner regulates, among other things, the Bank's internal business
procedures as well as its deposits, lending and investment activities. The
Commissioner must approve changes to the Bank's Certificate of Incorporation,
establishment or relocation of branch offices, mergers and the issuance of
additional stock. In addition, the Commissioner conducts periodic examinations
of the Bank. Certain of the areas regulated by the Commissioner are not
subject to similar regulation by the FDIC.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and SAIF-insured savings institutions in New Jersey
with respect to lending and investment authority, as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for
commercial banks, New Jersey legislation and regulations ("parity
legislation") have given New Jersey chartered savings institutions, such as
the Bank, the powers of federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by, New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
88
<PAGE>
HOLDING COMPANY REGULATION
The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required
to register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities
in which it may engage, provided that the Bank continues to be a QTL. See "--
Federal Regulation of Savings Institutions--QTL Test" for a discussion of the
QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities
of a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject to the
prior approval of the OTS, and to other activities authorized by OTS
regulation. Recently proposed legislation would treat all savings and loan
holding companies as bank holding companies and limit the activities of such
companies to those permissible for bank holding companies. See "Risk Factors--
Financial Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution, or holding company
thereof, without prior written approval of the OTS 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 interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition
of a savings institution in another state if the laws of the state of the
target savings institution specifically permit such acquisitions. The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended ("Securities Act"), for the registration of
the Common Stock to be issued pursuant to the Conversion. Upon completion of
the Conversion, the Company's Common Stock will be registered with the SEC
under the Exchange Act. The Company will then be subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to
89
<PAGE>
exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of 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. Their names and biographical information are set forth under
"Management of the Bank--Directors."
The following individuals are the executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITIONS HELD WITH COMPANY
---- ---------------------------
<S> <C>
John P. Mulkerin.................... President and Chief Executive Officer of
the Bank and Company, General Counsel
Christopher P. Martin............... Executive Vice President, Chief Operating
and Financial Officer, Corporate Secretary
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel of the Company has received remuneration from the
Company. Information concerning the principal occupations, employment and
other information concerning the directors and officers of the Company during
the past five years is set forth under "Management of the Bank--Biographical
Information."
90
<PAGE>
MANAGEMENT OF THE BANK
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(2) SINCE EXPIRES
- ---- ------ --------------------------------- -------- -------
<S> <C> <C> <C> <C>
Walter K. Timpson....... 75 Chairman of the Board 1964 2000
Donald T. Akey, M.D. ... 75 Director 1979 2000
Harry F. Burke.......... 90 Director 1970 1999
Keith H. McLaughlin..... 61 Director 1983 1999
John P. Mulkerin........ 60 President, Chief Executive Officer,
General Counsel and Director 1996 1998
Philip T. Ruegger, 70
Jr. ................... Director 1983 2000
Jeffries Shein.......... 57 Director 1985 1998
Christopher P. Martin... 40 Executive Vice President, Chief
Financial and Operating Officer,
Corporate Secretary and Director 1997 1998
</TABLE>
- --------
(1) As of September 30, 1997.
(2) All directors of the Bank are also directors of the Company.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK
---- ------ ------------------------------
<S> <C> <C>
John F. Cerulo, Jr. ......... 46 Senior Vice President/Retail Banking
Karen I. Martino............. 38 Senior Vice President/Audit and Compliance
Richard Spengler............. 36 Senior Vice President/Chief Lending Officer
</TABLE>
- --------
(1) As of September 30, 1997.
Each of the executive officers of the Bank will retain his office in the
Bank until their re-election at the annual meeting of the Board of Directors
of the Bank, held immediately after the first annual meeting of stockholders
subsequent to the Conversion, and until their successors are elected and
qualified or until they are removed or replaced. Officers are subject to re-
election by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
Directors
John P. Mulkerin was named President and Chief Executive Officer and a
member of the Board of Directors of the Bank in June 1996, following the death
of Joseph S. Yewaisis. Mr. Mulkerin joined the Bank in 1987 as Executive Vice
President, Chief Operating Officer and Corporate Secretary. He was named
General Counsel of the Bank in 1993. Mr. Mulkerin also serves as President and
Chief Executive Officer of the Company and is a director of FSB Financial
Corp., a wholly-owned subsidiary of the Bank. Mr. Mulkerin is also a member of
the Board of Directors of Middlesex Water Company, Raritan Bay Medical Center
and Daytop Village Foundation, headquartered in New York.
91
<PAGE>
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
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, following the death
of Mr. Joseph S. Yewaisis. Mr. Timpson has operated a real estate appraisal
firm in Metuchen, New Jersey, for over forty years.
Each director named is also a director of the Company.
Executive Officers Who Are Not Directors
John F. Cerulo, Jr. joined the Bank in 1988 as Senior Vice President-Retail
Banking. Prior to First Savings, Mr. Cerulo worked for another savings
institution for 16 years as a Branch Administrator.
Karen I. Martino joined the Bank in 1984. She is now Senior Vice President
and Auditor, a position she has held since 1990.
Richard Spengler joined the Bank in 1983. He was appointed Assistant Vice
President in 1990, and Vice President of Mortgage Operations in 1991. In
January 1995, Mr. Spengler was named Senior Vice President- Chief Lending
Officer.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The business of the Bank's Board of Directors is conducted through meetings
and activities of the Board and its committees. During the nine months ended
as of September 30, 1997, the Board of Directors held 10 regular meetings,
including the annual organization meeting, and five special meetings. During
the nine months ended September 30, 1997, no director attended fewer than 75%
of the total meetings of the Board of Directors of the Bank and committees on
which such director served.
The Audit Committee consists of Directors Akey (Chairman), Burke,
McLaughlin, Ruegger and Timpson. The Audit Committee met four times during the
nine months ended September 30, 1997. The Audit Committee reviews audit
programs and results of audits of compliance, departmental internal controls
and operating procedures.
92
<PAGE>
The Nominating Committee consists of the entire Board of Directors except
those directors standing for election. The Nominating Committee meets annually
to select the nominees for the Board of Directors. The Board of Directors met
once in its capacity as a nominating committee during the nine months ended
September 30, 1997.
The Compensation Committee consists of Directors Timpson (Chairman),
McLaughlin, Ruegger and Shein. The Compensation Committee meets at least
annually to review the performance and remuneration of the officers and
employees of the Bank. The committee reviews and approves all compensation
programs to be implemented by the Bank. The Compensation Committee met twice
in its capacity as a compensation committee during the nine months ended
September 30, 1997.
DIRECTOR COMPENSATION
Nonemployee directors receive $750 for each Board of Directors meeting
attended, plus a $1,750 monthly retainer. Nonemployee directors serving on the
committees are paid $300 for each meeting attended.
Directors' Deferred Fee Plan. Directors may elect to defer all or part of
their fees under the Agreement for Deferment of Directors' Fees (the "Deferral
Fee Agreement"). The fees so deferred are recorded on the books of the Bank as
a liability in the year the fees are earned; however, the Bank does not
specifically fund the amount so deferred. The Bank pays the deferred fees to
the directors not earlier than the time they cease to be a director,
retirement or when they attain age 65 (or some other age specifically elected
by the director), unless the Bank determines it serves its best interests or
the best interests of the director to disburse these funds at an earlier date.
The Bank also maintains the First Savings Bank, SLA Directors' Deferred Fee
Stock Unit Plan (the "Deferred Fee Stock Unit Plan"). During the Bank's 1992
and 1995 stock offerings, Directors who had deferred fees under the Deferred
Fee Agreement had the opportunity to elect to defer the fees under the
Deferred Fee Stock Unit Plan. Each Director who elected to participate in the
Deferred Fee Stock Unit Plan had his deferred fees credited with a number of
shares of Common Stock based on the fair market value of the stock. Messrs.
Burke, McLaughlin, Martin, Ruegger, Shein and Timpson currently participate in
the Plan. It is expected that Directors will again be able to defer fees
previously earned into the Deferred Fee Stock Unit Plan in connection with the
Offerings.
Retirement Plan. First Savings also maintains a nonqualified, unfunded
retirement plan for directors who are not employees, have served as a director
for five (5) years, and who retire from the Board of Directors within the time
specified under the Retirement Plan. Benefits, in general, are equal either to
all or a portion of the current annual retainer received by Board members,
depending upon the director's age and length of service at retirement.
Benefits are paid monthly, commencing in the month following the director's
retirement from the Board and ending in the month following the director's
death.
Stock Option Plan for Outside Directors. During 1992, the Board of Directors
adopted the First Savings Bank, SLA 1992 Stock Option Plan for Outside
Directors (the "Directors' Stock Option Plan") of the Bank and its affiliates.
Under the terms of the Director's Stock Option Plan, 100,399 shares of the
Common Stock have been reserved for issuance to current directors who are not
employees of the Bank. The Directors' Stock Option Plan is a self
administering plan and provides that each member of the Board of Directors of
the Bank who is not an officer or employee of the Bank or the Mutual Holding
Company will be granted non-statutory stock options to purchase 16,733 shares
of the Common Stock (based on adjustments for four 10% stock dividends and a
two-for-one stock split). All stock options granted under this plan are
currently exercisable at an exercise price of $3.413 per share, as adjusted
the four stock dividends and the stock split. As of September 30, 1997, 33,466
options had been exercised under this plan.
Incentive Plan. During 1995, the Board of Directors adopted the First
Savings Bank, SLA 1996 Omnibus Incentive Plan for directors, officers and
certain employees of the Bank and its affiliates. Under the terms of the
Incentive Plan, 21,780 shares of the Common stock have been reserved for
issuance to current directors who are not employees of the Bank. The portion
of the Incentive Plan granting awards to directors is self administering
93
<PAGE>
and provides that each member of the Board of Directors who is not an officer
or employee of the Bank or the Holding Company will be granted non-statutory
options to purchase 3,630 shares of the Bank's Common Stock at an exercise
price of $13.02 per share. Stock options granted under this plan vest in equal
installments over a three-year period from the date of issuance.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information as to the total remuneration paid by the Bank to the Chief
Executive Officer and other executive officers who received salary and bonuses
in excess of $100,000 during the year ended December 31, 1996 ("Named
Executive Officers"). In addition, the table sets forth information regarding
total remuneration for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
----------------------------- ----------------------- -------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION STOCK OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITIONS YEAR (1)(2) (3) (4) AWARDS (5) (6) (7) (8)(9)
------------------- ---- -------- ------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph S. Yewaisis(10).. 1996 $185,770 $ -- $-- $ -- -- $-- $17,742
Chairman of the Board, 1995 330,000 99,000 -- -- -- -- 17,122
President and Chief 1994 315,000 94,500 -- -- -- -- 14,615
Executive Officer
John P. Mulkerin(11).... 1996 202,250 67,500 -- 66,138 13,915 -- 19,813
President, Chief 1995 152,000 30,400 -- -- -- -- 17,062
Executive Officer and
General Counsel
Christopher P.
Martin(12)............. 1996 160,460 54,000 -- 66,138 13,915 -- 18,905
Executive Vice 1995 125,000 25,000 -- -- -- -- 14,168
President, Chief 1994 110,000 22,000 -- -- -- -- 10,718
Financial Officer,
Chief Operating Officer
and Corporate Secretary
Richard Spengler........ 1996 100,000 15,000 -- 17,875 2,420 -- 13,042
Senior Vice President, 1995 74,480 11,250 -- -- -- -- 7,995
Lending
1994 63,000 7,875 -- -- -- -- 6,020
</TABLE>
- --------
(1) Includes directors' fees paid to Mr. Mulkerin in 1996.
(2) Includes amounts of salary deferred pursuant to the Bank's Incentive
Savings Plan for Employees of First Savings Bank, SLA 401(k).
(3) Includes bonuses granted pursuant to the Bank's Annual Incentive Plan.
Under this plan, bonuses are awarded by the Compensation Committee of the
Board of Directors based upon achieving certain predetermined profit levels
and other identifiable goals.
(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 $75,300, $75,300 and
$19,600, respectively, at December 31, 1996. The dollar amounts set forth
in the table represent the market value of the shares awarded on the date
of grant. A committee of non-employee directors determines the date on
which plan share awards vest. Pursuant to the award agreements, the awards
will vest over a three-year period from the date of grant.
(6) The Bank maintains the 1992 Incentive Stock Option Plan for the benefit
of officers and employees. All options granted pursuant to the 1992
Incentive Stock Option Plan became exercisable as of July 10, 1993. The
Bank also maintains the 1996 Incentive Plan for the benefit of officers and
directors. Messrs. Mulkerin, Martin and Spengler were awarded 13,915
shares, 13,915 shares and 2,420 shares subject to options, respectively,
under the 1996 Incentive Plan, as adjusted for a 10% stock dividend paid on
October 30, 1997. Options granted become exercisable in equal installments
at an annual rate of 33 1/3% beginning November 19, 1997.
(7) For 1996, 1995 and 1994, the Bank had no long-term incentive plan;
accordingly, there were no payouts or awards under any long-term incentive
plan.
(8) Includes $4,950, $3,847 and $3,000 contributed by the Bank in 1996 to the
accounts of Messrs. Mulkerin, Martin and Spengler, respectively, under the
Incentive Savings Plan for Employees of First Savings Bank, SLA 401(k).
(9) Includes $15,063, $15,063 and $10,042, contributed by the Bank pursuant
to the Bank's ESOP in 1997 allocated for the benefit of Messrs. Mulkerin,
Martin and Spengler.
(10) Mr. Yewaisis passed away on May 29, 1996.
(11) Mr. Mulkerin was appointed to the positions of President and Chief
Executive Officer on June 12, 1996.
(12) Mr. Martin was appointed to the added positions of Chief Operating
Officer and Corporate Secretary on June 12, 1996.
94
<PAGE>
1996 Incentive Plan. On April 24, 1996, the Bank's stockholders approved the
First Savings Bank, SLA 1996 Omnibus Incentive Plan under which all employees
of the Bank are eligible to receive awards. The 1996 Incentive Plan provides
discretionary awards to officers and key employees, as determined by a
committee of non-employee directors. Stock options were awarded to officers
under the 1996 Incentive Plan on November 19, 1996. The following table lists
all grants of stock options under the Incentive Plan to the Named Executive
Officers for fiscal 1996 and contains certain information about the potential
value of those options based upon certain assumptions regarding the
appreciation of the Bank's stock over the life of the stock option.
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTIONS(1)
- ----------------------------------------------------------------------- ---------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTION/SARS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE
GRANTED EMPLOYEES IN PRICE PER EXPIRATION
NAME (2)(3)(4)(5) FISCAL YEAR SHARE(6) DATE(7) 5% 10%
---- ------------ ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John P. Mulkerin........ 13,915 21.1% $14.773 11/19/06 $ 129,504 $ 326,844
Christopher P. Martin... 13,915 21.1 14.773 11/19/06 129,504 326,844
Richard Spengler........ 2,420 3.7 14.773 11/19/06 22,523 56,843
</TABLE>
- --------
(1) The amounts represent certain assumed rates of appreciation. Actual gains,
if any, on stock exercises and Common Stock holdings are dependent on the
future performance of the Common Stock and overall stock market
conditions. There can be no assurance that the amounts reflected in this
table will be realized. All stock options and their respective prices
reflect the 10% stock dividend paid on October 30, 1997.
(2) Options granted pursuant to the Incentive Plan become exercisable in equal
installments at an annual rate of 33 1/3% beginning on November 19, 1997.
(3) The purchase price may be paid in cash or in Common Stock.
(4) Under limited circumstances, such as death or disability of an employee,
the employee (or his beneficiary) may request that the Bank, in exchange
for the employee's surrender of an option, pay to the employee (or
beneficiary) the amount by which the fair market value of the Common Stock
exceeds the exercise price of the option on the date of the employee's
termination of employment. It is within the Bank's discretion to accept or
reject such a request.
(5) To the extent possible, options will be treated as incentive options.
(6) The exercise price of options granted in November 1996 will be adjusted
downward in accordance with the Exchange Ratio, to reflect the increase in
the number of options outstanding upon consummation of the exchange.
(7) The option term is ten years.
95
<PAGE>
The following table provides certain information with respect to the number
of shares of Common Stock acquired upon exercise of stock options and the
value realized thereon. Also reported is the number of shares of Common Stock
represented by outstanding stock options at December 31, 1996, held by named
executive officers and the values for "in-the-money" options which represent
the positive spread between the exercise price of any existing stock option
and the year-end price of the Common Stock.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(1) DECEMBER 31, 1996(1)(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John P. Mulkerin............ 2,130 13,915 $ 28,540 $28,460
Christopher P. Martin....... 8,785 13,915 117,740 28,460
Richard Spengler............ -- 2,420 -- 4,950
</TABLE>
- --------
(1) All options granted under the 1992 Incentive Stock Option Plan were issued
on July 10, 1992, and exercisable on July 10, 1993, at an option price of
$3.413 per share. All options granted under the 1996 Incentive Plan were
issued on November 19, 1996, at an option price of $14.773 per share.
Options granted to Messrs. Mulkerin and Martin are exercisable at the rate
of 4,638 shares per year commencing on November 19, 1997. Options granted
to Mr. Spengler are exercisable at the rate of 807 shares per year
commencing on November 19, 1997. All options will immediately vest upon a
change in control. Such exercise prices will be adjusted downward by the
Exchange Ratio to reflect the increase in the number of options and the
decrease in per share market price resulting from the exchange.
(2) The market value of the Common Stock at December 31, 1996, was $18.50 per
share.
The 1996 Incentive Plan was implemented by the Bank and the Mutual Holding
Company as a means of providing employees and outside directors, respectively,
of the Bank and the Mutual Holding Company with a proprietary interest in the
Bank in a manner designed to encourage such persons to remain with the Bank
and the Company. In November 1996, the 1996 Incentive Plan acquired 18,000
shares of Bank Common Stock from authorized but unissued shares (21,780 shares
as adjusted for two 10% stock dividends).
A Committee of the Board of Directors of the Bank and the Company comprised
of nonemployee directors administers the 1996 Incentive Plan, and makes awards
to executive officers pursuant to the Plan. Awards under the 1996 Incentive
Plan become immediately vested in the event of death, disability, retirement
or a change in control of the Bank or its successors.
Officers, directors and employees of the Bank were awarded a total of 18,000
shares of Bank Common Stock during the year ended December 31, 1996 (21,780 as
adjusted for two 10% stock dividends paid on October 30, 1997). Of the total,
21,780 shares of Bank Common Stock acquired by the 1996 Incentive Plan, 14,524
shares were unallocated at November 30, 1997. At the completion of the
Conversion and Reorganization, the unallocated shares will be converted into
shares of Company Common Stock in accordance with the applicable Exchange
Ratio and will be available for grants to participants in the 1996 Incentive
Plan.
Adoption of Existing Bank Plans by Company. The Company has approved
adoption of the Bank's existing 1992 Stock Option Plans and 1996 Incentive
Plan (collectively the "Plans") as plans of the Company upon consummation of
the Conversion and Reorganization and will issue Common Stock in lieu of Bank
Common Stock to such Plans pursuant to the terms of such Plans. As of the
effective date of the Conversion and Reorganization, rights outstanding under
the Plans shall be assumed by the Company and thereafter shall be rights only
for shares of Company Common Stock, with each such right being for a number of
shares of Common Stock equal to the number of shares of Bank Common Stock that
were available thereunder immediately prior to such effective date times the
Exchange Ratio, and the price of each such right shall be adjusted to reflect
the Exchange Ratio and so that the aggregate purchase price of the right is
unaffected, but with no change in other
96
<PAGE>
terms or conditions of such right. The Company shall make appropriate
amendments to the Plans to reflect the adoption of the Plans by the Company
without adverse effect upon the rights outstanding thereunder. In addition,
the Bank's Incentive Savings Plan for Employees of First Savings Bank, SLA
(the "401(k) Plan"), will be amended to permit participants to invest in the
Common Stock of the Company. Currently, the 401(k) Plan has an employer stock
fund which enables participants to invest in Bank Common Stock.
EMPLOYMENT AGREEMENTS
The Mutual Holding Company and the Bank currently have employment agreements
with Messrs. Mulkerin and Martin. Effective upon the Conversion and
Reorganization, the Company intends to enter into employment agreements
(collectively, the "Employment Agreements") with Messrs. Mulkerin and Martin
(the "Executives"). The Bank's contracts will remain in effect. The Employment
Agreements are subject to the review and approval of the Company, and the
review of the OTS and may be amended as a result of such review. Review of the
compensation arrangements by the OTS does not indicate, and should not be
construed to indicate that the OTS has passed upon the merits thereof. The
Employment Agreements are intended to ensure that the Bank and the Company
will be able to maintain a stable and competent management base after the
Conversion and Reorganization. The continued success of the Bank and the
Company depends to a significant degree on the skills and competence of
Messrs. Mulkerin and Martin.
The proposed Employment Agreements are expected to provide for a three-year
term for the Executives. The Employment Agreements provide that, commencing on
the first anniversary date and continuing each anniversary date thereafter,
the Board of Directors of the Bank and the Company each review the agreements
and the Executive's performance for purposes of determining whether to extend
the agreements with the Bank and the Company for an additional year such that
the remaining terms would be the amount of the original terms. The base annual
salary which will be effective for the Employment Agreement for Messrs.
Mulkerin and Martin will be $260,000 and $210,000, respectively. In addition
to the base salary, the proposed Employment Agreements would provide for,
among other things, participation in stock benefit plans and other fringe
benefits applicable to executive personnel. The Employment Agreements provide
for termination by the Bank or the Company for "cause," as defined in the
agreements, at any time. In the event the Bank or the Company would choose to
terminate the Executive's employment for reasons other than for "cause," or in
the event of the Executive's resignation from the Bank and the Company upon:
(i) failure to re-elect the Executive to his current offices; (ii) a material
change in the Executive's functions, duties or responsibilities; (iii) a
relocation of the Executive's principal place of employment by more than 25
miles; (iv) liquidation or dissolution of the Bank or the Company; or (v) a
breach of the agreement by the Bank or the Company, the Executive or, in the
event of death, his beneficiary, would be entitled to receive the remaining
base salary payments due to the Executive and the contributions that would
have been made on the Executive's behalf to any employee benefit plans of the
Bank or the Company during the remaining term of the agreement. The Bank and
the Company would also continue and pay for the Executive's life, health and
disability coverage for the remaining term of the Employment Agreements.
Under the current and proposed Employment Agreements, if voluntary or
involuntary termination follows a "change in control" of the Bank or the
Company, as defined in the proposed Employment Agreements, the Executive or,
in the event of death, his beneficiary, would be entitled to a payment equal
to the greater of: (1) the payments due for the remaining term of the
agreement; or (2) a severance payment equal to three times the average of the
five preceding taxable years' compensation, in the case of the Company's
proposed Employment Agreement, and three times the average of the three
preceding taxable years' compensation in the case of the Bank's existing
Employment Agreements. It is also expected that the Company, like the Bank,
would also continue the Executive's life, health, and disability coverage for
36 months. Notwithstanding that both agreements would provide for a severance
payment in the event of a change in control, the Executive would only be
entitled to receive a severance payment under one agreement.
Payments to the Executives under the Bank's proposed Employment Agreements
are expected to be guaranteed by the Company in the event that payments or
benefits are not paid by the Bank. Payment under the
97
<PAGE>
Company's Employment Agreements would be made by the Company. All reasonable
costs and legal fees paid or incurred by the Executive pursuant to any dispute
or question of interpretation relating to the Employment Agreements would be
paid by the Bank or the Company, respectively, if the Executive is successful
on the merits pursuant to a legal judgment, arbitration or settlement. The
Bank's Employment Agreement provides, and it is expected that the Company's
Employment Agreement would provide, that the Bank and Company indemnify the
Executive to the fullest extent allowable under federal and Delaware law,
respectively. In the event of a "change in control" of the Bank or Company,
the total amount of payments that would be due under the Employment
Agreements, based solely on cash compensation paid to Messrs. Mulkerin and
Martin in the past fiscal year and excluding any benefits under any employee
benefit plan which may be payable, would be approximately $709,000 and
$567,000, respectively.
CHANGE IN CONTROL AGREEMENTS
Effective upon the Conversion and Reorganization, the Bank intends to enter
into Change in Control Agreements ("CIC Agreements") with certain other
officers of the Bank. Such agreements will have terms ranging from one to
three years. The proposed CIC Agreements are expected to provide that
commencing on the first anniversary date and continuing on each anniversary
thereafter, the Bank's CIC Agreements may be renewed by the Board of Directors
for an additional year It is also expected that the CIC Agreements with the
Bank will provide that in the event voluntary or involuntary termination
follows a change in control of the Bank or the Company, the officer would be
entitled to receive a severance payment equal to one to three times the
officer's average annual compensation for the five years preceding
termination, depending on the term of the officers' CIC Agreement. The Bank
would also continue, and pay for, the officer's life, health and disability
coverage for 12 to 36 months following termination. Payments to the officer
under the Bank's CIC Agreements would be guaranteed by the Company in the
event that payments or benefits are not paid by the Bank. In the event of a
change in control of the Bank or 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 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.
98
<PAGE>
Financial Institutions Retirement Fund does not segregate its assets,
liabilities or costs by participating employer. Therefore, disclosure of the
accumulated benefit obligations, plan assets and the components of annual
pension expense attributable to the Bank cannot be ascertained.
First Savings is required to make an annual contribution to the plan based
upon the actuarial estimate provided by the actuary. During the nine months
ended September 30, 1997, this amounted to $143,000, which includes past
conversion costs from prior plan year revaluations.
The following table illustrates annual pension benefits at age 65 under the
most advantageous plan provisions available at various levels of compensation
and years of service. The benefits listed in the table are not subject to a
deduction for Social Security or any other offset amount.
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------
AVERAGE 10 15 20 25 AND OVER
------- ------- ------- -------- -----------
<S> <C> <C> <C> <C>
$ 20,000........................ $ 4,000 $ 6,000 $ 8,000 $ 10,000
$ 30,000........................ 6,000 9,000 12,000 15,000
$ 50,000........................ 10,000 15,000 20,000 25,000
$ 75,000........................ 15,000 22,500 30,000 37,500
$100,000........................ 20,000 30,000 40,000 50,000
$150,000........................ 30,000 45,000 60,000 75,000
$200,000........................ 40,000 60,000 80,000 100,000
$300,000 and over(1)............ 60,000 90,000 130,000(2) 130,000(2)
</TABLE>
- --------
(1) Under current law, the average final compensation for computing benefits
under the Pension Plan cannot exceed $160,000 (indexed for inflation).
However, benefits are not reduced below the level of benefits accrued as
of December 31, 1992.
(2) Under current law, the maximum benefit is limited to $130,000 per year
beginning in 1998.
(3) The compensation utilized for formula purposes include salary amounts
listed under "Summary Compensation Table."
The following table sets forth the years of credited service as of December
31, 1996, for each of the individuals named in the Executive Compensation
Table.
<TABLE>
<CAPTION>
YEARS OF
CREDITED SERVICE
----------------
<S> <C>
John P. Mulkerin......................................... 9
Christopher P. Martin.................................... 13
Richard Spengler......................................... 14
</TABLE>
Supplemental Executive Retirement Plan. Effective as of January 1, 1994, the
Board of Directors revised a previously existing plan entitled the Retirement
Benefit Maintenance Plan (the "Maintenance Plan") and restated it as the First
Savings Bank, SLA Supplemental Executive Retirement Plan ("SERP"). The SERP
provides a post-employment supplemental retirement benefit for participants
who retire on or after their "Normal Retirement Age" (age 65) equal to (i)
seventy-five percent (75%) of the participant's base salary during the twelve
months prior to retirement, (ii) less the amount of the participant's "Pension
Plan Annual Benefit" and "Primary Social Security Benefit," as defined in the
plan. The plan allows for benefits, reduced according to actuarial
considerations, for early retirement. The SERP is not a tax-qualified employee
benefit plan. Pursuant to the SERP, the estimated additional annual benefits
payable upon retirement at normal retirement age for Messrs. Mulkerin and
Martin are $107,600 and $47,900, respectively.
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
99
<PAGE>
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.
Employee Stock Ownership Plan and Trust. The Bank established the First
Savings Bank, SLA Employee Stock Ownership Plan (the "ESOP") and related trust
for eligible employees in connection with the 1992 MHC Reorganization.
Employees employed with the Bank as of January 1, 1992 and employees of the
Company or the Bank employed after such date, who have been credited with at
least 1,000 hours during a 12-month period and who have attained the age of 21
participate in the ESOP.
In July 1992, the ESOP borrowed $700,000 from an unaffiliated lender to
purchase 70,000 shares of Bank Common Stock issued in the 1992 MHC
Reorganization ("1992 ESOP Loan"). In connection with the Bank's 1995
Secondary Issuance, the ESOP purchased an additional 42,000 shares of Bank
Common Stock at $13.00 per share. The ESOP borrowed an additional $546,000
from the MHC to fund the purchase of the shares. The MHC also assumed the 1992
ESOP Loan. Upon consummation of the Conversion and Reorganization, the Public
Bank Shares held by the ESOP will convert into Common Stock of the Company
based upon the Exchange Ratio, and the Company expects to refinance the MHC's
existing loan to the ESOP. See "The Conversion and Reorganization--Effect on
Existing Compensation Plans" and "Use of Proceeds."
In connection with the establishment of the ESOP, a committee of the Board
of Directors was appointed to serve as trustee of the ESOP (the "ESOP
Committee"). The trustee determines the investment of funds contributed to the
ESOP. The ESOP trustee, subject to its fiduciary duty, must vote all allocated
shares held in the ESOP in accordance with the instructions of the
participating employees. Under the ESOP, allocated shares for which no
instructions are given and unallocated shares will be voted by the trustee in
a manner calculated to most accurately reflect the instructions it has
received from participants regarding the allocated stock, provided such vote
is in accordance with the provisions of ERISA.
The ESOP intends to purchase 8% of the Conversion Stock issued in the
Conversion. As part of the Conversion and in order to fund the ESOP's purchase
of the Conversion Stock to be issued in the Conversion, the ESOP intends to
borrow funds either from the Company or a third-party lender equal to 8% of
the aggregate purchase price of the Conversion Stock. In either case, the loan
will be repaid principally from the Company's or the Bank's contribution's to
the ESOP over a period of 15 years and the collateral for the loan will be the
Common Stock purchased by the ESOP. This loan will be either in addition to
the existing ESOP loan, which will continue to be repaid over its original
term, or the Company will refinance the existing loan to consolidate it with
the new loan to the ESOP. Subject to receipt of any necessary regulatory
approvals or opinions, the Bank may make contributions to the ESOP for
repayment of the loan since the participants are all employees of the Bank, or
to reimburse the Company for contributions made by it. Contributions to the
ESOP will be discretionary, however, the Company or the Bank intend to make
annual contributions to the ESOP in an aggregate amount at least equal to the
principal and interest requirement on the debt. The interest rate for the loan
is expected to be the current market rate.
Shares purchased by the ESOP will initially be pledged as collateral for the
loan, and will be held in a suspense account until released for allocation
among participants as the loan is repaid. The pledged shares will be released
annually from the suspense account in an amount proportional to the repayment
of the ESOP loan for each plan year. The released shares will be allocated
among the accounts of participants on the basis of the participant's
compensation for the year of allocation. Participants will vest in their ESOP
accounts after five years of credited service. Participants also vest
completely in their accounts if their service terminates due to death, early
retirement, permanent disability or a change in control. Forfeitures will be
reallocated among remaining participating employees, in the same proportion as
contributions. Benefits may be payable upon death, retirement, early
retirement, disability or separation from service. The contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
100
<PAGE>
Stock-Based Incentive Plan. Following the Conversion and Reorganization, the
Board of Directors of the Company intends to adopt one or more stock-based
benefit plans to provide stock options, awards of restricted stock and certain
related rights to eligible officers, employees, and directors of the Company
and the Bank. The Company anticipates granting stock options and restricted
stock awards under a single plan. However, it is possible separate plans could
be established for directors and employees (including officers).
At a meeting of stockholders of the Company following the Conversion and
Reorganization, which under applicable OTS regulations may be held no earlier
than six months after the completion of the Conversion and Reorganization, the
Board of Directors intends to present the Stock-Based Incentive Plan or any
separate plan(s) to stockholders for approval. The Company has reserved an
amount equal to 10% of the shares of Common Stock issued in the Conversion and
Reorganization, or 1,439,190 shares (based upon the issuance of 14,391,900
shares), for stock options, and 4% of the shares of Common Stock issued in the
Conversion, or 575,676 shares (based upon the issuance of 14,391,900 shares),
for restricted stock awards, which may be awarded at no cost to officers,
directors and certain employees of the Bank. OTS regulations provide that no
individual officer or employee of the Bank may receive more than 25% of the
stock options available under the Stock-Based Incentive Plan (or any separate
plan for officers and employees) and non-employee directors may not receive
more than 5% individually, or 30% in the aggregate, of the stock options
available under the Stock-Based Incentive Plan (or any separate plan for
directors). OTS regulations also provide that no individual officer or
employee of the Bank may receive more than 25% of the restricted stock awards
available under the Stock-Based Incentive Plan (or any separate plan for
officers and employees) and non-employee directors may not receive more than
5% individually, or 30% in the aggregate, of the restricted stock awards
available under the Stock-Based Incentive Plan (or any separate plan for
directors). The Bank expects to contribute funds to a trust established in
connection with the Stock-Based Incentive Plan (or any separate plan(s)) to
enable the plan to acquire, in the aggregate, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, or 575,676 shares (based upon
the issuance of 14,391,900 shares). These shares would be acquired through
open market purchases, if permitted, or from authorized but unissued shares.
The Board intends to appoint a committee of the Board of Directors to serve as
trustee of a trust to be established in connection with the Stock-Based
Incentive Plan. In the event that additional authorized but unissued shares
are acquired by the Stock-Based Incentive Plan after the Conversion and
Reorganization, the interests of existing shareholders would be diluted. See
"Pro Forma Data."
The grants of stock options and restricted stock awards will be designed to
attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Bank, will be eligible to participate in the Stock-Based
Incentive Plan (or any separate plan for employees). It is expected that the
committee administering the plan will determine which officers and employees
will be granted stock options, restricted stock awards and related rights,
including limited rights. The committee will also determine whether stock
options will be incentive or non-statutory stock options, the number of shares
subject to each stock option and restricted stock award, the exercise price of
each non-statutory stock option, whether stock options may be exercised by
delivering other shares of Common Stock, and when stock options become
exercisable or restricted stock awards vest. Only employees may receive grants
of Incentive Stock Options. Therefore, under the Stock-Based Incentive Plan
(or any separate plan for directors), directors may receive only grants of
non-statutory stock options.
The Stock-Based Incentive Plan (or any separate plan for employees) may
provide for the grant of: (i) options to purchase the Common Stock intended to
qualify as incentive stock options under Section 422 of the Code ("Incentive
Stock Options"); (ii) options that do not so qualify ("Non-Statutory Stock
Options"); and (iii) limited option rights ("Limited Option Rights"). Limited
Option Rights are exercisable only upon a change in control of the Bank or the
Company. Upon exercise of Limited Option Rights in the event of a change in
control, the employee or director will be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of any unexercised
option, whether exercisable or unexercisable at such time, and the fair market
value of the shares of common stock subject to the stock option on the date of
exercise of the right in lieu of purchasing the stock underlying the stock
option. It is anticipated that all stock options granted contemporaneously
with stockholder approval of the Stock-Based Incentive Plan will qualify as
Incentive Stock
101
<PAGE>
Options to the extent permitted under Section 422 of the Code. Unless sooner
terminated, the Stock-Based Incentive Plan will be in effect for a period of
ten years from the earlier of adoption by the Board of Directors or approval
by the Company's Stockholders. Subject to stockholder approval, the Company
intends to grant stock options with Limited Option Rights under the Plan at an
exercise price equal to at least the fair market value of the underlying
Common Stock on the date of grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the
employee for at least one year after the date the stock is received in
connection with the stock option exercise and two years after the date of
grant of the stock option (a "disqualifying disposition"). No compensation
deduction will be available to the Company as a result of the grant or
exercise of Incentive Stock Options unless there has been a disqualifying
disposition. In the case of a Non-Statutory Stock Option and in the case of a
disqualifying disposition of an Incentive Stock Option, an individual will
realize ordinary income upon exercise of the stock option (or upon the
disqualifying disposition) in an amount equal to the amount by which the
exercise price exceeds the fair market value of the Common Stock purchased by
exercising the stock option on the date of exercise. The amount of any
ordinary income realized by an optionee upon the exercise of a Non-Statutory
Stock Option or due to a disqualifying disposition of an Incentive Stock
Option will be a deductible expense to the Company for tax purposes. In the
case of Limited Rights, the option holder will have to include the amount paid
to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
Under the Stock-Based Incentive Plan (or any separate plans for directors
and employees), restricted stock awards and related Limited Stock Rights,
would be granted in the form of shares of Common Stock held by the plans.
Awards will be non-transferable and non-assignable. Allocations and grants of
restricted stock awards, and related Limited Stock Rights, to officers and
employees may be made in the form of base grants and/or performance grants
(the vesting of which would be contingent upon performance goals established
by the committee administering the plan). In establishing any performance
goals, the committee may utilize the annual financial results of the Bank,
actual performance of the Bank as compared to targeted goals such as the ratio
of the Bank's net worth to total assets, the Bank's return on average assets
or average equity, or such other performance standards as determined by the
committee with the approval of the Board of Directors.
Limited Stock Rights would be exercisable by participants upon a change in
control of the Company or Bank as described in the plan. Subject to OTS
regulations, upon the exercise of a Limited Stock Right, the recipient will be
entitled to receive a cash payment equal to the fair market value of all
unvested stock awards in exchange for any rights to such unvested stock
awards.
When a participant becomes vested with respect to restricted stock awards,
the participant will realize ordinary income equal to the fair market value of
the Common Stock at the time of vesting (unless the participant made an
election pursuant to Section 83(b) of the Code). The amount of income
recognized by the participants will be a deductible expense for tax purposes
for the Bank. When restricted stock awards become vested and shares of Common
Stock are actually distributed to participants, the participants would receive
amounts equal to any accrued dividends with respect thereto. Prior to vesting,
recipients of stock awards may direct the voting of the shares awarded to
them. Shares not subject to grants and shares allocated subject to the
achievement of performance goals will be voted by the trustee in proportion to
the directions provided with respect to shares subject to grants. Vested
shares will be distributed to recipients as soon as practicable following the
day on which they vest.
If the Stock-Based Incentive Plan (or any separate plans for employees and
directors) is adopted in the form described above, stock awards would become
vested and stock options would become vested and exercisable in the manner
specified by the Company, subject to applicable OTS regulations, which require
that stock options and restricted stock awards begin vesting no earlier than
one year from the date of shareholder approval of the plan and thereafter vest
at a rate of no more than 20% per year. Stock options could be exercisable for
three
102
<PAGE>
months following the date on which the employee or director ceases to perform
services for the Bank or the Company, except that in the event of death or
disability, options accelerate and become fully vested and could be
exercisable for up to one year thereafter or such longer period as determined
by the Company. In the case of death or disability, stock options may be
exercised for a period of 12 months. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee would be treated as a Non-Statutory Stock
Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a consultant
or director. In the event of death, disability or normal retirement, the
Company, if requested by the optionee, or the optionee's beneficiary, could
elect, in exchange for vested options, to pay the optionee, or the optionee's
beneficiary in the event of death, the amount by which the fair market value
of the Common Stock exceeds the exercise price of the options on the date of
the employee's termination of employment.
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of stock options or stock awards granted
under a plan adopted within one year after conversion. Subject to any
applicable regulatory requirements, the Stock-Based Incentive Plan (or any
separate plans for employees and directors) may be amended subsequent to the
expiration of the one-year period following the Conversion and Reorganization
to provide for accelerated vesting of previously granted options in the event
of a change in control of the Company or the Bank. A change in control would
generally be considered to occur when a person or group of persons acting in
concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Bank or in the event of a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested
election of directors which resulted in the replacement of a majority of the
Board of Directors by persons not nominated by the directors in office prior
to the contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") required that all loans or extensions of credit to executive
officers and directors be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and not involve more than the normal risk
of repayment or present other unfavorable features. In addition, loans made to
a director or executive officer in excess of the greater of $25,000, or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must have been
approved in advance by a majority of the disinterested members of the Board of
Directors.
The Bank currently makes loans to executive officers and directors on the
same terms and conditions offered to the general public. The Bank's policy
provides that all loans made by the Bank to its executive officers and
directors be made in the ordinary course of business, on substantially the
same terms, including collateral, as those prevailing at the time for
comparable transactions with other persons and may not involve more than the
normal risk of collectibility or present other unfavorable features. The Bank
may, in the future, determine to offer loans to executive officers and
directors on terms not available to the public, but available to other
employees, in accordance with recently modified regulations.
Prior to the enactment of FIRREA, the Bank provided loans to directors and
executive officers at reduced rates and/or with points waived or reduced.
There were no loans to the Bank's current executive officers and directors
that exceeded $500,000 as of September 30, 1997. The largest principal amount
outstanding of a pre-FIRREA basis loan during the nine months ended September
30, 1997 was a first mortgage loan of $149,000, and the amount outstanding and
the interest rate on this loan on this date were $147,000 and 8.00%,
respectively. All other loans that exceeded $60,000 at any time during fiscal
year 1997 to executive officers, directors, immediate family members of
executive officers and directors, or organizations with which executive
officers and directors are affiliated, were made in the ordinary course of
business, on substantially the same terms including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons.
103
<PAGE>
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
BENEFICIAL OWNERSHIP OF BANK COMMON STOCK
The following table includes, as of November 30, 1997, certain information
as to the Bank Common Stock beneficially owned by (i) the only persons or
entities, including any "group" as that term issued in Section 13(d)(3) of the
Exchange Act, who or which was known to the Bank to be the beneficial owner of
more than 5% of the issued and outstanding Bank Common Stock, (ii) the
directors of the Bank, (iii) certain executive officers of the Bank, and (iv)
all directors and executive officers of the Bank as a group. For information
concerning proposed subscriptions by directors and executive officers and the
anticipated ownership of Common Stock by such persons upon consummation of the
Conversion and Reorganization, see "--Subscriptions by Executive Officers and
Directors."
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP AS OF PERCENT OF BANK
OR NUMBER OF PERSONS IN GROUP NOVEMBER 30, 1997(1)(3)(4)(5) COMMON STOCK
----------------------------- ----------------------------- ---------------
<S> <C> <C>
First Savings Bancshares, 4,134,812 51.6%
MHC(2).........................
Walter K. Timpson............... 137,426 1.7
Donald T. Akey, M.D............. 29,453 0.4
Harry F. Burke.................. 54,855 0.7
Keith H. McLaughlin............. 65,145 0.8
Philip T. Ruegger, Jr........... 153,588 1.9
Jeffries Shein.................. 206,132 2.6
John P. Mulkerin................ 87,544 1.1
Christopher P. Martin........... 50,543 0.6
John F. Cerulo, Jr.............. 12,479 0.2
Karen I. Martino................ 9,035 0.1
Richard Spengler................ 23,655 0.3
All Directors and Executive
Officers as a Group
(11 persons)................... 829,855 10.4
</TABLE>
- -------
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner for purposes of this table, of any shares of
Common Stock if he has shared voting or investment power with respect to
such security, or has a right to acquire beneficial ownership at any time
within 60 days from the date as to which beneficial ownership is being
determined. As used herein, "voting power" is the power to vote or direct
the voting of shares and "investment power" is the power to dispose or
direct the disposition of shares. Includes all shares held directly as
well as by spouses and minor children, in trust and other indirect
ownership, over which shares the named individuals effectively exercise
sole or shared voting and investment power.
(2) The Bank's executive officers and directors are also executive officers
and directors of First Savings Bancshares, MHC.
(3) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals.
(4) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Bank Common Stock which may be acquired within
60 days of November 30, 1997 pursuant to the exercise of outstanding stock
options. Shares of Bank Common Stock which are subject to stock options
are deemed to be outstanding for the purpose of computing the percentage
of outstanding Bank Common Stock owned by such person or group or group
but not deemed outstanding for the purpose of computing the percentage of
Bank Common Stock owned by any other person or group.
(5) Includes the following amount of unvested shares of restricted stock
awarded under the 1996 Incentive Plan which may be voted by the recipient
pending vesting and distribution: 726 shares to each of Messrs. Akey,
Burke, McLaughlin, Ruegger and Shein; 2,985 shares to both Messrs.
Mulkerin and Martin; and 807 shares to each of Mr. Cerulo, Ms. Martino and
Mr. Spengler. Includes options to purchase stock pursuant to the Bank's
1992 Stock Option Plans which were vested as of November 30, 1997: 17,943
shares to each of Messrs. Timpson, McLaughlin, Ruegger and Shein, 1,210
shares to each of Messrs. Akey and Burke; 6,768 shares to Mr. Mulkerin;
4,638 shares to Mr. Martin; and 807 shares to each of Messrs. Cerulo,
Spengler and Ms. Martino.
104
<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, for each of the Company's directors and
executive officers and for all of the directors and executive officers as a
group, (1) the number of Exchange Shares to be held upon consummation of the
Conversion and Reorganization, based upon their beneficial ownership of the
Bank Common Stock as of November 30, 1997, (2) the proposed purchases of
Conversion Stock, assuming sufficient shares are available to satisfy their
subscriptions, and (3) the total amount of Common Stock to be held upon
consummation of the Conversion and Reorganization, in each case assuming that
12,514,527 shares of Conversion Stock are sold, which is the midpoint of the
Valuation Price Range. Due to certain purchase limitation policies imposed by
the OTS in connection with mutual holding company conversions and
reorganizations, Messrs. Timpson, Ruegger and Shein are precluded from
purchasing additional shares of Conversion Stock in the Offerings.
<TABLE>
<CAPTION>
PROPOSED PURCHASES
OF CONVERSION TOTAL COMMON STOCK
STOCK(1) TO BE HELD
NUMBER OF ------------------ --------------------
EXCHANGE SHARES TO NUMBER NUMBER PERCENTAGE
BE HELD(2)(3)(4) AMOUNT OF SHARES OF SHARES OF TOTAL
------------------ -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Walter K. Timpson(5).... 351,401 $ -- -- 351,401 1.46%
Donald T. Akey, M.D..... 81,422 30,000 3,000 84,422 0.35
Harry F. Burke.......... 156,586 50,000 5,000 161,586 0.67
Keith H. McLaughlin..... 137,522 150,000 15,000 152,522 0.64
Philip T. Ruegger,
Jr.(5)................. 399,225 -- -- 399,225 1.66
Jeffries Shein (5)...... 554,703 -- -- 554,703 2.31
John P. Mulkerin........ 230,185 250,000 25,000 255,185 1.06
Christopher P. Martin... 127,001 200,000 20,000 147,001 0.61
John F. Cerulo, Jr. .... 32,149 60,000 6,000 38,149 0.16
Karen I. Martino........ 21,958 25,000 2,500 24,458 0.10
Richard Spengler........ 65,219 100,000 10,000 75,219 0.31
--------- -------- ------ --------- ----
All Directors and
Executive Officers as a
Group (11 persons)..... 2,157,371 $865,000 86,500 2,243,871 9.35%
========= ======== ====== ========= ====
</TABLE>
- --------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Conversion.
(2) Excludes shares which may be received upon the exercise of outstanding
stock options. Based upon the Exchange Ratio of 2.9590 Exchange Shares for
each Public Bank Share at the midpoint of the Valuation Price Range, the
persons named in the table would have options to purchase Common Stock as
follows: Mr. Timpson, 60,254 shares; Dr. Akey, 10,741 shares; Mr. Burke,
10,741 shares; Mr. McLaughlin, 60,254 shares; Mr. Ruegger, 60,254 shares;
Mr. Shein, 60,254 shares; Mr. Mulkerin, 47,477 shares; Mr. Martin, 41,174
shares; Mr. Cerulo, 7,160 shares; Ms. Martino, 7,160 shares; Mr. Spengler,
7,160 shares; and all directors and executive officers as a group, 372,629
shares.
(3) Excludes the following amount of shares awarded under the 1996 Incentive
Plan, which have not yet vested based upon the above Exchange Ratio, in
the following amounts: Mr. Timpson, 2,148 shares; Dr. Akey, 2,148 shares;
Mr. Burke, 2,148 shares; Mr. McLaughlin, 2,148 shares; Mr. Ruegger, 2,148
shares; Mr. Shein, 2,148 shares; Mr. Mulkerin, 8,832 shares; Mr. Martin,
8,832 shares; Mr. Cerulo, 2,387 shares; Ms. Martino, 2,387 shares; Mr.
Spengler, 2,387 shares; and all directors and executive officers as a
group, 37,713 shares.
(4) Excludes stock options and awards to be granted under the Company's Stock-
Based Incentive Plan if such plan is approved by stockholders at an annual
or special meeting of stockholders at least six months following the
Conversion and Reorganization. See "Management of the Bank--New Benefits
Resulting from the Conversion and Reorganization."
(5) Due to the purchase limitations imposed by the OTS, Messrs. Timpson,
Ruegger and Shein are precluded from purchasing any shares in the
Offerings.
105
<PAGE>
THE CONVERSION AND REORGANIZATION
THE BOARDS OF DIRECTORS OF THE MUTUAL HOLDING COMPANY, THE BANK AND THE
COMPANY HAVE APPROVED THE PLAN OF CONVERSION, AS HAS THE OTS, SUBJECT TO
APPROVAL BY THE MEMBERS OF THE MUTUAL HOLDING COMPANY AND THE STOCKHOLDERS OF
THE BANK ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN BY SUCH AGENCY.
GENERAL
On October 24, 1997 the Boards of Directors of the Mutual Holding Company
and the Bank unanimously adopted the Plan, subject to approval by the OTS,
pursuant to which the Mutual Holding Company will convert to a stock form of
organization; the Company will offer and sell the Conversion Stock; and the
Company will issue Common Stock in exchange for the Public Bank Shares. The
Plan was subsequently amended on December 16, 1997, January 28, 1998 and
February 9, 1998. It is intended that all of the outstanding capital stock of
the Bank will be held by the Company, which is incorporated under Delaware
law. The Plan was approved by the OTS, subject to, among other things,
approval of the Plan by the Members of the Mutual Holding Company and the
stockholders of the Bank. A special meeting of members and a special meeting
of stockholders has been called for this purpose to be held on April 2, 1998.
The Company has received approval of the OTS to become a savings and loan
holding company and to acquire all of the Common Stock of the Bank to be
issued in the Conversion and Reorganization. The Company plans to retain 50%
of the net proceeds from the sale of the Conversion Stock, and to contribute
the remaining proceeds contributed to the Bank. The Conversion and
Reorganization will be effected only upon completion of the sale of all of the
shares of Conversion Stock of the Company to be issued pursuant to the Plan.
The Plan provides generally that (i) the Mutual Holding Company will convert
to the stock form of organization and (ii) the Company will offer shares of
Conversion Stock for sale in the Subscription Offering to the Bank's Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders, and Other
Members. Concurrently, shares will be offered in a Community Offering with a
first preference given to the holders of the Public Bank Shares. It is
anticipated that all shares not subscribed for in the Subscription and
Community Offerings will be offered for sale by the Company to the general
public in a Syndicated Community Offering. The Primary Parties have the right
to accept or reject, in whole or in part, any orders to purchase shares of the
Conversion Stock received in the Community Offering or in the Syndicated
Community Offering. See "--Community Offering" and "--Syndicated Community
Offering."
The aggregate price of the shares of Conversion Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$106.4 million and $143.9 million, will be determined based upon an
independent appraisal, prepared by FinPro of the estimated pro forma market
value of the Common Stock of the Company. All shares of Conversion Stock to be
issued and sold in the Conversion and Reorganization will be sold at the same
price. The independent appraisal will be affirmed or, if necessary, updated at
the completion of the Subscription and Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering. The
appraisal has been performed by FinPro, a consulting firm experienced in the
valuation and appraisal of savings institutions. See "--Stock Pricing and
Exchange Ratio" for additional information as to the determination of the
estimated pro forma market value of the Conversion Stock.
The following is a brief summary of pertinent aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at each branch of the
Bank and at the Northeast Region and Washington, D.C. offices of the OTS. The
Plan is also filed as an Exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
106
<PAGE>
PURPOSES OF THE CONVERSION AND REORGANIZATION
The Mutual Holding Company, as a federally-chartered mutual holding company,
does not have stockholders and has no authority to issue capital stock. As a
result of the Conversion and Reorganization, the Mutual Holding Company will
be restructured into the form used by holding companies of commercial banks,
other business entities and a growing number of savings institutions. The
Conversion and Reorganization will enhance the ability of the Company and the
Bank to access capital markets, expand current operations, acquire other
financial institutions or branch offices, provide affordable home financing
opportunities to the communities the Bank serves or diversify into other
financial services to the extent allowable by applicable law and regulation.
The stock holding company form of organization would provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are
no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion and
Reorganization, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise. See "Use
of Proceeds."
While the Bank currently has the ability to raise additional capital through
the sale of additional shares of its common stock, that ability is limited by
the mutual holding company structure which, among other things, requires that
the Mutual Holding Company own a majority of the outstanding shares of its
savings institution subsidiary's common stock. The Conversion and
Reorganization will significantly increase the Bank's capital position to a
level whereby the Bank will be better positioned to take advantage of business
opportunities as they arise. At September 30, 1997, the Bank had stockholders'
equity, determined in accordance with generally accepted accounting principles
("GAAP"), of $99.2 million, or 9.5% of total assets. Assuming that the Company
contributes 50% of net proceeds at the maximum of the Estimated Price Range to
the Bank, the Bank's GAAP capital will increase to $152.8 million, or a ratio
of GAAP capital to adjusted assets, on a pro forma basis, of 13.92% after the
Conversion and Reorganization. The investment of the net proceeds from the
sale of the Conversion Stock is expected to provide the Bank with additional
income to increase further its capital position. The additional capital may
also assist the Bank in offering new programs and expanded services to its
customers. See "Use of Proceeds."
If the Bank had undertaken a standard conversion involving the formation of
a stock holding company in 1992 when it reorganized into mutual holding
company form, applicable OTS regulations would have required a greater amount
of common stock to be sold than the $10.0 million raised in the 1992 MHC
Reorganization, and in light of then prevailing market conditions there was
uncertainty as to whether the greater amount of common stock could have been
sold. A standard conversion in 1995 also would have immediately eliminated all
aspects of the mutual form of organization. In light of current market
conditions for the stocks of savings institutions and their holding companies
and the Bank's financial condition, the Boards of Directors of the Bank and
the Mutual Holding Company believe that it is in the best interests of such
companies and their respective stockholders and members to raise additional
capital at this time, and that the most feasible way to do so is through the
Conversion and Reorganization.
After completion of the Conversion and Reorganization, the unissued common
and preferred stock authorized by the Company's Certificate of Incorporation
will permit the Company, subject to market conditions and regulatory approval
of an offering, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions.
At the present time, the Company has no plans with respect to additional
offerings of securities, other than the issuance of additional shares upon
exercise of stock options or the possible issuance of authorized but unissued
shares for restricted stock awards under the Stock-Based Incentive Plan.
Following the Conversion and Reorganization, the Company will also be able to
use stock-related incentive programs to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the Bank--
Executive Compensation."
DESCRIPTION OF THE CONVERSION
The Boards of Directors of the Bank and the Mutual Holding Company adopted
the Plan on October 24, 1997. Thereafter, the Bank caused the Company to be
incorporated under Delaware law as a first-tier, wholly
107
<PAGE>
owned subsidiary of the Bank, and the Board of Directors of the Company
adopted the Plan on December 16, 1997, as amended on January 28, 1998 and
February 9, 1998. After receipt of all requisite regulatory approvals, the
Company will form First Interim as a first-tier, wholly owned subsidiary of
the Company, and the Board of Directors of First Interim shall adopt the Plan
by at least a two-thirds vote. In addition, the Bank and the Company shall
approve the Plan in their capacities as the sole shareholders of the Company
and First Interim, respectively.
Pursuant to OTS regulations, the Plan must be approved by the affirmative
vote of at least a majority of the total number of votes eligible to be cast
by Members at the Special Meeting and by holders of at least two-thirds of the
outstanding common stock of the Bank at the Stockholders' Meeting. In
addition, in accordance with current OTS policy, the Plan must be approved by
a majority of the votes cast, in person or by proxy, by the holders of the
Public Bank Shares at the Stockholders' Meeting.
The following diagram outlines the current organizational structure of the
parties' ownership interests:
FIRST SAVINGS BANCSHARES, MHC HOLDERS OF PUBLIC BANK SHARES
51.6% 48.4%
FIRST SAVINGS BANK, SLA
100%
FIRST SOURCE BANCORP, INC.
100%
FIRST INTERIM SAVINGS BANK, FSB
The following diagram reflects the resulting structure of the parties upon
consummation of the Conversion and Reorganization, including (i) the merger of
the Mutual Holding Company (following its conversion into an interim federal
stock savings institution) with and into the Bank, (ii) the merger of First
Interim with and into the Bank, pursuant to which the Public Bank Shares will
be converted into Exchange Shares, and (iii) the offering of Conversion Stock.
The diagram assumes that there are no fractional shares and does not give
effect to purchase of Conversion Stock by holders of Public Bank Shares or the
exercise of outstanding stock options.
PURCHASERS HOLDERS OF
OF CONVERSION STOCK PUBLIC BANK SHARES
52.1% 47.9%
FIRST SOURCE BANCORP, INC.
100%
FIRST SAVINGS BANK, SLA
108
<PAGE>
EFFECTS OF THE CONVERSION AND REORGANIZATION
General. Each depositor in the Bank has both a deposit account in the
institution and a pro rata ownership interest in the net worth of the
institution based upon the balance in his account, which interest may only be
realized in the event of a liquidation of the Mutual Holding Company. However,
this ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
Mutual Holding Company without any additional payment beyond the amount of the
deposit. A depositor who reduces or closes his account receives a portion or
all of the balance in the account but nothing for his ownership interest in
the net worth of the Mutual Holding Company, which is lost to the extent that
the balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to realize the
value of their ownership interest, which has realizable value only in the
unlikely event that the Mutual Holding Company is liquidated. In such event,
the depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves after other claims, including claims of
depositors to the amounts of their deposits, are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock is created to represent the ownership of the net
worth of the Company. THE COMMON STOCK OF THE COMPANY IS SEPARATE AND APART
FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of
the capital stock. The stock certificates are transferable and, therefore, the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the Bank.
Continuity. While the Conversion and Reorganization is being accomplished,
the normal business of the Bank of accepting deposits and making loans will
continue without interruption. The Bank will continue to be subject to
regulation by the OTS, the FDIC and the Department. After the Conversion and
Reorganization, the Bank will continue to provide services for depositors and
borrowers under current policies by its present management and staff.
The Directors serving the Bank at the time of Conversion and Reorganization
will serve initially as Directors of the Bank after the Conversion and
Reorganization. The Directors of the Company will consist initially of
individuals currently serving on the Board of Directors of the Mutual Holding
Company. All officers of the Bank at the time of Conversion and Reorganization
will retain their positions immediately after Conversion and Reorganization.
Effect on Public Bank Shares. Under the Plan, upon consummation of the
Conversion and Reorganization, the Public Bank Shares shall be converted into
Common Stock based upon the Exchange Ratio without any further action on the
part of the holder thereof. Upon surrender of the Public Bank Shares, Common
Stock will be issued in exchange for such shares.
Upon consummation of the Conversion and Reorganization, the Public
Stockholders of the Bank, a New Jersey chartered savings association, will
become stockholders of the Company, a Delaware corporation. For a description
of certain changes in the rights of stockholders as a result of the Conversion
and Reorganization, see "Comparison of Stockholders' Rights" below.
Under New Jersey law, Public Stockholders of the Bank will not have
dissenters' rights or appraisal rights in connection with the Conversion and
Reorganization. See "Comparison of Stockholders' Rights--Dissenters' Rights of
Appraisal."
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of Conversion and Reorganization will automatically continue as a
depositor after the Conversion and Reorganization, and each such deposit
account will remain the same with respect to deposit balance, interest rate
and other terms. Each such account will be insured by the FDIC to the same
extent as before the Conversion and Reorganization (i.e., up to $100,000 per
depositor). Depositors will continue to hold their existing certificates,
passbooks and other evidences of their accounts.
109
<PAGE>
Effect on Loans. No loan outstanding from the Bank will be affected by the
Conversion and Reorganization, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to
the Conversion and Reorganization.
Effect on Voting Rights of Members. At present, all depositors and certain
borrowers of the Bank are members of, and have voting rights in, the Mutual
Holding Company as to all matters requiring membership action. Upon Conversion
and Reorganization, the Mutual Holding Company will cease to exist and
therefore, depositors and borrowers will no longer have membership rights in
the Mutual Holding Company. Upon Conversion and Reorganization, all voting
rights in the Bank will be vested in the Company as the sole stockholder of
the Bank. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors and borrowers of the Bank will not
have voting rights in the Company after the Conversion and Reorganization
except to the extent that they become stockholders of the Company.
Tax Effects. The Primary Parties have received an opinion from Patton Boggs,
L.L.P. with regard to federal income taxation and from KPMG Peat Marwick LLP
with respect to New Jersey taxation which provides that the adoption and
implementation of the Plan of Conversion and Agreement and Plan of
Reorganization set forth herein will not be taxable for federal or New Jersey
tax purposes to the Primary Parties or the Bank's Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members, except as discussed
below. See "--Tax Aspects."
Effect on Liquidation Rights. If the Mutual Holding Company were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were any
assets remaining, depositors would be entitled to such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Bank were to liquidate
after Conversion, all claims of creditors (including those of depositors, to
the extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see "--
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
EFFECT ON EXISTING COMPENSATION PLANS
Under the Plan, the Bank's 1992 Stock Option Plans and 1996 Incentive Plan
will become stock benefit plans of the Company and the Bank's 1992 ESOP will
continue as a benefit plan of the Bank and shares of Common Stock will be
issued (or reserved for issuance) pursuant to such benefit plans. See
"Management of the Bank--Benefits."
STOCK PRICING AND EXCHANGE RATIO
The Plan of Conversion requires that the Aggregate Purchase Price of the
Conversion Stock must be based on the appraised pro forma market value of the
Company's Common Stock, as determined on the basis of an independent
valuation. The Primary Parties have retained FinPro to make such valuation.
For its services in making such appraisal, FinPro will receive a fee of
$25,000, plus reasonable expenses. The Primary Parties have agreed to
indemnify FinPro and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where FinPro liability
results from its negligence, willful misconduct or bad faith.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
FinPro also considered the following factors, among others: the present and
projected operating results and financial condition of the Primary Parties and
the economic and demographic conditions in the Mutual Holding Company's and
the Bank's existing marketing area; certain historical, financial and other
information relating to the Mutual Holding Company and the Bank; a comparative
evaluation of the operating and financial statistics of the Bank with those of
other similarly situated publicly-traded savings banks and savings
institutions located in the Mutual Holding Company's and the Bank's primary
110
<PAGE>
market area and northeastern United States; the aggregate size of the offering
of the Conversion Stock; the impact of Conversion and Reorganization on the
Mutual Holding Company's and the Bank's net worth and earnings potential; the
proposed dividend policy of the Company and the Bank; and the trading market
for the Bank Common Stock and securities of comparable institutions and
general conditions in the market for such securities.
On the basis of the foregoing, FinPro has advised the Primary Parties in its
opinion the estimated pro forma market value of the Company's Common Stock,
after giving effect to the Conversion and Reorganization, was $240.0 million
as of December 18, 1997. In accordance with OTS requirements, the Appraisal
was multiplied by an Exchange Ratio which was determined on the basis of the
Mutual Holding Company's ownership interest in the Bank's common stock
(51.6%), increased by $1.1 million to reflect a portion of the previously
waived dividends of $7.2 million. Such adjustment was required by the OTS
despite prior OTS policy which permitted the Mutual Holding Company to waive
dividends without impacting any future exchange ratio in a conversion and
reorganization. After giving effect to the adjustment for waived dividends,
but before giving effect to the payment of cash in lieu of issuing fractional
Exchange Shares and any shares of Conversion Stock purchased by Public
Stockholders in the Offerings or by the ESOP thereafter, the Exchange Ratio
will result in the Public Stockholders holding approximately 47.9% of the
Company, as compared to their current ownership interest in the Bank of
approximately 48.4%. As a result of the OTS change in policy regarding the
treatment of waived dividends, the Exchange Ratio was reduced from 2.9925 to
2.9590 at the midpoint of the Valuation Price Range. The Appraisal was
multiplied by 52.1% to determine the midpoint of the Conversion Stock offered
($125.1 million), and the minimum and maximum of the offering range were set
at 15% below and above the midpoint, respectively, resulting in a range of
$106.4 million to $143.9 million. The Boards of Directors of the Primary
Parties determined that the Conversion Stock would be sold at $10.00 per
share, resulting in a range of 10,637,542 to 14,391,900 shares of Conversion
Stock being offered. Upon consummation of the Conversion and Reorganization,
the Conversion Stock and the Exchange Shares will represent approximately
52.1% and 47.9%, respectively, of the Company's total outstanding shares.
The Boards of Directors of the Primary Parties reviewed FinPro's appraisal
report, including the methodology and the assumptions used by FinPro, and
determined that the Valuation Price Range was reasonable and adequate. The
Boards of Directors of the Primary Parties also established the formula for
determining the Exchange Ratio. Based upon such formula and the Valuation
Price Range, the Exchange Ratio ranged from a minimum of 2.5151 to a maximum
of 3.4028 Exchange Shares for each Public Bank Shares, with a midpoint of
2.9590. Based upon these Exchange Ratios, the Company expects to issue between
9,762,458 and 13,208,100 shares of Exchange Shares to the holders of Public
Bank Shares outstanding immediately prior to the consummation of the
Conversion and Reorganization. The Valuation Price Range and the Exchange
Ratio may be amended with the approval of the OTS, if required, or if
necessitated by subsequent developments in the financial condition of any of
the Primary Parties or market conditions generally. In the event the Appraisal
is updated to below $204.0 million or above $317.4 million (the maximum of the
Valuation Price Range, as adjusted by 15%), such Appraisal will be filed with
the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices and
policies of the OTS, in the event the Company receives orders for Conversion
Stock in excess of $143.9 million (the maximum of the Valuation Price Range)
and up to $165.5 million (the maximum of the Valuation Price Range, as
adjusted by 15%), the Company may be required by the OTS to accept all such
orders. No assurances, however, can be made that the Company will receive
orders for Conversion Stock in excess of the maximum of the Valuation Price
Range or that, if such orders are received, that all such orders will be
accepted because the Company's final valuation and number of shares to be
issued are subject to the receipt of an updated appraisal from FinPro, which
reflects such an increase in the valuation and the approval of such increase
by the OTS. There is no obligation or understanding on the part of management
to take and/or pay for any shares of Conversion Stock in order to complete the
Offerings.
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Price Range, the following: (i) the
total number of shares of Conversion Stock and Exchange Shares; (ii) the
percentage of the total Common Stock represented by the Conversion Stock and
the Exchange
111
<PAGE>
Shares; and (iii) the Exchange Ratio. The table assumes that there is no cash
paid in lieu of issuing fractional Exchange Shares.
<TABLE>
<CAPTION>
TOTAL SHARES
OF COMMON
CONVERSION STOCK EXCHANGE SHARES STOCK TO BE EXCHANGE
TO BE OFFERED(1) TO BE ISSUED(1)(2) OUTSTANDING(1) RATIO (1)
------------------ ------------------ -------------- ---------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Minimum................. 10,637,542 52.1% 9,762,458 47.9% 24,400,000 2.5151
Midpoint................ 12,514,527 52.1 11,485,473 47.9 24,000,000 2.9590
Maximum................. 14,391,900 52.1 13,208,100 47.9 27,600,000 3.4028
15% above maximum....... 16,550,374 52.1 15,189,626 47.9 31,740,000 3.9133
</TABLE>
- --------
(1) Assumes that outstanding options to purchase 142,541 shares of Bank
Common Stock at October 31, 1997 are not exercised prior to consummation
of the Conversion and Reorganization.
(2) Based upon 3,881,539 Public Bank Shares outstanding as of October 31,
1997. Does not reflect unexercised options.
THE APPRAISAL IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES.
FINPRO DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE BANK AND THE MUTUAL HOLDING COMPANY, NOR DID
FINPRO VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK AND THE
MUTUAL HOLDING COMPANY. THE VALUATION CONSIDERS THE BANK AND THE MUTUAL
HOLDING COMPANY AS GOING CONCERNS AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK AND THE MUTUAL HOLDING
COMPANY. MOREOVER, BECAUSE THE APPRAISAL IS NECESSARILY BASED UPON ESTIMATES
AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE
FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
CONVERSION STOCK OR RECEIVING EXCHANGE STOCK IN THE CONVERSION AND
REORGANIZATION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR
ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO
FORMA MARKET VALUE THEREOF. SEE "MARKET FOR THE COMMON STOCK."
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the number
of shares of Conversion Stock to be issued in the Conversion may be increased
to 16,550,374 shares due to regulatory considerations or changes in market or
general financial and economic conditions, without the resolicitation of
subscribers. See "--Limitations on Conversion Stock Purchases" as to the
method of distribution and allocation of additional shares that may be issued
in the event of an increase in the Estimated Price Range to fill unfilled
orders in the Subscription and Community Offerings.
No sale of shares of Conversion Stock may be consummated unless, prior to
such consummation, FinPro confirms to the Primary Parties and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, would cause FinPro to conclude that
the value of the Conversion Stock at the price so determined is incompatible
with its estimate of the pro forma market value of the Common Stock at the
conclusion of the Subscription and Community Offerings.
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the
OTS, may terminate the Plan and return all funds promptly with interest at the
Bank's passbook rate of interest on payments made by check, bank draft or
money order, extend or hold a new Subscription and Community Offering,
establish a new Estimated Price Range, commence a resolicitation of
subscribers or take such other actions as permitted by the OTS in order to
complete the Conversion. In the event that a resolicitation is commenced,
unless an affirmative response is received within a reasonable period of time,
all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the
OTS for periods of up to 90 days not to extend beyond April 2, 2000.
112
<PAGE>
If all shares of Conversion Stock are not sold through the Subscription and
Community Offerings, then the Bank and the Company expect to offer the
remaining shares in a Syndicated Community Offering which would occur as soon
as practicable following the close of the Subscription and Community Offerings
but may commence during the Subscription and Community Offerings subject to
prior rights of subscribers. All shares of Conversion Stock will be sold at
the same price per share in the Syndicated Community Offering as in the
Subscription and Community Offerings. See "--Syndicated Community Offering."
No sale of shares of Conversion Stock may be consummated unless, prior to
such consummation, FinPro confirms to the Bank, the Company and the OTS that,
to the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
FinPro to conclude that the aggregate value of the Conversion Stock at the
Purchase Price is incompatible with its estimate of the pro forma market value
of the Common Stock of the Company at the time of the Syndicated Community
Offering. Any change which would result in an aggregate purchase price which
is below or more than 15% above the Estimated Price Range would be subject to
OTS approval. If such confirmation is not received, the Primary Parties may
extend the Offerings, extend, reopen or commence new Subscription and
Community Offerings or Syndicated Community Offering, establish a new
Estimated Price Range and commence a resolicitation of all subscribers with
the approval of the OTS or take such other actions as permitted by the OTS in
order to complete the Conversion and Reorganization, or terminate the Plan and
cancel the Subscription and Community Offerings and/or the Syndicated
Community Offering. In the event market or financial conditions change so as
to cause the aggregate purchase price of the shares to be below the minimum of
the Estimated Price Range or more than 15% above the maximum of such range,
and the Company and the Bank determine to continue the Conversion and
Reorganization, subscribers will be resolicited (i.e., be permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by
the OTS. A resolicitation, if any, following the conclusion of the
Subscription and Community Offerings would not exceed 45 days, or if following
the Syndicated Community Offering, 90 days, unless further extended by the OTS
for periods up to 90 days not to extend beyond April 2, 2000. If such
resolicitation is not effected, the Bank will return all funds promptly with
interest at the Bank's passbook rate of interest on payments made by check,
bank draft or money order.
Copies of the appraisal report of FinPro including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan by the Boards of Directors of the Primary
Parties will be final, subject to the authority of the OTS, including but not
limited to interpretations relating to residence requirements applicable to
subscribers and purchase limitations. The Plan provides that, if deemed
necessary or desirable by the Boards of Directors of the Primary Parties, the
Plan may be substantively amended prior to the solicitation of proxies from
members entitled to vote on the Plan by a two-thirds vote of the Boards of
Directors; amendment of the Plan thereafter requires the approval of the OTS.
The Plan will terminate if the sale of all shares of stock being offered
pursuant to the Plan is not completed prior to 24 months after the date of the
Special Meeting. The Plan may be terminated by a two-thirds vote of the Boards
of Directors of the Primary Parties at any time prior to the Special Meeting,
and thereafter by such a vote with the approval of the OTS. The Company has
undertaken to file a post-effective amendment with the Securities and Exchange
Commission to reflect any material changes in the plan of distribution of the
Common Stock or any information contained within this Prospectus.
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Community Offerings, the total number of shares of
Conversion Stock to be issued in the Conversion and
113
<PAGE>
Reorganization may be increased or decreased without a resolicitation of
subscribers, provided that the product of the total number of shares times the
price per share is not below the minimum of the Estimated Price Range or more
than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and the FinPro estimate of the pro forma
market value of the Conversion Stock ranging from a minimum of $106.4 million
to a maximum, as increased by 15%, of $165.5 million, the number of shares of
Conversion Stock expected to be issued is between a minimum of 10,637,542
shares and a maximum, as adjusted by 15%, of 16,550,374 shares. The actual
number of shares issued between this range will depend on a number of factors
and shall be determined by the Primary Parties subject to OTS approval, if
necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range and, if the Plan is not terminated by the Primary Parties after
consultation with the OTS, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify
or rescind their subscriptions). Any change in the Estimated Price Range must
be approved by the OTS. If the number of shares issued in the Conversion and
Reorganization is increased due to an increase of up to 15% in the Estimated
Price Range to reflect changes in market or financial condition, persons who
subscribed for the maximum number of shares will not be given the opportunity
to subscribe for an adjusted maximum number of shares, except for the ESOP
which will be able to subscribe for such adjusted amount. See "--Limitations
on Conversion Stock Purchases." Any increase or decrease in the number of
shares of Common Stock will result in a corresponding change in the number of
Exchange Shares, so that upon consummation of the Conversion and
Reorganization, the Conversion Stock and the Exchange Shares will represent
approximately 51.6% and 48.4%, respectively, of the Company's total
outstanding shares of Common Stock.
An increase in the number of shares of Conversion Stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares of Conversion Stock would increase both a subscriber's
ownership interest and the Company's pro forma net earnings and stockholders'
equity on a per share basis while decreasing pro forma net earnings and
stockholder's equity on an aggregate basis. For a presentation of the effects
of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Conversion Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
holders of savings accounts with a balance of $50 or more as of December 31,
1995 ("Eligible Account Holders"); (2) the ESOP; (3) holders of savings
accounts with a balance of $50 or more as of December 31, 1997 ("Supplemental
Eligible Account Holders"); and (4) members of the Bank, consisting of
depositors of the Bank as of February 4, 1998, the Members' Voting Record
Date, and borrowers with loans outstanding as of July 10, 1992, which continue
to be outstanding as of the Members' Voting Record Date other than Eligible
Account Holders and Supplemental Eligible Account Holders ("Other Members").
All subscriptions received will be subject to the availability of Conversion
Stock after satisfaction of all subscriptions of all persons having prior
rights in the Subscription Offering and to the maximum and minimum purchase
limitations set forth in the Plan of Conversion and as described below under
"--Limitations on Conversion Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $750,000 of Conversion Stock offered, one-tenth of one percent
(.10%) of the total offering of shares of Conversion Stock or fifteen times
the product (rounded down to the next whole number) obtained by multiplying
the total number of shares of Conversion Stock to be issued by a fraction of
which the numerator is the amount of the Eligible Account
114
<PAGE>
Holder's Qualifying Deposit (defined by the Plan as any savings account in the
Bank with a balance of $50 or more as of December 31, 1995) and the
denominator is the total amount of Qualifying Deposits of all Eligible Account
Holders, in each case on the Eligibility Record Date, subject to the overall
purchase limitation and exclusive of an increase in the shares issued pursuant
to an increase in the Estimated Price Range of up to 15%. At December 31,
1995, the Bank's total deposits were $806.3 million. See "--Limitations on
Conversion Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make his
total allocation equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be allocated among the
remaining subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective Qualifying
Deposits bear to the total amount of Qualifying Deposits of all remaining
Eligible Account Holders whose subscriptions remain unfilled, exclusive of any
increase in the shares issued pursuant to an increase in the Estimated Price
Range of up to 15%.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also Directors or Officers of the Bank or
their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in
the year preceding December 31, 1994.
Priority 2: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of Conversion Stock issued in the Conversion, including
any increase in the number of shares of Conversion Stock to be issued in the
Conversion after the date hereof as a result of an increase of up to 15% in
the maximum of the Estimated Price Range. The ESOP intends to purchase 8% of
the shares to be issued in the Conversion or 851,003 shares and 1,151,352
shares, based on the issuance of 10,637,542 shares and 14,391,900 shares,
respectively. Subscriptions by the ESOP will not be aggregated with shares of
Conversion Stock purchased directly by or which are otherwise attributable to
any other participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or
associates thereof. See "Management of the Bank--Benefit Plans--Employee Stock
Ownership Plan and Trust."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $750,000 of Conversion Stock
offered, one-tenth of one percent (.10%) of the total offering of shares of
Conversion Stock or fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Conversion Stock
to be issued by a fraction of which the numerator is the amount of the
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator
is the total amount of Qualifying Deposits of all Supplemental Eligible
Account Holders, in each case on the Supplemental Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to
15%. At December 31, 1997, the Bank's total deposits were $816.3 million. See
"--Limitations on Conversion Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares in excess of the total number of
shares eligible for subscription, the shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make his total allocation equal
to the lesser of 100 shares or the number of shares subscribed for.
Thereafter, unallocated shares will be allocated among the remaining
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective Qualifying
115
<PAGE>
Deposits bear to the total amount of Qualifying Deposits of all remaining
Supplemental Eligible Account Holders whose subscriptions remain unfilled,
exclusive of any increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has
an ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable
subscription rights to subscribe for Conversion Stock in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $750,000 of Conversion Stock offered, or one-
tenth of one percent (.10%) of the total offering of shares of Conversion
Stock, subject to the overall purchase limitation and exclusive of an increase
in shares issued pursuant to an increase in the Estimated Price Range of up to
15%. See "--Limitations on Conversion Stock Purchases."
In the event that Other Members exercise subscription rights for a number of
shares in excess of the total number of shares eligible for subscription, the
shares will be allocated so as to permit each subscribing Other Member, to the
extent possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be allocated among the
remaining subscribing Other Members whose subscriptions remain unfilled on a
pro rata basis in the same proportion as a subscribing Other Member's total
votes on the Voting Record Date for the Special Meeting bears to the total
votes of all subscribing Other Members on such date.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at 12:00 noon, Eastern time, on March 30, 1998, unless extended
for up to 45 days by the Primary Parties or such additional periods with the
approval of the OTS. Subscription rights which have not been exercised prior
to the Expiration Date will become void.
The Primary Parties will not execute orders until all shares of Conversion
Stock have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the
Bank pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be canceled.
If an extension beyond the 45 day period following the Expiration Date is
granted, the Primary Parties will notify subscribers of the extension of time
and of any rights of subscribers to modify or rescind their subscriptions and
have their funds returned promptly with interest, and of the time period
within which subscribers must affirmatively notify the Primary Parties of
their intention to confirm, modify, or rescind their subscription. If an
affirmative response to any resolicitation is not received by the Company from
a subscriber, such order will be rescinded and all subscription funds will be
promptly returned with interest at the Bank's passbook rate. Such extensions
may not go beyond April 2, 2000.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the ESOP, the
Supplemental Eligible Account Holders and Other Members, the Primary Parties
have determined to offer shares pursuant to the Plan to certain members of the
general public, with a preference given to holders of Public Bank Shares,
subject to the right of the Company to accept or reject any such orders, in
whole or in part, in their sole discretion. Such persons, together with
associates of and persons acting in concert with such persons, may purchase up
to $750,000 of Conversion Stock offered subject to the maximum overall
purchase limitation and exclusive of shares issued pursuant to an increase in
the Estimated Price Range
116
<PAGE>
by up to 15%. See "--Limitations on Conversion Stock Purchases." This amount
may be increased to up to a maximum of 5% of the Conversion Stock offered or
decreased to less than $750,000 of Conversion Stock at the sole discretion of
the Primary Parties. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF CONVERSION
STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE
PRIMARY PARTIES, IN THEIR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS
IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS
PRACTICABLE FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of the Public Stockholders after completion of the
Subscription and Community Offerings, such stock will be allocated first to
each holder of Public Bank Shares whose order is accepted by the Bank, in an
amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Public Stockholder, if possible. Thereafter, unallocated
shares will be allocated among the Public Stockholders whose order remains
unsatisfied on a 100 shares per order basis until all such orders have been
filled or the remaining shares have been allocated. To the extent that there
are shares remaining after all subscriptions by Public Stockholders have been
filled, shares will be allocated to other subscribers in the Community
Offering, applying the same allocation formula described above.
Persons in Nonqualified States or Foreign Countries. The Primary Parties
will make reasonable efforts to comply with the securities laws of all states
in the United States in which persons entitled to subscribe for stock pursuant
to the Plan reside. However, the Plan provides that the Primary Parties are
not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which both of the following apply: (i) a small number of persons
otherwise eligible to subscribe for shares of Conversion Stock reside in such
state; and (ii) the Primary Parties determines that compliance with the
securities laws of such state would be impracticable for reasons of cost or
otherwise, including but not limited to a request that the Primary Parties or
their officers, directors or trustees register as a broker, dealer, salesman
or selling agent, under the securities laws of such state, or a request to
register or otherwise qualify the subscription rights or Conversion Stock for
sale or submit any filing with respect thereto in such state. Where the number
of persons eligible to subscribe for shares in one state is small, the Primary
Parties will base their decision as to whether or not to offer the Conversion
Stock in such state on a number of factors, including the size of accounts
held by account holders in the state, the cost of registering or qualifying
the shares or the need to register the Company, its officers, directors or
employees as brokers, dealers or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank has engaged Sandler O'Neill as a consultant and financial advisor
in connection with the offering of the Conversion Stock, and Sandler O'Neill
has agreed to use its best efforts to assist the Company with the solicitation
of subscriptions and purchase orders for shares of Conversion Stock in the
Offerings. Based upon negotiations between the Primary Parties concerning fee
structure, Sandler O'Neill will receive a fee equal to 1.15% of the aggregate
Purchase Price of all shares sold in the Subscription Offering and Community
Offering, excluding shares purchased by directors, officers, employees and any
immediate family member thereof and the ESOP for which Sandler O'Neill will
not receive a fee. In the event that a selected dealers agreement is entered
into in connection with a Syndicated Community Offering, the Bank will pay a
fee (to be negotiated at such time under such agreement) to such selected
dealers, any sponsoring dealers fees, and a management fee to Sandler O'Neill
of 1.15% for shares sold by a National Association of Securities Dealers, Inc.
("NASD") member firm pursuant to a selected dealers agreement; provided,
however, that any fees payable to Sandler O'Neill for Conversion Stock sold by
them pursuant to such a selected dealers agreement shall not exceed 1.15% of
the Purchase Price and provided, further, however, that the aggregate fees
payable to Sandler O'Neill and the selected dealers will not exceed 7.0% of
the aggregate purchase price of the Conversion Stock sold by selected dealers.
Fees to Sandler O'Neill and to any other broker-dealer may be deemed to be
underwriting fees, and Sandler O'Neill and such broker-dealers may be deemed
to be underwriters. The Primary Parties have agreed to indemnify Sandler
O'Neill for reasonable costs and expenses in connection with claims or
liabilities under applicable federal or state law, or otherwise, related to or
arising out of the Conversion except to the extent that
117
<PAGE>
such claim or liability arose out of or was based upon any untrue statement of
material fact, omission of a material fact related to or made in reliance upon
and in conformity with written information furnished to the Primary Parties by
Sandler O'Neill or such claim or liability was primarily attributable to the
gross negligence, willful misconduct or bad faith of Sandler O'Neill. Such
claims and liabilities could include claims under the federal and state
securities laws. Sandler O'Neill has received advances towards its fees
totaling $25,000. Total marketing fees to Sandler O'Neill are expected to be
$1.1 million and $1.5 million at the minimum and the maximum of the Estimated
Price Range, respectively. See "Pro Forma Data" for the assumptions used to
arrive at these estimates. In addition to the foregoing, the Bank has engaged
Ryan, Beck & Co., which it has retained in the past to provide financial and
strategic advice on general corporate matters, to provide financial advisory
services in connection with the Conversion and Reorganization and other
strategic matters for a fee of $150,000.
Sandler O'Neill also will perform proxy solicitation services, conversion
agent services and records management services for the Primary Parties in the
Conversion and is expected to receive a fee for these services of
approximately $10,000. Sandler O'Neill has received advances toward its fees
for these services totaling $5,000.
Directors and executive officers of the Primary Parties may participate in
the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering
in administrative capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers
to purchase Common Stock or provide advice regarding the purchase of Common
Stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and sales
of Common Stock will be conducted within the requirements of Rule 3a4-1, so as
to permit officers, directors and employees to participate in the sale of
Common Stock. No officer, director or employee of Primary Parties will be
compensated in connection with his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions
in the Conversion Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours before
the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with a prospectus.
To purchase shares in the Subscription and Community Offerings, an executed
stock order form and certification form with the required payment for each
share subscribed for, or with appropriate authorization for withdrawal from
the Bank's deposit account (which may be given by completing the appropriate
blanks in the stock order form), must be received by the Bank at any of its
offices by 12:00 noon, Eastern time, on the Expiration Date. Stock order forms
which are not received by such time or are executed defectively or are
received without full payment (or appropriate withdrawal instructions) are not
required to be accepted. In addition, the Primary Parties are not obligated to
accept orders submitted on photocopied or facsimilied stock order forms and
will not accept stock order forms unaccompanied by an executed certification
form. Notwithstanding the foregoing, the Company shall have the right, in its
sole discretion, to permit institutional investors to submit irrevocable
orders together with a legally binding commitment for payment and to
thereafter pay for the shares of Conversion Stock for which they subscribe in
the Community Offering at any time prior to 48 hours before the completion of
the Conversion. The Primary Parties have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent
that they will do so. Once received, an executed stock order form may not be
modified, amended or rescinded without the consent of the Primary Parties
unless the Conversion has not been completed within 45 days after the end of
the Subscription and Community Offerings, unless such period has been
extended.
118
<PAGE>
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December
31, 1995) and/or the Supplemental Eligibility Record Date (December 31, 1997)
and/or the Members Voting Record Date (February 4, 1998) must list all
accounts on the stock order form giving all names in each account and the
account number.
Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Conversion and Reorganization. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rates
until completion or termination of the Conversion and Reorganization, but a
hold will be placed on such funds, thereby making them unavailable to the
depositor until completion or termination of the Conversion and
Reorganization.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date
of the Conversion and Reorganization. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum
balance requirement at the time that the funds actually are transferred under
the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the ESOP
will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Conversion Stock subscribed
for at the Purchase Price upon consummation of the Subscription and Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided,
that there is in force from the time of its subscription until such time, a
loan commitment from an unrelated financial institution or the Company to lend
to the ESOP the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") may use the
assets of such IRAs to purchase shares of Conversion Stock in the Subscription
and Community Offerings, provided that such IRAs are not maintained at the
Bank. Persons with self-directed IRAs maintained at the Bank must have their
accounts transferred to an unaffiliated institution or broker to purchase
shares of Common Stock in the Subscription and Community Offerings. In
addition, the provisions of ERISA and IRS regulations require that officers,
directors and 10% shareholders who use self-directed IRA funds to purchase
shares of Conversion Stock in the Subscription and Community Offerings, make
such purchases for the exclusive benefit of the IRAs.
Certificates representing shares of Conversion Stock purchased will be
mailed to purchasers at the address specified in properly completed stock
order forms, as soon as practicable following consummation of the sale of all
shares of Conversion Stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion and Reorganization, the OTS
conversion regulations prohibit any person with subscription rights, including
the Eligible Account Holders, the ESOP, the Supplemental Eligible Account
Holders and Other Members of the Bank, from transferring or entering into any
agreement or understanding to transfer the legal or beneficial ownership of
the subscription rights issued under the Plan or the shares of Conversion
Stock to be issued upon their exercise. Such rights may be exercised only by
the person to whom they are granted and only for his account. Each person
exercising such subscription rights will be required to certify that he is
purchasing shares solely for his own account and that he has no agreement or
understanding
119
<PAGE>
regarding the sale or transfer of such shares. The regulations also prohibit
any person from offering or making an announcement of an offer or intent to
make an offer to purchase such subscription rights or shares of Conversion
Stock prior to the completion of the Conversion and Reorganization.
THE PRIMARY PARTIES WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES
(INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF
SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion and Reorganization, the Plan provides
that, if feasible, all shares of Conversion Stock not purchased in the
Subscription and Community Offerings, if any, will be offered for sale to the
general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers to be formed and managed by Sandler O'Neill acting
as agent of the Company to assist the Company and the Bank in the sale of the
Conversion Stock. The Company and the Bank have the right to reject orders in
whole or in part in their sole discretion in the Syndicated Community
Offering. Neither Sandler O'Neill nor any registered broker-dealer shall have
any obligation to take or purchase any shares of the Conversion Stock in the
Syndicated Community Offering, however, Sandler O'Neill has agreed to use its
best efforts in the sale of shares in the Syndicated Community Offering.
The price at which Conversion Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing and
Exchange Ratio." Subject to overall purchase limitations, no person, together
with any associate or group of persons acting in concert, will be permitted to
subscribe in the Syndicated Community Offering for more than $750,000 of the
Conversion Stock offered; provided, however, that shares of Conversion Stock
purchased in the Community Offering by any persons, together with associates
of or persons acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering and be subject to the overall
maximum purchase limitation.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order
form and funds to the Bank for deposit in a segregated account on or before
noon of the business day following receipt of the order form or execution of
the order form by the selected dealer. Alternatively, selected dealers may
solicit indications of interest from their customers to place orders for
shares. Such selected dealers shall subsequently contact their customers who
indicated an interest and seek their confirmation as to their intent to
purchase. Those indicating an intent to purchase shall execute order forms and
forward them to their selected dealer or authorize the selected dealer to
execute such forms. The selected dealer will acknowledge receipt of the order
to its customer in writing on the following business day and will debit such
customer's account on the third business day after the customer has confirmed
his intent to purchase (the "debit date") and on or before noon of the next
business day following the debit date will send order forms and funds to the
Bank for deposit in a segregated account. Although purchasers' funds are not
required to be in their accounts with selected dealers until the debit date in
the event that such alternative procedure is employed once a confirmation of
an intent to purchase has been received by the selected dealer, the purchaser
has no right to rescind his order.
Certificates representing shares of Conversion Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the
120
<PAGE>
sale of the Conversion Stock. Any certificates returned as undeliverable will
be disposed of in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company
with the approval of the OTS. Such extensions may not be beyond April 2, 2000.
See "--Stock Pricing and Exchange Ratio" above for a discussion of rights of
subscribers, if any, in the event an extension is granted.
LIMITATIONS ON CONVERSION STOCK PURCHASES
The Plan includes the limitations set forth below on the number of shares of
Conversion Stock which may be purchased during the Conversion. The purchase
limits set forth in paragraphs (2), (4), (5), (6) and (7) are subject to the
overall maximum purchase limitations in (8) below which includes Exchange
Shares received by purchasers.
(1) No person may subscribe for less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $750,000 of Conversion Stock
offered, one-tenth of one percent (.10%) of the total offering of shares of
Conversion Stock or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of
Conversion Stock to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all Eligible
Account Holders in each case on the Eligibility Record Date subject to the
overall maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(3) The ESOP may purchase in the aggregate up to 10% of the shares of
Conversion Stock issued in the Conversion and Reorganization, including
shares issued in the event of an increase in the Estimated Price Range of
15%, and intends to purchase 8% of the shares of Conversion Stock issued in
the Conversion and Reorganization, including any increase in the number of
shares to be issued after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently $750,000 of
Conversion Stock offered, one-tenth of one percent (.10%) of the total
offering of shares of Conversion Stock or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the total
number of shares of Conversion Stock to be issued by a fraction of which
the numerator is the amount of the Qualifying Deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders in such
case on the Supplemental Eligibility Record Date subject to the overall
maximum purchase limitation in (8) below and exclusive of an increase in
the total number of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $750,000 of Conversion Stock offered, or one-
tenth of one percent (.10%) of the total offering of shares of Conversion
Stock subject to the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Conversion Stock in the Community
Offering, together with associates of and groups of persons acting in
concert with such persons, may purchase in the Community Offering up to
$750,000 of Conversion Stock offered in the Conversion and Reorganization
subject to the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
121
<PAGE>
(7) Persons purchasing shares of Conversion Stock in the Syndicated
Community Offering, together with associates of and persons acting in
concert with such persons, may purchase in the Syndicated Offering up to
$750,000 of shares of Conversion Stock offered in the Conversion and
Reorganization subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15% and, provided
further that shares of Conversion Stock purchased in the Community Offering
by any persons, together with associates of and persons acting in concert
with such persons, will be aggregated with purchases in the Syndicated
Community Offering in applying the $750,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may purchase stock in the Community Offering and Syndicated
Community Offering subject to the purchase limitations described in (6) and
(7) above, provided that, except for the ESOP, the overall maximum number
of shares of Conversion Stock subscribed for or purchased in all categories
of the Conversion and Reorganization by any person, together with
associates of and groups of persons acting in concert with such persons,
when combined with any Exchange Shares received by such persons, shall not
exceed 2.1% of the shares of Conversion Stock offered in the Conversion and
Reorganization and exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to 15%; and
(9) No more than 25.0% of the total number of shares of Conversion Stock
offered for sale in the Conversion and Reorganization may be purchased by
directors and officers of the Bank and the Mutual Holding Company and their
associates in the aggregate, when combined with any Exchange Shares
received and excluding purchases by the ESOP.
Except as may otherwise be required by the OTS, the Public Stockholders will
not have to sell any Company Common Stock or be limited in receiving Exchange
Shares even if their ownership of Bank Common Stock when converted into
Exchange Stock would exceed the above purchase limitations. However, any
Public Stockholder receiving Exchange Shares in excess of the purchase
limitations will be precluded from purchasing new shares of Company Common
Stock in the Offerings. Subject to any required regulatory approval and the
requirements of applicable laws and regulations, but without further approval
of the members of the Mutual Holding Company or the Public Stockholders of the
Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5%
at the sole discretion of the Primary Parties. If such amount is increased,
subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Bank may be, given the opportunity
to increase their subscriptions up to the then applicable limit. In addition,
the Boards of Directors of the Primary Parties may, in their sole discretion,
increase the maximum purchase limitation referred to above up to 9.99%,
provided that orders for shares exceeding 5% of the shares being offered in
the Subscription and Community Offerings shall not exceed, in the aggregate,
10% of the shares being offered in the Subscription and Community Offerings.
Requests to purchase additional shares of Conversion Stock under this
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein. In any event, any Exchange Shares received by an
individual will be aggregated with shares subscribed for by such person for
purposes of applying the maximum purchase limitation.
The overall maximum purchase limitation may not be reduced to less than 1%
but the individual amount permitted to be subscribed for may be further
reduced by the Primary Parties, subject to paragraphs (2), (4), and (5) above
without the further approval of members or Public Stockholders or
resolicitation of subscribers, but subject to any other approvals as may be
required by the OTS. An individual Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member may not purchase individually in the
Subscription Offering the overall maximum purchase limit of 2.1% of the shares
of Conversion Stock offered, but may make such purchase, together with
associates of and persons acting in concert with such person, by also
purchasing in other available categories of the Conversion and Reorganization,
subject to availability of shares, the overall maximum purchase limit for
purchases in the Conversion and Reorganization and the amount of Exchange
Shares received by such individual.
In the event of an increase in the total number of shares offered in the
Conversion and Reorganization due to an increase in the Estimated Price Range
of up to 15% (the "Adjusted Maximum"), the additional shares will
122
<PAGE>
be allocated in the following order or priority in accordance with the Plan:
(i) to fill the ESOP's subscription of 8% of the Adjusted Maximum number of
shares; (ii) in the event that there is an oversubscription by Eligible
Account Holders, to fill unsatisfied subscriptions of Eligible Account
Holders, exclusive of the Adjusted Maximum; (iii) in the event that there is
an oversubscription by Supplemental Eligible Account Holders, to fill
unsatisfied subscriptions of Supplemental Eligible Account Holders, exclusive
of the Adjusted Maximum; (iv) in the event that there is an oversubscription
by Other Members, to fill unsatisfied subscriptions of Other Members exclusive
of the Adjusted Maximum; and (v) to fill unsatisfied subscriptions in the
Community Offering to the extent possible, exclusive of the Adjusted Maximum
and with a preference to Public Stockholders.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Primary Parties or a majority-owned subsidiary of the Bank) of
which such person is an officer, partner or 10% stockholder; (ii) any trust or
other estate in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity; provided, however,
such term shall not include any employee stock benefit plan of the Bank in
which such person has a substantial beneficial interest or serves as a trustee
or in a similar fiduciary capacity; and (iii) any relative or spouse of such
person, or any relative of such spouse, who either has the same home as such
person or who is a director or officer of the Bank. Directors are not treated
as associates of each other solely because of their Board membership. For a
further discussion of limitations on purchases of a converting institution's
stock at the time of Conversion and subsequent to Conversion, see "Beneficial
Ownership of Capital Stock--Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion and Reorganization" and "Restrictions on Acquisition of the Company
and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor would receive his pro rata
share of any assets of the Mutual Holding Company remaining after payment of
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account was to the total value of all deposit accounts in the Bank at the time
of liquidation. After the Conversion and Reorganization, each depositor, in
the event of a complete liquidation, would have a claim as a creditor of the
same general priority as the claims of all other general creditors of the
Bank. However, except as described below, his claim would be solely in the
amount of the balance in his deposit account plus accrued interest. He would
not have an interest in the value or assets of the Bank or the Company above
that amount.
The Plan provides for the establishment, upon the completion of the
Conversion and Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
in an amount equal to the greater of (1) the Bank's retained earnings at
December 31, 1991, the date of the latest statement of financial condition
contained in the final offering circular utilized in the 1992 MHC
Reorganization or (2) 51.6% of the Bank's shareholders' equity as of the date
of its latest balance sheet contained in the final Prospectus used in
connection with the Conversion and Reorganization. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he were to continue to
maintain his deposit account at the Bank, would be entitled, on a complete
liquidation of the Bank after the Conversion and Reorganization, to an
interest in the liquidation account prior to any payment to the stockholders
of the Bank. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account, including regular savings accounts, transaction accounts such
as NOW accounts, money market deposit accounts, and certificates of deposit,
with a balance of $50 or more held in the Bank on December 31, 1995 and
September 30, 1997, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the
total liquidation account based on the proportion that the balance of his
Qualifying Deposits on the Eligibility Record Date or Supplemental Eligibility
Record Date, respectively, bore to the total amount of all Qualifying Deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders in
the Bank. For Qualifying Deposits in existence at both dates separate
subaccounts shall be determined on the basis of the Qualifying Deposits in
such deposit accounts on such respective record dates.
123
<PAGE>
If, however, on any annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, the amount of the Qualifying
Deposit of an Eligible Account Holder or Supplemental Eligible Account Holder
is less than the amount of the Qualifying Deposit of such Eligible Account
Holder or Supplemental Eligible Account Holder as of the Eligibility Record
Date or Supplemental Eligibility Record Date, respectively, or less than the
amount of the Qualifying Deposits as of the previous annual closing date, then
the interest in the liquidation account relating to such Qualifying Deposit
would be reduced from time to time by the proportion of any such reduction,
and such interest will cease to exist if such Qualifying Deposit accounts are
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related Qualifying Deposit.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion and Reorganization is expressly conditioned
upon the receipt by the Primary Parties of either a favorable ruling from the
IRS or an opinion with respect to federal and New Jersey income taxation to
the effect that the Conversion and Reorganization will not be a taxable
transaction to the Mutual Holding Company, the Company, the Bank, Eligible
Account Holders, or Supplemental Eligible Account Holders except as noted
below.
No private ruling will be received from the IRS with respect to the proposed
Conversion and Reorganization. Instead, the Bank has received an opinion of
Patton Boggs, L.L.P., to the effect that for federal income tax purposes,
among other matters: (1) the conversion of the Mutual Holding Company from
mutual form to a federal interim stock savings institution and its
simultaneous merger with and into the Bank, with the Bank being the surviving
institution, will qualify as a reorganization within the meaning of Section
368(a)(1)(A) of the Code, (2) no gain or loss will be recognized by the Bank
upon the receipt of the assets of the Mutual Holding Company in such merger,
(3) the merger of First Interim with and into the Bank, with the Bank being
the surviving institution, will qualify as a reorganization within the meaning
of Section 368(a)(1)(A) of the Code, (4) no gain or loss will be recognized by
First Interim upon the transfer of its assets to the Bank, (5) no gain or loss
will be recognized by the Bank upon the receipt of the assets of First
Interim, (6) no gain or loss will be recognized by the Company upon the
receipt of Bank Common Stock solely in exchange for Common Stock, (7) no gain
or loss will be recognized by the Public Stockholders upon the receipt of
Common Stock solely in exchange for their Public Bank Shares, (8) the basis of
the Common Stock to be received by the Public Stockholders will be the same as
the basis of the Public Bank Shares surrendered in exchange therefore, before
giving effect to any payment of cash in lieu of fractional shares, (9) the
holding period of the Common Stock to be received by the Public Stockholders
will include the holding period of the Public Bank Shares, provided that the
Public Bank Shares were held as a capital asset on the date of the exchange,
(10) no gain or loss will be recognized by the Company upon the sale of shares
of Conversion Stock in the Offering, (11) the Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members may recognize gain, if
any, upon the issuance to them of withdrawable savings accounts in the Bank
following the Conversion and Reorganization, interests in the liquidation
account and nontransferable subscription rights to purchase Conversion Stock,
but only to the extent of the value, if any, of the interest in the
Liquidation Account and the subscription rights, and (12) the tax basis to the
holders of Conversion Stock purchased in the Offerings will be the amount paid
therefore, and the holding period for the shares of Conversion Stock will
begin on the date of consummation of the Offerings if purchased through the
exercise of subscription rights and on the day after the date of purchase if
purchased in the Community Offering or Syndicated Community Offering. KPMG
Peat Marwick LLP has opined that the Conversion and Reorganization will not be
a taxable transaction to the Company, the Bank, Eligible Account Holders or
Supplemental Eligible Account Holders for New Jersey income and/or franchise
tax purposes. Certain portions of both the federal and the state and local tax
opinions are based upon the assumption that the subscription rights issued in
connection with the Conversion and Reorganization will have no value.
Unlike private rulings, an opinion of counsel is not binding on the IRS and
the IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
124
<PAGE>
In the opinion of FinPro, the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without
cost, are nontransferable and of short duration, and afford the recipients the
right only to purchase the Conversion Stock at a price equal to its estimated
fair market value, which will be the same price as the Purchase Price for the
unsubscribed shares of Conversion Stock. Such valuation is not binding on the
IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could be taxable to those Eligible Account
Holders or Supplemental Eligible Account Holders who receive and/or exercise
the subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor
as to the tax consequences in the event that such subscription rights are
deemed to have an ascertainable value.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Conversion Stock purchased in connection with the Conversion
and Reorganization by a director or an executive officer of the Primary
Parties will be subject to a restriction that the shares not be sold for a
period of one year following the Conversion and Reorganization, except in the
event of the death of such director or executive officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer
within such time period of any certificate or record ownership of such shares
other than as provided above is a violation of the restriction. Any shares of
Common Stock issued at a later date as a stock dividend, stock split, or
otherwise, with respect to such restricted stock will be subject to the same
restrictions. The directors and executive officers of the Company and the Bank
will also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of Conversion Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Primary Parties after adoption of the Plan of Conversion) and
their associates during the three-year period following Conversion and
Reorganization may be made only through a broker or dealer registered with the
SEC, except with the prior written approval of the OTS. This restriction does
not apply, however, to negotiated transactions involving more than 1.0% of the
Company's outstanding Common Stock or to the purchase of stock pursuant to any
Stock-Based Incentive Plan to be established after the Conversion and
Reorganization.
Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, beginning one year following completion of the Conversion and
Reorganization the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of
the OTS no later than ten days prior to the commencement of a repurchase
program written notice containing a full description of the program to be
undertaken and such program is not disapproved by the Regional Director. In
addition, under current OTS policies, repurchases may be allowed in the first
year following Conversion and in amounts greater than 5% in the second and
third years following the Conversion, provided there are valid and compelling
business reasons for such repurchases and the OTS does not object to such
repurchases.
125
<PAGE>
COMPARISON OF STOCKHOLDERS' RIGHTS
GENERAL
As a result of the Conversion and Reorganization, holders of the Bank Common
Stock will become stockholders of the Company. There are certain differences
in stockholder rights arising from distinctions between the Bank's certificate
of incorporation and bylaws and the Company's Certificate of Incorporation and
Bylaws and from distinctions between laws with respect to New Jersey chartered
savings associations and Delaware law.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes all
material differences and certain important similarities. The discussion herein
is qualified in its entirety by reference to the Certificate of Incorporation
and Bylaws of the Company and Delaware General Corporation law.
Authorized Capital Stock. The Company's authorized capital stock consists of
85,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock,
both with a par value $0.01 per share, whereas the Bank's authorized capital
stock consists of 10,000,000 shares of Bank Common Stock and 1,000,000 shares
of serial preferred stock, both with a par value $0.01 per share (the "Bank
Preferred Stock"). The increased authorized capitalization will provide the
Company's Board of Directors with additional flexibility to effect, among
other transactions, acquisitions, financings, stock dividends, stock splits
and stock benefit plans. However, these additional authorized shares may also
be used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also
has sole authority to determine the terms of any one or more series of
Preferred Stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
Preferred Stock, the Board has the power, to the extent consistent with its
fiduciary duty, to issue a series of Preferred Stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board of Directors currently
has no plans for the issuance of additional shares, other than the issuance of
additional shares pursuant to the terms of the Stock-Based Incentive Plan and
upon exercise of stock options to be issued pursuant to the terms of the
Stock-Based Incentive Plan, all of which are to be established and presented
to stockholders at a meeting after the Conversion and Reorganization.
The Company will be subject to annual franchise taxes under Delaware law
based on its authorized capitalization. As a New Jersey chartered institution,
the Bank is not subject to franchise taxes, regardless of the amount of its
authorized capitalization.
Issuance of Capital Stock. Pursuant to applicable laws and regulations, the
Mutual Holding Company is required to own not less than a majority of the
outstanding Bank Common Stock. There will be no such restriction applicable to
the Company following consummation of the Conversion and Reorganization.
Neither the Certificate of Incorporation of the Bank nor the Certificate of
Incorporation of the Company contains a restriction on the issuance of shares
of capital stock to directors, officers or controlling persons of the Company
and the Bank, respectively. Thus, stock-related compensation plans such as
stock option plans could be adopted by the Company and the Bank without
stockholder approval and shares of Company capital stock and Bank capital
stock could be issued directly to directors, officers or controlling persons
without stockholder approval. The Bylaws of the NASD, however, generally
require corporations with securities which are quoted on the Nasdaq National
Market to obtain stockholder approval of most stock compensation plans for
directors, officers and key employees of the corporation. Moreover, although
generally not required, stockholder approval of stock-related compensation
plans may be sought in certain instances in order to qualify such plans for
favorable federal income tax and securities law treatment under current laws
and regulations.
Voting Rights. The Bank's Bylaws and Certificate of Incorporation prohibit,
and the Company's Bylaws do not provide for, cumulative voting in elections of
directors. The prohibition on cumulative voting will help to
126
<PAGE>
ensure continuity and stability of the Company's Board of Directors and the
policies adopted by it by making it more difficult for the holders of a
relatively small amount of the Common Stock to elect their nominees to the
Board of Directors and possibly by delaying, deterring or discouraging proxy
contests.
Neither the Certificate of Incorporation of the Bank nor the Certificate of
Incorporation and Bylaws of the Company provide for pre-emptive rights to
stockholders in connection with the issuance of capital stock.
For additional information relating to voting rights, see "--General--
Limitation on Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends. The ability of the Bank to pay dividends on its
capital stock is restricted by federal regulations and New Jersey law and
regulations and by tax considerations related to savings associations such as
the Bank. See "Regulation--Federal Regulation of Savings Institutions--Capital
Requirements" and "Federal and State Taxation--Federal Taxation." Although the
Company is not subject to these restrictions as a Delaware corporation, such
restrictions will indirectly affect the Company because dividends from the
Bank will be a primary source of funds of the Company for the payment of
dividends to stockholders of the Company.
The Delaware General Corporation Law generally provides that, subject to any
restrictions in the corporation's Certificate of Incorporation, dividends may
be declared from the corporation's surplus or, if there is no surplus, from
its net profits for the fiscal year in which the dividend is declared and the
preceding fiscal year. However, if the corporation's capital (generally
defined in the Delaware General Corporation Law as the sum of the aggregate
par value of all shares of the corporation's capital stock, where all such
shares have a par value and the board of directors has not established a
higher level of capital) has been diminished to an amount less than the
aggregate amount of the capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets,
dividends may not be declared and paid out of such net profits until the
deficiency in such capital has been repaired.
Board of Directors. The Bank's Certificate of Incorporation and the
Certificate of Incorporation and Bylaws of the Company, respectively, require
the Board of Directors of the Bank and the Company to be divided into three
classes as nearly equal in number as possible and that the members of each
class shall be elected for a term of three years and until their successors
are elected and qualified, with one class being elected annually.
Under the Bank's Bylaws, any vacancies in the Board of Directors of the Bank
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. Persons elected by the
directors of the Bank to fill vacancies may only serve until the next annual
meeting of stockholders. However, under the Company's Certificate of
Incorporation, any vacancy occurring in the Board of Directors of the Company,
including any vacancy created by reason of an increase in the number of
directors, may be filled by the remaining directors, and any director so
chosen shall hold office for the remainder of the term to which the director
has been elected and until his successor is elected and qualified.
Under the Bank's Bylaws, any director may be removed for cause by a two-
thirds vote of the Board of Directors or by the affirmative vote of at least
80% of the voting power of the then outstanding shares of capital stock of the
Bank entitled to vote in an election of directors. Under the Company's
Certificate of Incorporation, a director or the entire board of directors may
be removed only for cause and only by the affirmative vote of the holders of
at least 80% of the outstanding voting shares of the Company.
Limitations on Liability. The Company's Certificate of Incorporation
provides that the personal liability of the directors and officers of the
Company for monetary damages shall be eliminated to the fullest extent
permitted by the Delaware General Corporation Law as it exists on the
effective date of the Certificate of Incorporation or as such law may be
thereafter in effect. Section 102(b)(7) of the Delaware General Corporation
Law currently provides that directors (but not officers) of corporations that
have adopted such a provision will not be so liable, except (i) for any breach
of the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for the payment of certain unlawful
dividends and the making of certain stock purchases or redemptions, or (iv)
for any transaction from which the director derived an improper personal
benefit.
127
<PAGE>
If Delaware law was amended in the future to provide for greater limitations
on the personal liability of directors or to permit corporations to limit the
personal liability of officers, the provision in the Company's Certificate of
Incorporation limiting the personal liability of directors and officers would
automatically incorporate such authorities without further action by
stockholders. Similarly, if Delaware law was amended in the future to restrict
the ability of a corporation to limit the personal liability of directors, the
Company's Certificate of Incorporation would automatically incorporate such
restrictions without further action by stockholders.
The Bank's current Certificate of Incorporation contains similar provisions
regarding the elimination of director liability consistent with New Jersey
law.
Indemnification of Directors, Officers and Employees. The Bank's Certificate
of Incorporation provides that the Bank shall indemnify its directors,
officers and employees for any costs incurred in connection with any
litigation involving any such person's activities as a director, officer or
employee. In addition, indemnification is permitted in the case of a
settlement, a final judgment against such person or final judgment other than
on the merits, if it is determined by the board of directors and the
Commission that such person was acting in good faith within the scope of his
or her employment as he or she could reasonably have perceived it under the
circumstances and for a purpose he or she could have reasonably believed under
the circumstances was in the best interest of the Bank or its stockholders.
The Company's Certificate of Incorporation provides that the Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was a director, officer or employee of the Company or any
predecessor of the Company, or is or was serving at the request of the Company
or any predecessor of the Company as a director, officer or employee of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, liability and loss reasonably incurred or suffered by such
indemnitee in connection therewith to the fullest extent authorized by the
Delaware General Corporation Law of the State of Delaware against expenses,
liability and loss reasonably incurred or suffered by such indemnitee in
connection therewith.
The Company's Certificate of Incorporation also provides that reasonable
expenses (including attorneys' fees) incurred by a director, officer or
employee of the Company in defending any civil, criminal, administrative or
investigative action, suit or proceeding described above shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
as authorized by the Board of Directors upon receipt of an undertaking by or
on behalf of such person to repay such amount if it shall ultimately be
determined that the person is not entitled to be indemnified by the Company.
Special Meetings of Stockholders. The Bank's Bylaws provide that special
meetings of the stockholders of the Bank may be called by the Chairman,
President, a majority of the Board of Directors or the holders of not less
than ten percent of the outstanding capital stock of the Bank entitled to vote
at the meeting. The Certificate of Incorporation and Bylaws of the Bank
provide, however, that until the fifth anniversary of the 1992 MHC
Reorganization, special meetings of stockholders relating to changes in
control of the Bank or amendments to its Certificate of Incorporation may only
be called upon direction of the Board of Directors of the Bank. The Company's
Certificate of Incorporation contains a provision pursuant to which special
meetings of stockholders of the Company only may be called by the Board of
Directors of the Company.
Stockholder Nominations and Proposals. The Bank's Bylaws generally provide
that stockholders may submit nominations for election as director at an annual
meeting of stockholders 60 days prior to the annual meeting and any new
business to be taken up at such a meeting at least 60 days before the date of
any such meeting.
The Company's Bylaws require a stockholder who intends to nominate a
candidate for election to the Board of Directors, or to raise new business at
a stockholder meeting to give at least 90 days advance notice to the
128
<PAGE>
Secretary of the Company. The notice provision requires a stockholder who
desires to raise new business to provide certain information to the Company
concerning the nature of the new business, the stockholder and the
stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Company with certain information concerning the nominee and the proposing
stockholder.
Inspectors of Election. The Bank's Bylaws provide that the Board of
Directors may appoint one or more persons other than nominees for office as
inspectors of election at a meeting of stockholders and that if inspectors of
election are not so appointed, the Chairman of the Board or the President may,
and on the request of not less than 10% of the votes represented at the
meeting shall, make such appointment at the meeting. The Company's Bylaws
provide that the Board of Directors of the Company shall appoint one or more
persons as inspectors of election, and that the chairman of any meeting of
stockholders shall make such an appointment in the event that the inspector(s)
appointed by the Board of Directors shall be unable to act or the board shall
fail to appoint any inspector. The Bylaws of the Bank and the Company also
specify the duties of inspectors of election.
Stockholder Action Without a Meeting. The Bylaws of the Bank provide that
any action to be taken or which may be taken at any annual or special meeting
of stockholders must be taken at such annual or special meeting and may not be
taken without a meeting. The Certificate of Incorporation and Bylaws of the
Company similarly provide that any action required by Delaware law to be taken
at any annual or special meetings of stockholders, or any action which may be
taken at any annual or special meeting of stockholders, must be taken at such
annual or special meeting, and may not be taken without a meeting.
Limitations on Acquisitions of Voting Stock and Voting Rights. The Bank's
Certificate of Incorporation provides that no person, other than the MHC or
the Company, shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of the issued and outstanding shares of
any class of an equity security of the Bank, unless such offer to acquire or
acquisition is approved by a majority of the Board of Directors. In the event
that shares are acquired in violation of this restriction, all shares
beneficially owned by any person in excess of 10% shall be considered "Excess
Shares" and shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matters
submitted to stockholders for a vote.
The Certificate of Incorporation of the Company provides that in no event
shall any record owner of any outstanding Common Stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the then outstanding shares of Common Stock (the "Limit") be entitled
or permitted to any vote in respect of the shares held in excess of the Limit.
Beneficial ownership is determined pursuant to Rule 13d-3 of the General Rules
and Regulations promulgated pursuant to the Exchange Act, and includes shares
beneficially owned by such person or any of his affiliates (as defined in the
Certificate of Incorporation), shares which such person or his affiliates have
the right to acquire upon the exercise of conversion rights or options and
shares as to which such person and his affiliates have or share investment or
voting power, but shall not include shares beneficially owned by the ESOP or
directors, officers and employees of the Bank or Company or shares that are
subject to a revocable proxy and that are not otherwise beneficially owned, or
deemed by the Company to be beneficially owned, by such person and his
affiliates. The Certificate of Incorporation of the Company further provides
that this provision limiting voting rights may only be amended upon the vote
of 80% of the outstanding shares of voting stock (after giving effect to the
limitation on voting rights).
Mergers, Consolidations and Sales of Assets. The Bank's Certificate of
Incorporation and Bylaws do not impose any specific vote requirement for
stockholder approval of mergers and certain business transactions.
The Delaware General Corporation Law requires the approval of the Board of
Directors and the holders of a majority of the outstanding stock of the
Company entitled to vote thereon for mergers or consolidations, and for sale,
leases or exchanges of all or substantially all of the Company's assets,
unless a higher requirement is specified in the Company's Certificate of
Incorporation.
129
<PAGE>
As holder of all of the outstanding Bank Common Stock after consummation of
the Conversion and Reorganization, the Company generally will be able to
authorize a merger, consolidation or other business combination involving the
Bank without the approval of the stockholders of the Company. However, the
Company's Certificate of Incorporation requires the approval of the holders of
at least 80% of the Company's outstanding shares of voting stock to approve
certain "Business Combinations" as defined therein. See "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws."
Dissenters' Rights of Appraisal. Under New Jersey corporate law, which is
applicable to the Bank generally, a stockholder of a New Jersey corporation
which engages in a merger, consolidation or sale of all or substantially all
of its assets shall have the right to demand from such corporation payment of
the fair or appraised value of his stock in the New Jersey corporation,
subject to specified procedural requirements. This law also provides, however,
that the stockholders of a New Jersey chartered corporation with stock which
is listed on a national securities exchange or which has more than 1,000
shareholders are not entitled to dissenters' rights in connection with a
merger involving such corporation if the stockholder is required to accept
only "qualified consideration" for his stock, which is defined to include
cash, shares of stock of any corporation which at the effective date of the
merger will be listed on a national securities exchange or quoted on the
Nasdaq National Market System or any combination of such shares of stock and
cash.
After the Conversion and Reorganization, the rights of appraisal of
dissenting stockholders of the Company will be governed by the Delaware
General Corporation Law. Pursuant thereto, a stockholder of a Delaware
corporation generally has the right to dissent from any merger or
consolidation involving the corporation or sale of all or substantially all of
the corporation's assets, subject to specified procedural requirements.
However, no such appraisal rights are available for the shares of any class or
series of a corporation's capital stock if (i) as of the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
such shares were either listed on a national securities exchange or held of
record by more than 2,000 stockholders, or (ii) the corporation is the
surviving corporation of a merger and the merger did not require the approval
of the corporation's stockholders, unless in either case, the holders of such
stock are required by an agreement of merger or consolidation to accept for
that stock something other than: (a) shares of stock of the corporation
surviving or resulting from the merger or consolidation; (b) shares of stock
of any other corporation that, at the effective date of the merger, will be
listed on a national securities exchange or held of record by more than 2,000
stockholders; (c) cash in lieu of fractional shares of a corporation described
in clause (a) or (b) above; or (d) any combination of the shares of stock and
cash in lieu of fractional shares described in clauses (a) through (c) above.
Amendment of Governing Instruments. No amendment of the Bank's Certificate
of Incorporation may be made unless it is first proposed by the Board of
Directors of the Bank, thereafter approved by the holders of a majority of the
total votes eligible to be cast at a legal meeting and submitted to the
Commissioner for action as specified by law or regulation. The Company's
Certificate of Incorporation similarly provides that no amendment of the
Company's Certificate of Incorporation may be made unless it is first approved
by the Board of Directors of the Company and thereafter is approved by the
holders of a majority of the shares of the Company entitled to vote generally
in an election of directors, voting together in a single class; provided,
however, that the affirmative vote of at least 80% of the outstanding voting
stock entitled to vote is needed for certain amendments.
The Bylaws of the Bank may be amended by a majority of the full Board of
Directors of the Bank or by a majority vote of the votes cast by the
stockholders of the Bank at any legal meeting. The Bylaws of the Company may
be amended by a majority vote of the Board of Directors of the Company or by
the affirmative vote of the holders of 80% of the votes cast by stockholders
of the Company at a meeting of stockholders.
130
<PAGE>
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Plan of Conversion provides for the conversion of the Mutual Holding
Company from the mutual to the stock form of organization. See "The Conversion
and Reorganization--General." Certain provisions in the Company's Certificate
of Incorporation and Bylaws and in its management remuneration entered into in
connection with the Conversion and Reorganization, together with provisions of
Delaware corporate law, may have anti-takeover effects. In addition,
regulatory restrictions may make it difficult for persons or companies to
acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and
certain other statutory and regulatory provisions relating to stock ownership
and transfers, the Board of Directors and business combinations, which might
be deemed to have a potential "anti-takeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations promulgated
pursuant to the Exchange Act, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to
which such person and his affiliates have or share investment or voting power,
but shall not include shares beneficially owned by the ESOP or directors,
officers and employees of the Bank or Company or shares that are subject to a
revocable proxy and that are not otherwise beneficially owned, or deemed by
the Company to be beneficially owned, by such person and his affiliates. The
Certificate of Incorporation of the Company further provides that this
provision limiting voting rights may only be amended upon the vote of 80% of
the outstanding shares of voting stock (after giving effect to the limitation
on voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected
each year. The Company's Certificate of Incorporation and Bylaws provide that
the size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, shall be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides
131
<PAGE>
that a director may be removed from the Board of Directors prior to the
expiration of his term only for cause, upon the vote of 80% of the outstanding
shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 85,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock.
The shares of Common Stock and Preferred Stock were authorized in an amount
greater than that to be issued in the Conversion and Reorganization to provide
the Company's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its
fiduciary duty to deter future attempts to gain control of the Company. The
Board of Directors also has sole authority to determine the terms of any one
or more series of Preferred Stock, including voting rights, conversion rates,
and liquidation preferences. As a result of the ability to fix voting rights
for a series of Preferred Stock, the Board has the power, to the extent
consistent with its fiduciary duty, to issue a series of Preferred Stock to
persons friendly to management in order to attempt to block a post-tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. The Company's Board of
Directors currently has no plans for the issuance of additional shares, other
than the issuance of additional shares pursuant to the terms of the restricted
stock awards and upon exercise of stock options to be issued pursuant to the
terms of the Stock-Based Incentive Plan all of which are to be established and
presented to stockholders no earlier than six months after the Conversion and
Reorganization.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
stockholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the
proposed transaction has been approved in advance by a majority of those
members of the Company's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the
proposed transaction meets certain conditions set forth therein which are
designed to afford the stockholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The
term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than the Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the Company. This
provision of the Certificate of Incorporation applies to any "Business
Combination," which is defined to include (i) any merger or consolidation of
the Company or any of its subsidiaries with or into any Interested Stockholder
or Affiliate (as defined in the Certificate of Incorporation) of an Interested
Stockholder; (ii) any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition to or with any Interested Stockholder or Affiliate of 25% or
more of the assets of the Company or combined assets of the Company and its
subsidiary; (iii) the issuance or transfer to any Interested Stockholder or
its Affiliate by the Company (or any subsidiary) of any securities of the
Company in exchange for any assets, cash or securities the value of which
equals or exceeds 25% of the fair market value of the Common Stock of the
Company; (iv) the adoption of any
132
<PAGE>
plan for the liquidation or dissolution of the Company proposed by or on
behalf of any Interested Stockholder or Affiliate thereof; and (v) any
reclassification of securities, recapitalization, merger or consolidation of
the Company which has the effect of increasing the proportionate share of
Common Stock or any class of equity or convertible securities of the Company
owned directly or indirectly by an Interested Stockholder or Affiliate
thereof. The directors and executive officers of the Bank are purchasing in
the aggregate approximately 0.6% of the shares of the Common Stock at the
maximum of the Estimated Price Range. In addition, the ESOP intends to
purchase 8% of the aggregate of the Conversion Stock sold in the Conversion.
Additionally, if at a meeting of stockholders following the Conversion and
Reorganization stockholder approval of the proposed Stock-Based Incentive Plan
is received, the Company expects to acquire 4% of the aggregate of the
Conversion Stock issued in the Conversion and Reorganization and expects to
issue an amount equal to 10% of the aggregate of the Conversion Stock issued
in the Conversion and Reorganization to directors and executive officers. As a
result, assuming the Stock-Based Incentive Plan is approved by stockholders,
directors, executive officers and employees have the potential to control the
voting of approximately 25% of the Company's Common Stock, thereby enabling
them to prevent the approval of the transactions requiring the approval of at
least 80% of the Company's outstanding shares of voting stock described
hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein) to (i) make a tender or
exchange offer for any equity security of the Company, (ii) merge or
consolidate the Company with another corporation or entity, or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company, the Bank and the
stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance
of such offer on the Company's customers and the Bank's present and future
account holders, borrowers and employees; on the communities in which the
Company and the Bank operate or are located; and on the ability of the Company
to fulfill its corporate objectives as a savings and loan holding company and
on the ability of the Bank to fulfill the objectives of a federally-chartered
stock savings association under applicable statutes and regulations. By having
these standards in the Certificate of Incorporation of the Company, the Board
of Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and classification
of directors, director and officer indemnification by the Company and
amendment of the Company's Bylaws and Certificate of Incorporation. The
Company's Bylaws may be amended by its Board of Directors, or by a vote of 80%
of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least
90 days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly,
a stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of
133
<PAGE>
Directors. The provisions of the employment agreements, CIC Agreements,
Severance Plan, and the Stock-Based Incentive Plan to be established may also
discourage takeover attempts by increasing the costs to be incurred by the
Bank and the Company in the event of a takeover. See "Management of the Bank--
Employment Agreements" and "--New Benefits Resulting from the Conversion and
Reorganization--Stock Option Plans."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of
Directors' view that these provisions should not discourage persons from
proposing a merger or other transaction at a price that reflects the true
value of the Company and that otherwise is in the best interest of all
stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-
year period following the date such "Person" became an Interested Stockholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had received
other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the Board of Directors. A
corporation may exempt itself from the requirements of the statute by adopting
an amendment to its Certificate of Incorporation or Bylaws electing not to be
governed by Section 203. At the present time, the Board of Directors does not
intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S CERTIFICATE OF INCORPORATION AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion and
Reorganization, the Board of Directors believes that it is appropriate to
retain certain provisions permitted by New Jersey law and to adopt certain new
provisions to protect the interests of the Bank and its stockholders from any
hostile takeover. Such provisions may, indirectly, inhibit a change in control
of the Company, as the Bank's sole stockholder. See "Risk Factors--Certain
Anti--Takeover Provisions Which May Discourage Takeover Attempts."
The Bank's Certificate of Incorporation will continue to contain a provision
whereby the acquisition of or offer to acquire beneficial ownership of more
than 10% of the issued and outstanding shares of any class of
134
<PAGE>
equity securities of the Bank by any person (i.e., any individual,
corporation, group acting in concert, trust, partnership, joint stock company
or similar organization), either directly or through an affiliate thereof,
will be prohibited for a period of five years following the date of completion
of the Conversion and Reorganization. Any stock in excess of 10% acquired in
violation of the Certificate of Incorporation provision will not be counted as
outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event
that holders of revocable proxies for more than 10% of the shares of the
Common Stock of the Company seek, among other things, to elect one-third or
more of the Company's Board of Directors, to cause the Company's stockholders
to approve the acquisition or corporate reorganization of the Company or to
exert a continuing influence on a material aspect of the business operations
of the Company, which actions could indirectly result in a change in control
of the Bank, the Board of Directors of the Bank will be able to assert this
provision of the Bank's Certificate of Incorporation against such holders.
Although the Board of Directors of the Bank is not currently able to determine
when and if it would assert this provision of the Bank's Certificate of
Incorporation, the Board of Directors, in exercising its fiduciary duty, may
assert this provision if it were deemed to be in the best interests of the
Bank, the Company and its stockholders. It is unclear, however, whether this
provision, if asserted, would be successful against such persons in a proxy
contest which could result in a change in control of the Bank indirectly
through a change in control of the Company. Finally, stockholders will not be
permitted to call a special meeting of stockholders relating to a change of
control of the Bank or a charter amendment or to cumulate their votes in the
election of directors. Furthermore, the staggered terms of the Board of
Directors could have an anti-takeover effect by making it more difficult for a
majority of shares to force an immediate change in the Board of Directors
since only one-third of the Board is elected each year. The purpose of these
provisions is to assure stability and continuity of management of the Bank in
the years immediately following the Conversion and Reorganization.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of Bank
Preferred Stock proposed to be authorized, the Board of Directors believes
that the availability of such shares will provide the Bank with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, it might be possible for the Board of Directors
to authorize the issuance of one or more series of Bank Preferred Stock with
rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Bank Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors
does not intend to issue any Bank Preferred Stock except on terms which the
Board deems to be in the best interest of the Bank and its then existing
stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion and Reorganization, from transferring, or from entering into any
agreement or understanding to transfer, to the account of another, legal or
beneficial ownership of the subscription rights issued under the Plan or the
Conversion Stock to be issued upon their exercise. The Plan also prohibits any
person, prior to the completion of the Conversion and Reorganization, from
offering, or making an announcement of an offer or intent to make an offer, to
purchase such subscription rights or Conversion Stock.
For three years following the Conversion and Reorganization, OTS regulations
prohibit any person from acquiring or making an offer to acquire more than 10%
of the stock of any converted savings institution, except for: (i) offers
that, if consummated, would not result in the acquisition by such person
during the preceding 12-month period of more than 1% of such stock; (ii)
offers for up to 25% in the aggregate by the ESOP or other tax qualified plans
of the Bank or the Company; or (iii) offers which are not opposed by the Board
of Directors of the Bank and which receive the prior approval of the OTS. Such
prohibition is also applicable to the acquisition of the stock of the Company.
Such acquisition may be disapproved by the OTS if it is found, among other
things,
135
<PAGE>
that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the
savings institution's conversion proceeds. In the event that any person,
directly or indirectly, violates this regulation, the securities beneficially
owned by such person in excess of 10% shall not be counted as shares entitled
to vote and shall not be voted by any person or counted as voting shares in
connection with any matters submitted to a vote of stockholders. The
definition of beneficial ownership for this regulation extends to persons
holding revocable or irrevocable proxies for the Company's stock under
circumstances that give rise to a conclusive or rebuttable determination of
control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the OTS under the Change
in Bank Control Act. The OTS requires all persons seeking control of a savings
institution and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among
other things, that (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interests of
its depositors; or (iii) the competency, experience or integrity of the
acquiring person or the proposed management personnel indicates that it would
not be in the interest of the depositors or the public to permit the
acquisition of control by such person. Such change in control restrictions on
the acquisition of holding company stock are not limited to three years after
conversion but will apply for as long as the regulations are in effect.
Persons holding revocable or irrevocable proxies may be deemed to be
beneficial owners of such securities under OTS regulations and therefore
prohibited from voting all or the portion of such proxies in excess of the 10%
aggregate beneficial ownership limit. Such regulatory restrictions may prevent
or inhibit proxy contests for control of the Company or the Bank which have
not received prior regulatory approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 85,000,000 shares of Common Stock having
a par value of $.01 per share and 10,000,000 shares of preferred stock having
a par value of $.01 per share (the "Preferred Stock"). The Company currently
expects to issue up to 27,600,000 shares of Common Stock (or 31,740,000 in the
event of an increase of 15% in the Estimated Price Range) and no shares of
Preferred Stock in the Conversion. Except as discussed above in "Restriction
on Acquisition of the Company and the Bank." Each share of the Company's
Common Stock will have the same relative rights as, and will be identical in
all respects with, each other share of Common Stock. Upon payment of the
Purchase Price for the common stock, in accordance with the Plan, all such
stock will be duly authorized, fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the
Company issues Preferred Stock, the holders thereof may have a priority over
the holders of the Common Stock with respect to dividends.
136
<PAGE>
Voting Rights. Upon Conversion and Reorganization, the holders of Common
Stock of the Company will possess exclusive voting rights in the Company. They
will elect the Company's Board of Directors and act on such other matters as
are required to be presented to them under Delaware law or the Company's
Certificate of Incorporation or as are otherwise presented to them by the
Board of Directors. Except as discussed in "Restrictions on Acquisition of the
Company and the Bank," each holder of Common Stock will be entitled to one
vote per share and will not have any right to cumulate votes in the election
of directors. If the Company issues Preferred Stock, holders of the Preferred
Stock may also possess voting rights. Certain matters require an 80%
stockholder vote. See "Restrictions on Acquisition of the Company and the
Bank."
Subsequent to the Conversion and Reorganization, voting rights will be
vested exclusively in the owners of the shares of capital stock of the Bank,
which will be the Company, and voted at the direction of the Company's Board
of Directors. Consequently, the holders of the Common Stock will not have
direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion and Reorganization--Liquidation Rights"), all assets of
the Bank available for distribution. In the event of liquidation, dissolution
or winding up of the Company, the holders of its Common Stock would be
entitled to receive, after payment or provision for payment of all its debts
and liabilities, all of the assets of the Company available for distribution.
If Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion and Reorganization. Such stock may be issued with
such preferences and designations as the Board of Directors may from time to
time determine. The Board of Directors can, without stockholder approval,
issue preferred stock with voting, dividend, liquidation and conversion rights
which could dilute the voting strength of the holders of the Common Stock and
may assist management in impeding an unfriendly takeover or attempted change
in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Certificate of Incorporation of the Bank authorizes the issuance of
capital stock consisting of 10,000,000 shares of common stock, par value $0.01
per share, and 1,000,000 shares of preferred stock, par value $.01 per share,
which preferred stock may be issued in series and classes having such rights,
preferences, privileges and restrictions as the Board of Directors may
determine. Each share of Common Stock of the Bank has the same relative rights
as, and is identical in all respects with, each other share of common stock.
The Board of Directors is authorized to approve the issuance of Bank Common
Stock up to the amount authorized by the Certificate of Incorporation without
the approval of the Bank's stockholders. Following the Conversion and
Reorganization, all of the issued and outstanding common stock of the Bank
will be held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK
OF THE BANK REPRESENTS NON-WITHDRAWABLE CAPITAL, IS NOT AN ACCOUNT OF AN
INSURABLE TYPE, AND IS NOT INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock are entitled to receive
and to share equally in such dividends as may be declared by the Board of
Directors of the Bank out of funds legally available therefor.
137
<PAGE>
See "Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
Voting Rights. The holders of the Bank's common stock possess exclusive
voting rights in the Bank. Each holder of shares of common stock is entitled
to one vote for each share held, provided that cumulation of votes is not
permitted. See "Restrictions on Acquisition of the Company and the Bank--Anti-
Takeover Effects of the Company's Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock is entitled to receive, after payment of
all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon), and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or
in kind. If additional preferred stock is issued subsequent to the Conversion
and Reorganization, the holders thereof may also have priority over the
holders of common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank are
not entitled to preemptive rights with respect to any shares of the Bank which
may be issued. The common stock is not subject to redemption.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company, Cranford, New Jersey.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries as of
December 31, 1996 and for each of the years in the three year period ended
December 31, 1996 have been included herein, in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
FinPro has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its valuation with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock will be passed upon for the Bank and the
Company by Patton Boggs, L.L.P., Washington, D.C., special counsel to the Bank
and the Company. Patton Boggs, L.L.P. will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The federal
income tax consequences of the Conversion and Reorganization will be passed
upon for the Bank and the Company by Patton Boggs, L.L.P. and the New Jersey
tax consequences of the Conversion and Reorganization will be passed upon for
the Bank and the Company by KPMG Peat Marwick LLP. Certain legal matters will
be passed upon for Sandler O'Neill by Breyer & Aguggia, Washington, D.C.
138
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information,
including the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of such material can be obtained from the SEC at prescribed
rates. In addition, the SEC maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including the
Company. This Prospectus contains a description of the material terms and
features of all material contracts, reports or exhibits to the Registration
Statement required to be described, however, the statements contained in this
Prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Mutual Holding Company has filed an application for conversion with the
OTS with respect to the Conversion and Reorganization. Pursuant to the rules
and regulations of the OTS, this Prospectus omits certain information
contained in that application. The application may be examined at the
principal office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and
at the Office of the Regional Director of the OTS located at 10 Exchange
Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the Conversion and Reorganization, the Company will
register its Common Stock with the SEC under Section 12(b) of the Exchange Act
and, upon such registration, the Company and the holders of its stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act. Under the Plan, the Company has undertaken
that it will not terminate such registration for a period of at least three
years following the Conversion and Reorganization.
A copy of the Certificate of Incorporation and the Bylaws of the Company and
the Stock Certificate of Incorporation and Bylaws of the Bank are available
without charge from the Bank.
139
<PAGE>
FIRST SAVINGS BANK, SLA AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report....................................... F-2
Consolidated Statements of Financial Condition as of September 30,
1997 (unaudited) and December 31, 1996 and 1995................... F-3
Consolidated Statements of Income for the Nine Months Ended Septem-
ber 30, 1997 and 1996 (unaudited) and for the Years Ended December
31, 1996, 1995 and 1994........................................... 43
Consolidated Statements of Stockholders' Equity for the Nine Months
Ended September 30, 1997 (unaudited) and for the Years Ended De-
cember 31, 1996, 1995 and 1994.................................... F-4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 (unaudited) and for the Years Ended
December 31, 1996, 1995 and 1994.................................. F-5
Notes to Consolidated Financial Statements......................... F-7 to F-33
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes
thereto.
The financial statements of First Source Bancorp, Inc. have been omitted
because First Source Bancorp, Inc. has not yet issued any stock, has no assets
and no liabilities, and has not conducted any business other than of an
organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Savings Bank, SLA:
We have audited the consolidated financial statements of First Savings Bank,
SLA, and Subsidiaries as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Savings Bank, SLA, and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
January 27, 1997, except as
to note 19, which is as of
December 31, 1997
F-2
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1997 1996 1995
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks...................... $ 5,873 $ 7,192 $ 8,674
Federal funds sold........................... 17,925 1,850 17,875
---------- -------- --------
Total cash and cash equivalents.............. 23,798 9,042 26,549
Federal Home Loan Bank of New York (FHLB-NY)
stock, at cost, (note 10)................... 8,045 7,428 6,276
Investment securities, at amortized cost
(estimated fair value of $41,108, $38,980
and $39,617 at 9/30/97, 12/31/96 and
12/31/95, respectively) (notes 4 and 10).... 40,959 38,955 39,003
Investment securities available for sale
(notes 4 and 10)............................ 18,024 14,831 2,058
Mortgage-backed securities (estimated fair
value of $231,667, $255,052 and $291,689 at
9/30/97, 12/31/96 and 12/31/95,
respectively) (notes 5 and 10).............. 228,158 252,383 288,143
Mortgage-backed securities available for sale
(notes 5 and 10)............................ 122,371 120,797 89,339
Loans receivable, net (notes 6 and 10)....... 567,197 509,627 457,756
Loans available for sale (notes 6 and 10).... -- 287 424
Interest and dividends receivable, net (note
7).......................................... 7,719 7,415 6,793
Premises and equipment, net (note 8)......... 13,283 10,356 9,347
Excess of cost over fair value of net assets
acquired.................................... 9,018 10,950 12,299
Other assets (note 12)....................... 5,941 5,044 7,025
---------- -------- --------
Total assets............................. $1,044,513 $987,115 $945,012
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 9)............................ $ 809,449 $794,595 $806,338
Borrowed funds (note 10)..................... 123,894 87,994 38,750
Employee Stock Ownership Plan (ESOP) debt
(note 11)................................... 571 646 746
Advances by borrowers for taxes and
insurance................................... 5,382 4,600 3,813
Other liabilities (note 12 and 13)........... 6,004 6,417 5,652
---------- -------- --------
Total liabilities........................ 945,300 894,252 855,299
---------- -------- --------
Commitments and contingencies (note 14)......
Stockholders' Equity
Preferred Stock, 1,000,000 shares
authorized; issued and outstanding--none..
Common Stock, $0.01 par value, 10,000,000
shares authorized; 8,006,707, 7,903,719
and 7,872,604 shares issued and
outstanding at 9/30/97, 12/31/96 and
12/31/95, respectively (note 13).......... 73 72 65
Paid-in capital (note 13).................. 27,856 27,427 22,007
Retained earnings (note 12)................ 71,870 66,299 68,222
Net unrealized gain (loss) on securities
available for sale, net of tax (notes 4
and 5).................................... 193 (3) 165
Less: Common Stock acquired by the ESOP
(note 13)................................. (571) (646) (746)
Common Stock acquired by the Recognition
and Retention Plan (RRP) (note 13)...... (208) (286) --
---------- -------- --------
Total stockholders' equity (notes 2 and
3)...................................... 99,213 92,863 89,713
---------- -------- --------
Total liabilities and stockholders'
equity.................................. $1,044,513 $987,115 $945,012
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN/(LOSS)
ON SECURITIES COMMON COMMON
AVAILABLE STOCK STOCK TOTAL
COMMON PAID-IN RETAINED FOR SALE, ACQUIRED ACQUIRED STOCKHOLDERS'
STOCK CAPITAL EARNINGS NET OF TAX BY ESOP BY RRP EQUITY
------ ------- -------- -------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... $29 $11,606 $56,539 $ 1,105 $(400) $ (70) $68,809
Net income for the year
ended December 31,
1994................... 8,275 8,275
Issuance of 10% stock
dividend............... 3 3,100 (3,103) --
Cash dividends ($0.27
per share)............. (787) (787)
Net change in unrealized
gain/(loss)............ (2,502) (2,502)
2-for-1 stock split..... 33 (33) --
Amortization of RRP..... 70 70
Principal payments on
ESOP loan.............. 100 100
Exercise of stock
options................ 99 99
--- ------- ------- ------- ----- ----- -------
Balance at December 31,
1994................... 65 14,772 60,924 (1,397) (300) -- 74,064
Net income for the year
ended December 31,
1995................... 8,302 8,302
Net proceeds from stock
offering (600,000
shares)................ 7,205 7,205
Stock acquired by ESOP
(42,000 shares)........ (546) (546)
Cash dividends ($0.30
per share)............. (1,004) (1,004)
Net change in unrealized
gain/(loss)............ 1,562 1,562
Principal payments on
ESOP loan.............. 100 100
Exercise of stock
options................ 30 30
--- ------- ------- ------- ----- ----- -------
Balance at December 31,
1995................... 65 22,007 68,222 165 (746) -- 89,713
Net income for the year
ended December 31,
1996................... 4,710 4,710
Issuance of 10% stock
dividend............... 7 5,388 (5,395) --
Cash in lieu of
fractional shares...... (3) (3)
Stock acquired by RRP
(21,780 shares)........ (310) (310)
Cash dividends ($0.33
per share)............. (1,238) (1,238)
Net change in unrealized
gain/(loss)............ (168) (168)
Amortization of RRP..... 24 24
Principal payments on
ESOP loan.............. 100 100
Exercise of stock
options................ 35 32
--- ------- ------- ------- ----- ----- -------
Balance at December 31,
1996................... 72 27,427 66,299 (3) (646) (286) 92,863
Net income for the nine
months ended September
30, 1997............... 6,760 6,760
Cash dividends ($0.31
per share)............. (1,189) (1,189)
Net change in unrealized
gain/(loss)............ 196 196
Amortization of RRP..... 78 78
Principal payments on
ESOP loan.............. 75 75
Exercise of stock
options................ 1 429 430
--- ------- ------- ------- ----- ----- -------
Balance at September 30,
1997................... $73 $27,856 $71,870 $ 193 $(571) $(208) $99,213
=== ======= ======= ======= ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1997 1996 1996 1995 1994
--------- -------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 6,760 $ 2,364 $ 4,710 $ 8,302 $ 8,275
Adjustments to
reconcile net income
to net cash provided
by
operating activities:
Depreciation of
premises and
equipment............ 754 630 842 1,018 1,241
Amortization of excess
of cost over fair
value of assets
acquired............. 1,932 1,138 1,349 1,066 223
Amortization of ESOP.. 75 75 100 100 100
Amortization of RRP... 78 -- 24 -- 70
Net accretion and
amortization of
deferred loan fees... 44 (95) (284) (335) (256)
Provision for loan
losses............... 900 375 550 310 300
Provision for losses
on real estate
owned................ 61 105 105 222 149
Net (gain) loss on
sales of investment
securities available
for sale............. (149) 19 (114) 104 (21)
Net loss on market
adjustment to
investment securities
held for trading..... 29 -- -- -- --
Net (gain) loss on
sales of mortgage
loans available for
sale................. (12) 41 40 (15) 77
Net gain on sales of
mortgage-backed
securities available
for sale............. (461) (199) (162) (840) (96)
Net gain on sales of
real estate owned.... (92) (161) (183) (52) (59)
Investment securities
purchased for
trading.............. (1,989) -- -- -- --
Proceeds from sales of
investment securities
held for trading..... 1,971 -- -- -- --
Net amortization of
premiums and
discounts............ 112 410 716 (1,275) 795
Increase in interest
and dividends
receivable........... (304) (370) (622) (1,552) (629)
(Decrease) increase in
other liabilities.... (413) 3,846 765 1,011 247
(Decrease) increase in
other assets......... (1,127) (589) 5 (461) 110
--------- -------- --------- --------- ---------
Net cash provided by
operating
activities.......... 8,169 7,589 7,841 7,603 10,526
--------- -------- --------- --------- ---------
Cash flows from
investing activities:
Proceeds from sales of
investment securities
available for sale... 8,149 10,877 20,978 25,823 47,821
Proceeds from sales of
mortgage loans
available for sale... 3,048 6,157 6,892 6,358 5,310
Proceeds from sales of
mortgage-backed
securities available
for sale............. 116,891 73,210 96,309 82,632 36,001
Proceeds from sale of
real estate owned.... 1,035 3,495 4,351 3,299 2,681
Purchases of
investment securities
available for sale... (11,000) (28,807) (31,808) (1,016) (23,716)
Loans originated for
sale................. (2,750) (5,923) (6,798) (6,619) (4,701)
Purchases of mortgage-
backed securities
available for sale... (129,974) (87,005) (136,935) (86,767) (38,580)
Purchases of
investment
securities........... (15,998) (15,950) (20,937) (47,002) (14,000)
Maturities of
investment
securities........... 14,000 13,000 19,000 19,000 11,000
Origination of loans.. (105,179) (97,339) (124,134) (95,674) (79,338)
Purchases of loans.... (4,665) (4,631) (10,118) (5,181) --
Purchases of mortgage-
backed securities.... (30,689) (54,392) (54,392) (128,524) (108,049)
Principal payments on
loans................ 51,023 59,701 80,178 54,993 77,202
Principal payments on
mortgage-backed
securities........... 66,292 79,493 98,392 64,785 72,220
(Purchase) redemption
of FHLB-NY stock..... (617) (1,152) (1,152) (585) 726
Purchases of premises
and equipment........ (3,681) (673) (1,849) (2,065) 2,434
Cost in excess of fair
value of assets
acquired............. -- -- -- (12,640) --
--------- -------- --------- --------- ---------
Net cash used in
investing
activities.......... (44,115) (49,939) (62,023) (129,183) (17,857)
--------- -------- --------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1997 1996 1996 1995 1994
--------- -------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Net proceeds from stock
offering............... -- -- -- 7,205 --
Proceeds from ESOP
debt................... -- -- -- 546 --
Cost of stock
contributed to RRP..... -- -- (310) -- --
Payment on ESOP debt.... (75) (75) (100) (100) (100)
Purchase of ESOP
shares................. -- -- -- (546) --
Stock options
exercised.............. 430 35 35 30 99
Cash dividends paid..... (1,189) (928) (1,238) (1,004) (787)
Proceeds from
acquisition of
deposits............... -- -- -- 112,784 --
Net increase (decrease)
in deposits............ 14,854 (5,897) (11,743) 11,941 2,652
Net increase in borrowed
funds.................. 35,900 30,687 49,244 4,750 8,000
Net increase (decrease)
in advances by
borrowers for taxes
and insurance.......... 782 684 787 80 (80)
--------- -------- --------- --------- ---------
Net cash provided by
financing activities.. 50,702 24,506 36,675 135,686 9,784
--------- -------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents........... 14,756 (17,844) (17,507) 14,106 2,453
Cash and cash equivalents
at beginning of period.. 9,042 26,549 26,549 12,443 9,990
--------- -------- --------- --------- ---------
Cash and cash equivalents
at end of period........ $ 23,798 $ 8,705 $ 9,042 $ 26,549 $ 12,443
========= ======== ========= ========= =========
Supplemental disclosures
of cash flow
information:
Cash paid during the
period for:
Interest................ $ 30,196 $ 27,443 $ 36,967 $ 35,409 $ 24,953
Income taxes............ 3,851 3,824 3,831 4,495 4,474
Non cash investing and
financing activities
for the period:
Transfer of loans to
real estate owned...... 885 2,105 2,535 4,960 2,365
Transfer of investment
and mortgage-backed
securities from held to
maturity to available
for sale............... -- -- -- 77,549 --
Transfer of loans
available for sale to
loans receivable....... -- -- -- -- 596
========= ======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies
used in preparation of the accompanying consolidated financial statements of
First Savings Bank, SLA, and its Subsidiaries ("the Bank"). FSB Financial
Corp. is a wholly owned subsidiary and provides a line of fixed and variable
rate annuity products and mutual funds. 1000 Woodbridge Center Drive, Inc. is
a wholly owned subsidiary of the Bank, and is currently inactive.
Principles of Consolidation
The consolidated financial statements are comprised of the accounts of the
Bank and its wholly-owned subsidiaries, FSB Financial Corp. and 1000
Woodbridge Center Drive, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowance for loan losses, management generally obtains independent appraisals
for significant properties.
The accompanying unaudited consolidated financial statements as of September
30, 1997, and for the nine month periods ended September 30, 1997 and 1996,
have been prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of such interim
periods have been made. The results of operations for the nine months ended
September 30, 1997 are not necessarily indicative of results that may be
expected for the year ending December 31, 1997.
Cash Equivalents
For purposes of the consolidated statements of cash flows, cash equivalents
consist of interest-bearing deposits in other financial institutions and loans
of federal funds.
Investment and Mortgage-Backed Securities
Management determines the appropriate classification of investment and
mortgage-backed securities as either available for sale, held to maturity, or
held for trading at the purchase date. Securities available for sale include
debt, mortgage-backed, and marketable equity securities that are held for an
indefinite period of time and may be sold in response to changing market and
interest rate conditions. These securities are reported at fair value with
unrealized gains and losses, net of tax, included as a separate component of
stockholders' equity. Upon realization, such gains and losses will be included
in earnings using the specific identification method. In November, 1995, the
Financial Accounting Standards Board ("FASB") issued "Special Report--A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities" within which there was offered transition guidance
permitting an enterprise to reassess the appropriateness of the
classifications of all of its securities before December 31, 1995. The Bank
reassessed its classifications and, on December 15, 1995, transferred $77.5
million in amortized cost of investment and mortgage-backed securities to the
available for sale classification. The net unrealized loss (net of taxes) as
of the date of transfer was $40,000.
F-7
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Trading account securities are adjusted to market value through earnings.
Gains and losses from adjusting trading account securities to market value and
from the sale of these securities are included in noninterest income. There
were no trading account securities outstanding at September 30, 1997,
December, 31, 1996 or 1995.
Investment securities, other than those designated as available for sale or
trading, are carried at amortized historical cost and consist of those
securities for which there is a positive intent and ability to hold to
maturity. Investment securities are adjusted for amortization of premiums and
accretion of discounts using the level-yield method over the estimated lives
of the securities.
Mortgage-backed securities, other than those designated as available for
sale or trading, are carried at their outstanding principal balance, adjusted
for amortization of premiums and accretion of discounts using the level-yield
method over the estimated lives of the securities.
Federal Home Loan Bank of New York Stock
The Bank, as a member of the FHLB-NY, is required to hold shares of capital
stock in the FHLB-NY in an amount equal to 1% of the Bank's outstanding
balance of residential mortgage loans or 5% of its outstanding advances from
the FHLB-NY, whichever is greater.
Loans Receivable, Net
Loans receivable, other than loans available for sale, are stated at the
unpaid principal balance, net of premiums, unearned discounts, net deferred
loan origination and commitment fees, and the allowance for loan losses.
Loans are classified as non-accrual when they are past due 90 days or more
as to principal or interest, or where reasonable doubt exists as to timely
collectibility. However, if a loan meets the above criteria but a current
appraisal of the property indicates that the total outstanding balance is less
than 55% of the appraised value, the loan is not classified as non-accrual. At
the time a loan is place on non-accrual status, previously accrued and
uncollected interest is reversed against interest income. Interest received on
non-accrual loans is generally credited to interest income for the current
period. If principal and interest payments are brought contractually current
and future collectibility is reasonably assured, loans are returned to accrual
status. Discounts are accreted and premiums amortized to income using the
level yield method over the estimated lives of the loans. Loan fees and
certain direct loan origination costs are deferred, and the net fee or cost is
recognized in interest income using the level-yield method over the
contractual life of the individual loans, adjusted for actual prepayments.
Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures" were adopted
prospectively by the Bank on January 1, 1995. These statements address the
accounting for impaired loans and specify how allowances for loan losses
related to these impaired loans should be determined. The adoption of the
statements did not effect the level of the overall allowance or the operating
results. Income recognition and charge-off policies were not changed as a
result of SFAS 114 and SFAS 118. The Bank has defined the population of
impaired loans to be all non- accrual commercial real estate, multi-family and
land loans. Impaired loans are individually assessed to determine that the
loan's carrying value is not in excess of the fair value of the collateral or
the present value of the loan's expected future cash flows. Smaller balance
homogeneous loans that are collectively evaluated for impairment, such as
residential mortgage loans and installment loans are specifically excluded for
the impaired loan portfolio. There were no impaired loans at September 30,
1997, nor at December 31, 1996 and 1995, as defined by SFAS 114 and SFAS 118.
F-8
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans available for sale are carried at the lower of cost or market using
the aggregate method. Valuation adjustments, if applicable, are reflected in
current operations. Gains and losses on sales are recorded using the specific
identification method. Management determines the appropriate classification of
loans as either held to maturity or available for sale at origination, in
conjunction with the Bank's overall asset/liability management strategy.
Effective January 1, 1996, SFAS 122, "Accounting for Mortgage Servicing
Rights," was adopted on a prospective basis. SFAS 122 requires capitalization
of the rights to service mortgage loans for others, whether those rights are
acquired through purchase or origination. The Bank determines the value of
servicing rights through an evaluation of prepayment trends, the market for
purchased servicing and underlying interest rate of the loans. All capitalized
mortgage servicing rights, both originated and purchased, will be evaluated
for impairment on a quarterly basis with any adjustments recognized through a
valuation allowance. The Bank amortizes mortgage servicing rights over the
estimated life of the loans on a straight line basis. Certain provisions of
SFAS 122 were amended by SFAS 125. See Note 16, "Recent Accounting
Pronouncements," for a description of SFAS 125.
A substantial portion of the Bank's loans are secured by real estate in the
State of New Jersey. Accordingly, as with most financial institutions in the
market area, the collectibility of a substantial portion of the carrying value
of the Bank's loan portfolio and real estate owned is susceptible to changes
in market conditions.
Allowance for Loan Losses
The allowance for loan losses is based on management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, review of individual loans for adverse situations that may
affect the borrower's ability to repay, the estimated value of any underlying
collateral, and consideration of current economic conditions.
Additions to the allowance arise from charges to operations through the
provision for loan losses or from the recovery of amounts previously charged
off. The allowance is reduced by loan charge-offs.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in the Bank's market area. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Real Estate Owned, Net
Real estate owned is recorded at the fair value at the date of acquisition,
with a charge to the allowance for loan losses for any excess of cost over
fair value. Subsequently, real estate owned is carried at the lower of cost or
fair value, less estimated selling costs. Certain costs incurred in preparing
properties for sale are capitalized, and expenses of holding foreclosed
properties are charged to operations as incurred. There was $1.4 million, $1.5
million, and $3.1 million in real estate owned included in Other Assets at
September 30, 1997, December 31, 1996 and 1995, respectively.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired from the
acquisition of deposits is amortized to expense over the expected life of the
acquired deposit base (7 to 15 years) using the straight-line method. During
1995, the Bank acquired the deposits and former branch locations of two
offices of the former Carteret Savings for a premium of $12.6 million. Core
deposit studies regarding the retention of the deposits acquired are
F-9
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
performed by the Bank on an annual basis. After reviewing the results of the
core deposit studies, a writedown of the core deposit premium may be
recognized if the current balance of the core deposit premium is considered
impaired. The Bank recognized writedowns of $1.3 million and $334,000 for the
nine months ended September 30, 1997, and for the year ended December 31,
1996, respectively.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at
cost, less accumulated amortization and depreciation. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives, ranging from three to forty years, depending on the asset or
lease. Repair and maintenance items are expensed and improvements are
capitalized. Upon retirement or sale, any gain or loss is charged to
operations.
Stock-Based Compensation
In October 1995, SFAS 123, "Accounting for Stock-Based Compensation" was
issued. SFAS 123 encourages recording in current period earnings compensation
expense related to the fair value of certain stock-based compensation.
Companies may choose to continue to follow the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), where compensation expense is not recorded for certain stock-based
compensation plans. However, companies are required to disclose pro forma net
income and earnings per share as if they adopted the fair value based method
of accounting. The Bank has elected to continue to account for stock-based
compensation under APB 25 and the pro forma disclosures required by SFAS 123
have been included in Note 13, "Stock Option Plans." The adoption of SFAS 123
had no impact on the Bank's consolidated financial statements.
Recognition and Retention Plan (RRP)
RRP awards are granted in the form of shares of common stock held by the
RRP, and are payable over a three year vesting period at a rate of 33.3% per
year, commencing on the date of the award grant. Compensation expense is
recorded at the fair market value of the shares at the grant date ratably over
the vesting period.
Income Taxes
The Bank accounts for income taxes according to SFAS 109, "Accounting for
Income Taxes." Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using the enacted tax rates applicable
to taxable income for the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Pension Plan
Pension plan costs based on actuarial computation of current and future
benefits for employees are charged to expense and are funded based on the
maximum amount that can be deducted for Federal income tax purposes.
Post-Retirement Benefits
The Bank accounts for post-retirement benefits under SFAS 106 "Employers'
Accounting for Post-Retirement Benefits Other than Pensions." SFAS 106
requires the accrual of the expected cost of providing health care and other
benefits to employees subsequent to their retirement during the service
periods of the employees.
F-10
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding.
Common stock equivalents are determined by applying the treasury stock method.
Per share data reflects 10% stock dividends paid on April 1, 1994, and
December 16, 1996, and declared on September 24, 1997, respectively, and a 2-
for-1 stock split on December 1, 1994, all applied retroactively.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 amounts to
conform to the 1997 presentation.
(2) REORGANIZATION AND STOCK ISSUANCE
On July 10, 1992, the Office of Thrift Supervision ("OTS") approved the Plan
of Reorganization adopted by the Board ("the Reorganization"), whereby the
Bank was reorganized into a federal mutual holding company. At that time,
First Savings Bank, SLA, reorganized from a New Jersey-chartered mutual
savings association into a federal mutual holding company, First Savings
Bancshares, MHC ("Holding Company"). The Bank has continued to operate under
the mutual holding company regulations as proscribed by the OTS.
As part of the Reorganization, a minority stock offering was completed on
July 10, 1992, whereby 1,000,000 shares were sold at a price of $10 per share,
for gross proceeds of $10.0 million, which represented a minority ownership of
37.6% of the Bank. On July 11, 1995, the Bank completed a secondary stock
offering of 600,000 shares of common stock at $13 per share for gross proceeds
of $7.8 million, offset by offering-related expenses totaling $595,000. The
net proceeds were used to purchase investment and mortgage-backed securities.
The total minority ownership, after the secondary stock offering, totaled
47.5% at December 31, 1995. At September 30, 1997, the total minority
ownership was 48.4%.
On October 24, 1997, the Boards of Directors for First Savings Bank and
First Savings Bancshares, MHC, the mutual holding company of the Bank,
announced that a Plan of Conversion was adopted to convert First Savings
Bancshares, MHC to stock form and to reorganize First Savings Bancshares, MHC
and First Savings Bank into the stock holding company structure by forming a
new stock Delaware corporation to become the parent holding company for the
Bank. Pursuant to the Plan, the new Delaware corporation will exchange certain
shares of its common stock for the outstanding common stock of the Bank and
will issue and offer for sale certain additional shares of its common stock.
The Plan of Conversion must receive regulatory approval from the Office of
Thrift Supervision, along with approval from the members of First Savings
Bancshares, MHC, and the Bank's stockholders. The transaction is expected to
be completed during the second quarter of 1998.
The Plan of Conversion provides for the establishment, upon the completion
of the Conversion and Reorganization, of a special "liquidation account" for
the benefit of account holders in an amount equal to the greater of (1) the
Bank's retained earnings at December 31, 1991, or (2) 51.6% of the Bank's
shareholders' equity as of the date of its latest balance sheet contained in
the final Prospectus used in connection with the Conversion and
Reorganization. Each account holder, if he were to continue to maintain his
deposit account at the Bank, would be entitled, on a complete liquidation of
the Bank after the Conversion and Reorganization, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
account holder would have an initial interest in such liquidation account for
each deposit account with a balance of $50 or more held in the Bank on
December 31, 1995 and September 30, 1997, respectively. Each account holder
will have a pro rata interest in the total liquidation account based on the
proportion that the balance of his deposits on the eligibility record date
bore to the total amount of all deposits in the Bank.
F-11
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If, however, on any annual closing date subsequent to the eligibility record
date, the amount of the deposit is less than the amount of the deposit of such
eligible account holder as of the eligibility record date, or less than the
amount of the deposits as of the previous annual closing date, then the
interest in the liquidation account relating to such deposit would be reduced
from time to time by the proportion of any such reduction, and such interest
will cease to exist if such deposit accounts are closed.
Subsequent to the Conversion and Reorganization, the Bank may not declare or
pay cash dividends on or repurchase any of its shares of common stock if the
effect thereof would cause equity to be reduced below the amount required for
its liquidation account or other applicable regulatory capital maintenance
requirements, or if such declaration and payment would otherwise violate
regulatory requirements.
As of September 30, 1997, the MHC had waived $6.7 million of dividends. Upon
completion of the Conversion, as all shares of the Holding Company stock will
be publicly owned, the restriction and availability of waived dividends will
cease.
Conversion costs will be deferred and reduce the proceeds from the common
stock sold in the Conversion. If the Conversion is not completed all costs
will be charged to expense. As of September 30, 1997, no Conversion costs had
been incurred.
(3) REGULATORY MATTERS
Capital distributions, in the form of any dividend paid or other
distribution in cash or in kind, are limited by the OTS. A "Tier 1"
association, which is defined as an association that has capital immediately
prior to a proposed capital distribution that is equal to or greater than the
amount of its fully phased-in capital requirement, is authorized to make
capital distributions during a calendar year up to the higher of 100% of its
net income to date during the calendar year plus the amount that would reduce
by one-half its surplus capital ratio at the beginning of the calendar year,
or 75% of its net income over the most recent four-quarter period. The Bank is
a Tier 1 association.
OTS regulations require savings institutions to maintain minimum levels of
regulatory capital. Under the regulations in effect at September 30, 1997,
December 31, 1996 and 1995, the Bank was required to maintain a minimum ratio
of tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier
1 (core) capital to total adjusted assets of 3.0%; and a minimum ratio of
total (core and supplementary) capital to risk-weighted assets of 8.0%.
Under the prompt corrective action regulations, the OTS is required to take
certain supervisory actions and may take additional discretionary actions with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a Tier 1 (core) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%;
and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors.
Management believes that, as of September 30, 1997, the Bank meets all
capital adequacy requirements to which it is subject. Further, the most recent
OTS notification categorized the Bank as a well capitalized institution under
the prompt corrective action regulations. There have been no conditions or
events since that notification that management believes have changed the
Bank's capital classification.
F-12
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the Bank's actual capital amounts and ratios
as of September 30, 1997, December 31, 1996 and 1995, compared to the OTS
minimum capital adequacy requirements and the OTS requirements for
classification as a well-capitalized institution:
<TABLE>
<CAPTION>
OTS REQUIREMENTS
------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL-CAPITALIZED
---------------- ----------------- ------------------------
AMOUNT RATIO(%) AMOUNT RATIO (%) AMOUNT RATIO (%)
------- -------- ------- --------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1997
Tangible capital........ $89,992 8.68 $15,552 1.50
Tier 1 (core) capital... 89,992 8.68 31,104 3.00 $ 51,840 5.00
Risk-based capital:
Tier 1................ 89,992 21.13 25,552 6.00
Total............... $95,319 22.38 $34,070 8.00 $ 42,587 10.00
======= ===== ======= ==== =========== =========
DECEMBER 31, 1996
Tangible capital........ $81,909 8.38 $14,670 1.50
Tier 1 (core) capital... 81,909 8.38 29,340 3.00 $ 48,900 5.00
Risk-based capital:
Tier 1................ 81,909 20.85 23,571 6.00
Total............... $86,822 22.10 $31,428 8.00 $ 39,286 10.00
======= ===== ======= ==== =========== =========
DECEMBER 31, 1995
Tangible capital........ $77,249 8.28 $13,995 1.50
Tier 1 (core) capital... 77,751 8.33 28,005 3.00 $ 46,675 5.00
Risk-based capital:
Tier 1................ 77,751 20.85 22,371 6.00
Total............... $80,680 21.64 $29,828 8.00 $ 37,285 10.00
======= ===== ======= ==== =========== =========
</TABLE>
The following is a reconciliation of regulatory capital to capital under
generally accepted accounting principles (in thousands):
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
<S> <C> <C> <C>
GAAP capital................................... $99,213 $99,213 $99,213
Unrealized gain on securities.................. (193) (193) (193)
Goodwill and other intangibles................. (9,018) (9,018) (9,018)
Mortgage servicing rights disallowance......... (10) (10) (10)
General valuation allowance.................... -- -- 5,327
------- ------- -------
Regulatory capital........................... $89,992 $89,992 $95,319
======= ======= =======
</TABLE>
F-13
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) INVESTMENT SECURITIES
A summary of investment securities at September 30, 1997, December 31, 1996
and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INVESTMENTS HELD TO MATURITY
U.S. Government and Agency
obligations........................ $40,959 $193 $ (44) $41,108
======= ==== ===== =======
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agency
obligations........................ $13,972 $ 26 $ (55) $13,943
Corporate obligations............... 4,079 3 (1) 4,081
------- ---- ----- -------
Total investment securities
available for sale............... $18,051 $ 29 $ (56) $18,024
======= ==== ===== =======
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INVESTMENTS HELD TO MATURITY
U.S. Government and Agency
obligations........................ $38,955 $247 $(222) $38,980
======= ==== ===== =======
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agency
obligations........................ $12,964 $ 4 $(132) $12,836
Corporate obligations............... 2,000 -- (5) 1,995
------- ---- ----- -------
Total investment securities
available for sale............... $14,964 $ 4 $(137) $14,831
======= ==== ===== =======
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INVESTMENTS HELD TO MATURITY
U.S. Government and Agency
obligations........................ $39,003 $621 $ (7) $39,617
======= ==== ===== =======
INVESTMENTS AVAILABLE FOR SALE
U.S. Government and Agency
obligations........................ $ 1,000 $ -- $ (4) $ 996
Corporate obligations............... 1,041 21 -- 1,062
------- ---- ----- -------
Total investment securities
available for sale............... $ 2,041 $ 21 $ (4) $ 2,058
======= ==== ===== =======
</TABLE>
As of September 30, 1997, December 31, 1996 and 1995, corporate obligations
consisted primarily of corporate notes with ratings of A or better, and
preferred stock with an Aa2/AA2 rating. All corporate obligations are
available for sale.
F-14
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost and estimated fair value of investment securities at September 30,
1997 and December 31, 1996, by contractual maturity, are shown below (in
thousands). Expected maturities may differ from contractual maturities because
borrowers may have the right to call or repay obligations at par value without
prepayment penalties.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- -------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INVESTMENTS HELD TO MATURITY
Due in:
Less than one year.................. $ -- $ -- $ 1,000 $ 1,002
One to five years................... 14,991 15,041 13,990 14,054
Five to ten years................... 19,972 20,022 17,970 17,953
Ten to fifteen years................ 5,996 6,045 5,995 5,971
------- ------- ------- -------
$40,959 $41,108 $38,955 $38,980
======= ======= ======= =======
<CAPTION>
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INVESTMENTS AVAILABLE FOR SALE
Due in:
One to five years................... $12,972 $12,942 $13,964 $13,856
Five to ten years................... 5,079 5,082 1,000 975
------- ------- ------- -------
$18,051 $18,024 $14,964 $14,831
======= ======= ======= =======
</TABLE>
Proceeds from sales of investment securities and the realized gross gains
and losses from those sales are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31
------------------ -------------------------
1997 1996 1996 1995 1994
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Proceeds from sales........... $ 10,120 $ 10,877 $20,978 $25,823 $47,821
======== ======== ======= ======= =======
Gross realized gains.......... $ 180 $ 12 $ 147 $ 94 $ 317
Gross realized losses......... (60) (31) (33) (198) (296)
-------- -------- ------- ------- -------
$ 120 $ (19) $ 114 $ (104) $ 21
======== ======== ======= ======= =======
</TABLE>
Investment securities with an amortized cost of $15.4 million and $15.0
million at September 30, 1997 and December 31, 1996, respectively, are pledged
as collateral for other borrowings. Pursuant to a collateral agreement with
the FHLB-NY, all unpledged, qualifying investment securities, including those
available for sale, are pledged to secure advances from the FHLB-NY (see note
10).
F-15
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at September 30, 1997, December 31,
1996 and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO
MATURITY
FHLMC............................. $132,388 $2,988 $ (73) $135,303
GNMA.............................. 18,612 536 -- 19,148
FNMA.............................. 33,164 307 (15) 33,456
Collateralized mortgage
obligations...................... 43,994 61 (295) 43,760
-------- ------ ----- --------
Total mortgage-backed securities
held to maturity............... $228,158 $3,892 $(383) $231,667
======== ====== ===== ========
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
FHLMC............................. $ 69,272 $ 537 $(238) $ 69,571
FNMA.............................. 35,009 11 (102) 34,918
Collateralized mortgage
obligations...................... 17,761 128 (7) 17,882
-------- ------ ----- --------
Total mortgage-backed securities
available for sale............. $122,042 $ 676 $(347) $122,371
======== ====== ===== ========
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO
MATURITY
FHLMC............................. $161,180 $2,663 $(187) $163,656
GNMA.............................. 20,851 398 -- 21,249
FNMA.............................. 32,225 217 (115) 32,327
Collateralized mortgage
obligations...................... 38,127 75 (382) 37,820
-------- ------ ----- --------
Total mortgage-backed securities
held to maturity............... $252,383 $3,353 $(684) $255,052
======== ====== ===== ========
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
FHLMC............................. $ 88,818 $ 505 $(343) $ 88,980
GNMA.............................. 7,320 17 (23) 7,314
FNMA.............................. 22,528 53 (73) 22,508
Collateralized mortgage
obligations...................... 2,004 -- (9) 1,995
-------- ------ ----- --------
Total mortgage-backed securities
available for sale............. $120,670 $ 575 $(448) $120,797
======== ====== ===== ========
</TABLE>
F-16
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS GAINS VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO
MATURITY
FHLMC............................. $199,320 $3,241 $ (48) $202,513
GNMA.............................. 19,690 588 -- 20,278
FNMA.............................. 12,474 181 (9) 12,646
Collateralized mortgage
obligations...................... 56,659 139 (546) 56,252
-------- ------ ----- --------
Total mortgage-backed securities
held to maturity............... $288,143 $4,149 $(603) $291,689
======== ====== ===== ========
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
FHLMC............................. $ 62,029 $ 334 $ (81) $ 62,282
GNMA.............................. 12,059 13 -- 12,072
FNMA.............................. 6,206 90 (10) 6,286
Collateralized mortgage
obligations...................... 8,805 21 (127) 8,699
-------- ------ ----- --------
Total mortgage-backed securities
available for sale............. $ 89,099 $ 458 $(218) $ 89,339
======== ====== ===== ========
</TABLE>
Proceeds from sales of mortgage-backed securities and the realized gross
gains and losses from those sales are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- -------------------------
1997 1996 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Proceeds from sales............ $116,891 $73,210 $96,309 $82,632 $36,001
======== ======= ======= ======= =======
Gross realized gains........... $ 513 $ 243 $ 324 $ 986 $ 217
Gross realized losses.......... (52) (44) (162) (146) (121)
-------- ------- ------- ------- -------
$ 461 $ 199 $ 162 $ 840 $ 96
======== ======= ======= ======= =======
</TABLE>
Mortgage-backed securities with an amortized cost of $301,000, $338,000 and
$444,000 at September 30, 1997, December 31, 1996 and 1995, respectively, were
pledged as collateral to secure deposits held for municipalities within the
State of New Jersey. Mortgage-backed securities with an amortized cost of
$87.8 million, $48.7 million and $21.8 million at September 30, 1997, December
31, 1996 and 1995, respectively, were pledged as collateral for other
borrowings. Pursuant to a collateral agreement with the FHLB-NY, all
unpledged, qualifying mortgage-backed securities are pledged to secure
advances from the FHLB-NY (see note 10). Expected maturities of mortgage-
backed securities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalties. As
of September 30, 1997, December 31, 1996 and 1995, there were $7.1 million,
$8.1 million and $10.9 million, respectively, in Collateralized Mortgage
Obligations that are private-label issuances, all of which were held to
maturity, and all rated AAA/Aaa by S&P and Moody's. The market value of the
private label Collateralized Mortgage Obligations at September 30, 1997,
December 31, 1996 and 1995 was $7.0 million, $8.0 million and $10.7 million,
respectively.
F-17
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) LOANS RECEIVABLE, NET
A summary of loans receivable at September 30, 1997, December 31, 1996 and
1995, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C>
LOANS RECEIVABLE
Real estate mortgages:
One- to four-family.................... $466,257 $425,175 $386,458
Multi-family and commercial............ 37,794 29,085 26,997
Home equity............................ 41,895 39,139 33,456
FHA-insured and VA-guaranteed.......... 2,572 3,002 3,759
AID housing loan....................... -- -- 165
-------- -------- --------
548,518 496,401 450,835
Real estate construction................. 44,469 25,124 11,412
Consumer................................. 6,208 5,772 5,055
-------- -------- --------
Total Loans.......................... 599,195 527,297 467,302
-------- -------- --------
Loans in process......................... (26,214) (12,253) (3,800)
Deferred (fees) expenses................. 255 19 (265)
Net unearned discount.................... (57) (114) (234)
Allowance for loan losses................ (5,982) (5,322) (5,247)
-------- -------- --------
(31,998) (17,670) (9,546)
-------- -------- --------
Loans receivable, net................ $567,197 $509,627 $457,756
======== ======== ========
LOANS AVAILABLE FOR SALE
Real estate mortgages--one-to-four
family.................................. $ -- $ 287 $ 424
======== ======== ========
</TABLE>
The Bank serviced loans for others in the amount of $94.5 million and $103.4
million at September 30, 1997 and 1996, respectively, and $101.2 million,
$106.9 million and $112.4 million at December 31, 1996, 1995 and 1994,
respectively. Related servicing income earned on loans serviced for others
totaled $218,000 and $246,000 for the nine months ended September 30, 1997 and
1996, respectively, and $325,000, $350,000 and $386,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Loans in the amount of $1.7 million, $1.9 million and $2.1 million were
outstanding to directors and executive officers of the Bank at September 30,
1997, and December 31, 1996 and 1995, respectively. The loans consist
primarily of loans secured by mortgages on residential properties.
The Bank has pledged, under a blanket assignment, its unpledged and
qualifying mortgage portfolio to secure advances from the FHLB-NY (see note
10).
A summary of nonperforming assets at September 30, 1997, December 31, 1996
and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------
1997 1996 1995
------------- ------ ------
<S> <C> <C> <C>
Nonaccrual loans............................... $3,561 $4,720 $5,838
Loans 90 days or more delinquent and still
accruing...................................... 379 93 200
Total nonperforming loans.................... 3,940 4,813 6,038
Real estate owned (included in other assets)... 1,398 1,517 3,131
------ ------ ------
Total nonperforming assets................. $5,338 $6,330 $9,169
====== ====== ======
</TABLE>
F-18
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If interest income on nonaccrual loans had been current in accordance with
their original terms, approximately $253,000 and $274,000 of interest income
for the nine months ended September 30, 1997 and 1996, respectively, and
$364,000, $579,000 and $805,000 of interest income for the years ended
December 31, 1996, 1995, and 1994, respectively, would have been recorded.
Interest income recognized on non-accrual loans totaled $55,000 and $84,000
for the nine months ended September 30, 1997 and 1996, respectively, and
$105,000, $114,000 and $71,000 for the years ended December 31, 1996, 1995 and
1994, respectively. At September 30, 1997, there were no commitments to lend
additional funds to borrowers whose loans are classified as nonperforming.
An analysis of the allowance for loan losses for the nine months ended
September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995
and 1994, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- ----------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....... $5,322 $5,247 $5,247 $5,745 $5,899
Provision charged to operations...... 900 375 550 310 300
------ ------ ------ ------ ------
6,222 5,622 5,797 6,055 6,199
Charge-offs.......................... (240) (534) (585) (1,044) (490)
Recoveries........................... -- 3 110 236 36
------ ------ ------ ------ ------
Balance at end of period............. $5,982 $5,091 $5,322 $5,247 $5,745
====== ====== ====== ====== ======
</TABLE>
(7) INTEREST AND DIVIDENDS RECEIVABLE, NET
A summary of interest and dividends receivable, net of allowance for
uncollected interest of $407,000, $440,000, and $1.1 million at September 30,
1997, December 31, 1996 and 1995, respectively, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------
1997 1996 1995
------------- ------ ------
<S> <C> <C> <C>
Loans........................................... $3,339 $2,868 $2,841
Investment securities........................... 851 908 810
Mortgage-backed securities...................... 3,529 3,639 3,142
------ ------ ------
$7,719 $7,415 $6,793
====== ====== ======
</TABLE>
(8) PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30, 1997, December 31, 1996 and 1995,
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1997 1996 1995
------------- -------- -------
<S> <C> <C> <C>
Land...................... $ 2,235 $ 1,423 $ 1,423
Buildings and
improvements............. 10,902 7,977 7,670
Leasehold improvements.... 2,127 1,967 1,915
Furnishings, equipment and
automobiles.............. 4,705 3,265 4,953
Construction in progress.. 120 1,788 1,043
------- -------- -------
Total................... 20,089 16,420 17,004
Accumulated depreciation
and amortization......... (6,806) (6,064) (7,657)
------- -------- -------
$13,283 $ 10,356 $ 9,347
======= ======== =======
</TABLE>
F-19
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) DEPOSITS
Deposits at September 30, 1997, December 31, 1996 and 1995, are summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- --------------------------- ---------------------------
INTEREST WEIGHTED INTEREST WEIGHTED INTEREST WEIGHTED
RATE AVERAGE RATE AVERAGE RATE AVERAGE
RANGES RATE RANGES RATE RANGES RATE
AMOUNT (%) (%) AMOUNT (%) (%) AMOUNT (%) (%)
-------- --------- -------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand................. $ 26,410 -- -- $ 19,888 -- -- $ 18,515 -- --
NOW and money market.... 195,003 0-3.39 2.93 181,499 0-5.43 2.90 173,597 0-3.70 2.88
Savings................. 123,384 0-5.84 2.54 131,427 0-2.50 2.50 140,919 0-4.11 2.50
Certificates of
deposit................ 464,652 3.45-9.34 5.54 461,781 3.69-9.34 5.38 473,307 3.69-9.34 5.60
-------- ---- -------- ---- -------- ----
$809,449 4.27 $794,595 4.20 $806,338 4.34
======== ==== ======== ==== ======== ====
</TABLE>
The scheduled maturities of certificates of deposit at September 30, 1997
and December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
One year or less.................................. $348,304 $358,098
After one to two years............................ 44,579 39,366
After two to three years.......................... 22,886 17,533
After three to four years......................... 11,035 15,889
After four to five years.......................... 15,186 11,738
After five years.................................. 22,662 19,157
-------- --------
$464,652 $461,781
======== ========
</TABLE>
Included in deposits at September 30, 1997, December 31, 1996 and 1995, are
$76.5 million, $62.5 million and $60.3 million of deposits of $100,000 and
over, and $342,000, $331,000 and $357,000, respectively, of accrued interest
payable on deposits.
(10) BORROWED FUNDS
Federal Home Loan Bank-New York Advances
Advances from the FHLB-NY at September 30, 1997, December 31, 1996 and 1995,
are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
---------- ---------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996.............. $ -- --% $ -- --% $ 4,000 5.18%
1997.............. 5,000 6.09 12,000 5.80 7,000 5.94
1998.............. 15,000 6.26 10,000 6.56 5,000 7.42
1999.............. 6,000 5.87 6,000 5.87 1,000 5.58
2000.............. 2,000 5.76 2,000 5.76 2,000 5.76
2002.............. 5,000 5.76 -- -- -- --
---------- ------- -------
$ 33,000 6.06% $30,000 6.06% $19,000 6.13%
========== ======= ======= ==== ======= ====
</TABLE>
F-20
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank has entered into FHLB-NY advances that have call features that may
be exercised by the FHLB-NY at predetermined dates. The total of such advances
at September 30, 1997 and December 31, 1996, totaled $10.0 million for both
periods. The maximum amount of FHLB-NY advances outstanding at any month-end
during the nine months ended September 30, 1997 and for the years ended
December 31, 1996 and 1995 was $40.0 million, $30.0 million and $34.0 million,
respectively. At September 30, 1997 and December 31, 1996, $10.0 million and
$5.0 million of FHLB-NY advances had adjustable rates.
Advances from the FHLB-NY are secured by pledges of FHLB-NY stock of $8.0
million, $7.4 million and $6.3 million at September 30, 1997, December 31,
1996 and 1995, respectively, and a blanket assignment of the Bank's unpledged,
qualifying mortgage loans, mortgage-backed securities and investment
securities.
The Bank has an available overnight line of credit with the FHLB-NY for a
maximum of $48.9 million at September 30, 1997.
Other Borrowings
The following is a summary of Other Borrowings at September 30, 1997,
December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
CONTRACTUAL MATURITY AMOUNT INTEREST AMOUNT INTEREST AMOUNT INTEREST
-------------------- ---------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996.................... $ -- -- % $ -- -- % $ 1,000 5.95%
1997.................... 15,000 5.62 13,750 5.93 8,750 6.12
1998.................... 25,894 6.32 24,244 6.35 10,000 6.15
1999.................... 15,000 5.71 15,000 5.71 -- --
2000.................... 20,000 6.07 -- -- -- --
2001.................... 5,000 5.55 5,000 5.55 -- --
2002.................... 10,000 5.75 -- -- -- --
---------- ------- ---------- ------- ---------- -------
$ 90,894 5.94% $ 57,994 6.02% $ 19,750 6.13%
========== ======= ========== ======= ========== =======
</TABLE>
The maximum amount of other borrowings outstanding at any month-end during
the nine months ended September 30, 1997 and for the years ended December 31,
1996 and 1995 was $90.9 million, $58.0 million and $24.9 million,
respectively. Securities underlying other borrowings included mortgage-backed
and investment securities, which had an amortized cost of $103.3 million,
$63.7 million and $21.8 million, and market values of $103.7 million, $63.8
million and $22.0 million at September 30, 1997, December 31, 1996 and 1995,
respectively. At September 30, 1997 and December 31, 1996, $50.0 million and
$20.0 million, respectively, of other borrowings are callable at defined dates
and at the lender's discretion prior to the contractual maturity of the
borrowings.
(11) EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") DEBT
The ESOP debt as of September 30, 1997, December 31, 1996 and 1995, was
$571,000, $646,000 and $746,000, respectively, and bears an interest rate
equal to the prime rate less 1.50%, as published in the Wall Street Journal,
with principal and interest payable in quarterly installments over a ten-year
period. During the nine months ended September 30, 1997, and the year ended
December 31, 1996, $25,000 and $25,000 of dividends paid on ESOP shares were
used to pay down ESOP debt. Total interest paid on ESOP debt for the nine
months ended September 30, 1997 and 1996, was $33,000 and $37,000,
respectively, and for the years ended December 31, 1996, 1995 and 1994 was
$48,000, $41,000, and $26,000, respectively. In July, 1995, the Bank completed
a secondary stock offering, whereby the ESOP purchased an additional 42,000
shares of
F-21
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock at $13 per share, totaling $546,000. The funds to purchase the
shares were obtained from the parent company. The maturity date of the loan is
September 30, 2005. The borrowing is secured by 80,102 shares of the Bank's
common stock (as restated for the 10% stock dividend declared on September 24,
1997).
(12) INCOME TAXES
Under tax law that existed prior to 1996, the Bank was generally allowed a
special bad debt deduction in determining income for tax purposes. The
deduction was based on either a specified experience formula or a percentage
of taxable income before such deduction. The percentage of taxable income
method was used in preparing the income tax returns for 1995 and 1994.
Legislation was enacted in August 1996, which repealed for tax purposes the
percentage of taxable income bad debt reserve method. As a result, the Bank
must instead use the direct charge-off method to compute its bad debt
deduction. The legislation also requires the Bank to recapture its post-1987
net additions to the tax bad debt reserves. The Bank has previously provided
for this liability in the financial statements. The Bank's federal tax returns
have been audited through December 31, 1984.
Retained earnings at September 30, 1997 and December 31, 1996 includes
approximately $12.7 million for which no provision for income tax has been
made. This amount represents an allocation of income to bad debt deductions
for tax purposes only. Events that would result in taxation of these reserves
include failure to qualify as a bank for tax purposes, distributions in
complete or partial liquidation, stock redemptions and excess distributions to
shareholders. At September 30, 1997 and December 31, 1996, the Bank had an
unrecognized tax liability of $4.6 million with respect to this reserve.
Income tax expense applicable to income for the periods ended September 30,
1997 and 1996, and for the years ended December 31, 1996, 1995 and 1994,
consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ---------------------
1997 1996 1996 1995 1994
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Federal:
Current............................ $4,159 $ 3,854 $3,183 $3,671 $4,624
Deferred........................... (501) (2,595) (603) 545 (114)
------ ------- ------ ------ ------
3,658 1,259 2,580 4,216 4,510
State:
Current............................ 376 346 282 365 409
Deferred........................... (44) (229) (53) 30 (7)
------ ------- ------ ------ ------
332 117 229 395 402
------ ------- ------ ------ ------
$3,990 $ 1,376 $2,809 $4,611 $4,912
====== ======= ====== ====== ======
</TABLE>
F-22
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation between the effective income tax expense and the amount
computed by multiplying the applicable statutory federal income tax rate for
the periods ended September 30, 1997 and 1996, and for the years ended
December 31, 1996, 1995 and 1994, is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ------------------------
1997 1996 1996 1995 1994
------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Income before income taxes...... $10,750 $3,740 $7,519 $12,913 $13,187
Applicable statutory federal tax
rate........................... 35% 35% 35% 35% 35%
------- ------ ------ ------- -------
Computed "expected" federal
income tax expense............. 3,763 1,309 2,632 4,520 4,615
Increase in federal income tax
expense resulting from:
State income taxes, net of
federal benefit.............. 216 76 151 257 261
Other items, net.............. 11 (9) 26 (166) 36
------- ------ ------ ------- -------
$ 3,990 $1,376 $2,809 $ 4,611 $ 4,912
======= ====== ====== ======= =======
Effective tax rate.............. 37.1% 36.8% 37.4% 35.7% 37.2%
======= ====== ====== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of deferred tax assets and liabilities at September 30, 1997, December
31, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------
1997 1996 1995
------------- ------ ------
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Provision for loan losses--book................ $2,231 $1,980 $1,984
Postretirement benefits........................ 376 350 293
Cash to accrual adjustment..................... -- 1 164
Excess pension expense......................... 448 670 204
Deferred directors' fees....................... 87 63 20
Unrealized loss on securities available for
sale.......................................... -- 2 --
Excess of cost over fair value of net assets
acquired...................................... 479 -- --
Other.......................................... 87 2 8
------ ------ ------
Total gross deferred tax assets (included in
Other Assets)............................... 3,708 3,068 2,673
------ ------ ------
DEFERRED TAX LIABILITIES:
Provision for loan losses--tax................. 1,161 1,161 1,136
Unrealized gain on securities available for
sale.......................................... 109 -- 94
Tax depreciation less than book depreciation... 2 179 148
Excess sum-of-year discount over straight
line.......................................... 215 90 181
Amortization of core deposit premium........... -- 55 93
Net mortgage premium accretion................. 66 66 85
Prepaid expense................................ 16 -- 171
Deferred points................................ 152 -- --
Other.......................................... 36 -- --
------ ------ ------
Total gross deferred tax liabilities
(included in Other Liabilities)............. 1,757 1,551 1,908
------ ------ ------
Net deferred tax asset......................... $1,951 $1,517 $ 765
====== ====== ======
</TABLE>
F-23
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Included in Stockholders' Equity are income tax expenses (benefits)
attributable to net unrealized gains (losses) on securities available for sale
in the amounts of $109,000 for the nine months ended September 30, 1997 and
$(2,000) and $94,000 for the years ended December 31, 1996 and 1995,
respectively.
(13) EMPLOYEE BENEFIT PLANS
The Bank is a participant in the Financial Institutions Retirement Fund, a
multi-employer defined benefit plan. All employees who attain the age of 21
years and complete one year of service are eligible to participate in this
plan. Retirement benefits are based upon a formula utilizing years of service
and average compensation, as defined. Participants are vested 100% upon the
completion of five years of service. Pension expense was $143,000, $240,000,
$320,000, $330,000 and $330,000 for the nine months ended September 30, 1997
and 1996, and for the years ended December 31, 1996, 1995 and 1994,
respectively.
Financial Institutions Retirement Fund does not segregate its assets,
liabilities or costs by participating employer. Therefore, disclosure of the
accumulated benefit obligations, plan assets and the components of annual
pension expense attributable to the Bank cannot be ascertained.
The Bank has a Supplemental Executive Retirement Plan ("SERP"), which
provides a post-employment supplemental retirement benefit equal to seventy-
five percent of the participant's base salary during the twelve months prior
to retirement less the amount of the participant's Pension Plan Annual Benefit
and primary Social Security Benefit due at the participant's normal retirement
age. The SERP is non-qualified employee benefit plan. SERP expenses due to
normal accruals were $635,000 and $488,000 for the periods ended September 30,
1997 and 1996, respectively, and $550,000, $200,000, and $72,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Due to the sudden death
of the Bank's President, an additional one-time expense of $600,000 was
incurred in 1996 to fund the related SERP liability.
The Bank also maintains an incentive savings plan for eligible employees.
Employees may make contributions to the plan of 2% to 12% of their
compensation. For the first 6% of the employee's contribution, the Bank will
contribute 50% of that amount to the employee's account. At the end of the
plan year, the Bank may make an additional contribution to the plan. The
contributions under this plan were $98,000 and $106,000 for the periods ended
September 30, 1997 and 1996, respectively, and $135,000, $119,000 and
$107,000, for the years ended December 31, 1996, 1995 and 1994, respectively.
Postretirement Benefits
The Bank accounts for postretirement benefits in accordance with SFAS 106.
The expense for the periods ended September 30, 1997 and 1996 were $70,000 and
$63,000, respectively, and for the years ended December 31, 1996 and 1994 was
$157,000 and $3,000, respectively. There was no expense for the year ended
December 31, 1995. The accumulated postretirement benefit obligation for fully
eligible active plan participants and retirees was $1.0 million, $948,000 and
$791,000 as of September 30, 1997, December 31, 1996 and 1995, respectively.
The plan is unfunded as of September 30, 1997, and the obligation is included
in Other liabilities as an accrued postretirement benefit cost.
F-24
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (RRP)
for the benefit of directors, officers and key employees of the Bank. During
1995, the Board of Directors amended the RRP in order to increase the number
of shares available for grants under the plan by 21,780 shares (adjusted for
the 10% stock dividend declared on September 24, 1997), as approved by the OTS
and stockholders.
Under the RRP, awards are granted in the form of shares of common stock held
by the RRP, and are payable over a three year period at a rate of 33.3% per
year, commencing on the date of the award grant. The market value of shares
issued and granted under the RRP in August and November, 1996 was $310,000.
Amortization of the RRP for the nine month period ended September 30, 1997 and
for the year ended December 31, 1996 was $78,000 and $24,000, respectively.
Employee Stock Ownership Plan
On July 10, 1992, the Bank established an ESOP for eligible employees who
have completed a twelve-month period of employment with the Bank. The ESOP
acquired 70,000 shares of common stock. On July 11, 1995, the Bank completed a
secondary offering of common stock, and the ESOP purchased 42,000 shares of
common stock at $13.00 per share. Funds for the purchase of the additional
shares were borrowed from the Bank's parent. Shares purchased by the ESOP are
held by a trustee for allocation among participants as the loan is repaid. The
Bank, at its discretion, contributes funds, in cash, to pay principal and
interest on the ESOP loan. The number of shares of common stock released each
year is proportional to the amount of principal and interest repaid on the
loan for the year. The Bank recognizes compensation expense when debt payments
are made.
The Bank accounts for the allocation of ESOP shares purchased prior to 1995
at their original issue price. The Bank accounts for the shares purchased in
the secondary offering in accordance with American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") 93-6. Those shares
have a fair value of $1.8 million at September 30, 1997. The ESOP allocated
21,962, 29,282, 26,620 and 26,620 shares for the period ended September 30,
1997 and the years ended December 31, 1996, 1995 and 1994, respectively,
inclusive of four 10% stock dividends, and a 2-for-1 stock split. The
compensation expense for payments made to the ESOP totaled $50,000 and $50,000
for the periods ended September 30, 1997 and 1996, respectively, and $75,000,
$75,000 and $100,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Stock Option Plans
The Bank maintains stock option plans ("the Plans") for the benefit of
directors, officers, and other key employees of the Bank. Options granted
under the Plans are exercisable over a period not to exceed ten years from the
date of grant. Under the Plans, the exercise price of each option equals the
market price of the Bank's stock on the date of grant. During 1995, the Board
of Directors amended the Plans, in conjunction with the secondary offering, to
increase the number of shares available for grants by 60,000 shares, as
approved by the OTS and stockholders. The following table summarizes the
options granted and exercised under the Plans during
F-25
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
---------- ------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 271,958 $ 6.306 209,627 $ 3.413 218,451 $ 3.413 247,366 $ 3.413
Granted................. -- -- 72,600 14.245 -- -- -- --
Exercised............... (119,774) 3.413 (10,269) 3.413 (8,824) 3.413 (28,915) 3.413
---------- -------- -------- -------- --------- -------- --------- --------
Outstanding at end of
period................. 152,184 $ 8.582 271,958 $ 6.306 209,627 $ 3.413 218,451 $ 3.413
========== ======== ======== ======== ========= ======== ========= ========
Options exercisable at
end of period.......... 86,844 199,356 180,343 159,884
========== ======== ========= =========
Weighted average fair
value of options
granted during the pe-
riod................... -- $ 14.103 -- --
======== ======== ======== ========
</TABLE>
The following table summarizes information about the stock options
outstanding at September 30, 1997, and December 31, 1996, as adjusted for the
effect of stock dividends:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------
WEIGHTED
AVERAGE NUMBER OF
REMAINING WEIGHTED SHARES WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE SHARES LIFE IN EXERCISE AT PERIOD EXERCISE
PRICES OUTSTANDING YEARS PRICE END PRICE
------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.413 79,584 4.6 $ 3.413 79,584 $ 3.413
13.017-14.773 72,600 9.0 14.245 7,260 13.017
-------------- ------- --- ------- ------ -------
$ 3.413-14.773 152,184 6.7 $ 8.582 86,844 $ 4.216
============== ======= === ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
---------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------
WEIGHTED
AVERAGE NUMBER OF
REMAINING WEIGHTED SHARES WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE SHARES LIFE IN EXERCISE AT PERIOD EXERCISE
PRICES OUTSTANDING YEARS PRICE END PRICE
------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.413 199,358 5.5 $ 3.413 199,356 $3.413
13.017-14.773 72,600 9.8 14.245 -- --
-------------- ------- --- ------- ------- ------
$ 3.413-14.773 271,958 6.7 $ 6.305 199,356 $3.413
============== ======= === ======= ======= ======
</TABLE>
F-26
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank applies APB 25 in accounting for the Plans. Consistent with SFAS
123, if compensation cost for the Plans was included, the Bank's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (as restated for the 10% stock dividend declared on September
24, 1997). There were no options granted in 1997 (in thousands, except per
share data):
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
----------------- --------------------
1997 1996 1996 1995 1994
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Income:
As Reported....................... $ 6,760 $ 2,364 $4,710 $8,302 $8,275
Pro forma......................... 6,760 2,364 4,649 8,302 8,275
Earnings per share:
Basic earnings per share.......... 0.86 0.31 0.60 1.06 1.06
Diluted earnings per share........ 0.83 0.30 0.59 1.04 1.03
Pro forma basic earnings per
share............................ 0.86 0.31 0.59 1.06 1.06
Weighted average fair value of
options granted during the year.. -- -- 4.38 -- --
</TABLE>
The fair value of stock options (or their equivalents) granted by the Bank
was estimated through the use of the Black-Scholes option-pricing model that
takes into account the following factors as of the grant dates: the exercise
price and expected life of the option, the market price of the underlying
stock at the grant date and its expected volatility, and the risk-free
interest rate for the expected term of the option. In deriving the fair value
of a stock option, the stock price at the grant date is reduced by the value
of the dividends to be paid during the life of the option. The following
assumptions were used for grants in 1996: dividend yield of 2.50%, an expected
volatility of 28.6% and a risk-free interest rate of 6.05%. There were no
options granted in 1997, 1995 and 1994 that required disclosure in accordance
with SFAS 123. The effects of applying SFAS 123 on the pro forma net income
may not be representative of the effects on pro forma net income for future
years.
(14) COMMITMENTS AND CONTINGENCIES
Commitments
Financial Transactions With Off-Balance-Sheet Risk And Concentrations Of
Credit
The Bank, in the normal course of conducting its business, extends credit to
meet the financing needs of its customers through commitments and letters of
credit.
F-27
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following commitments and contingent liabilities existed at September
30, 1997, December 31, 1996 and 1995, which are not reflected in the
accompanying consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
SEPTEMBER 30, 1997 1996 1995
------------------ ------- -------
<S> <C> <C> <C>
Origination of Mortgage Loans:
Fixed rate........................... $ 8,809 $ 6,477 $ 6,168
Variable rate........................ 14,505 22,813 3,583
Purchase of mortgage loans--variable
rate................................ 2,428 2,773 6,393
Undisbursed home equity credit
lines............................... 14,333 15,210 14,575
Purchase of investment and mortgage-
backed.............................. 16,936 21,268 4,000
Undisbursed construction credit
lines............................... 26,214 12,243 3,800
Undisbursed consumer lines of
credit.............................. 1,544 -- --
Participations in Thrift Institutions
Community Investment Corp. of New
Jersey ............................. 100 650 2,300
Unused credit card lines............. 911 964 966
Standby letters of credit............ 2,143 1,322 977
Sale of mortgage-backed securities... -- (21,364) --
</TABLE>
These instruments involve elements of credit and interest rate risk in
excess of the amount recognized in the consolidated financial statements. The
Bank uses the same credit policies and collateral requirements in making
commitments and conditional obligations as it does for on-balance-sheet loans.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained is based on
management's credit evaluation of the borrower.
The Bank grants one- to four-family first mortgage real estate loans, multi-
family, and nonresidential first mortgage real estate loans to borrowers
throughout New Jersey. Its borrowers' abilities to repay their obligations are
dependent upon various factors, including the borrowers' income and net worth,
cash flows generated by the underlying collateral, value of the underlying
collateral and priority of the Bank's lien on the property. Such factors are
dependent upon various economic conditions and individual circumstances beyond
the Bank's control; the Bank is therefore subject to risk of loss. The Bank
believes its lending policies and procedures adequately minimize the potential
exposure to such risks and that adequate provisions for loan losses are
provided for all known and inherent risks. Collateral and/or guarantees are
required for virtually all loans. Interest rates on the $8.8 million of fixed-
rate mortgage loans committed as of September 30, 1997 ranged from 6.375% to
7.875%.
Lease Obligations
At September 30, 1997, and December 31, 1996, the Bank was obligated under
noncancellable operating leases for premises and equipment. Rental expense
under these leases aggregated approximately $518,000 and $536,000 for the nine
months ended September 30, 1997 and 1996, respectively, and $711,000, $714,000
and $644,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-28
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The projected minimum rental commitments are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
1997.............................................. $ 115 $ 420
1998.............................................. 336 273
1999.............................................. 336 273
2000.............................................. 197 140
2001.............................................. 123 70
Thereafter........................................ 205 155
------ ------
$1,312 $1,331
====== ======
</TABLE>
Contingencies
The Bank is a defendant in certain claims and legal actions arising in the
ordinary course of business. Management is of the opinion that the ultimate
disposition of these matters will not have a material adverse effect on the
Bank's consolidated financial condition or results of operations.
(15) SPECIAL SAIF ASSESSMENT
The Deposit Insurance Funds Act of 1996 (the "Act") was signed into law on
September 30, 1996. Among other things, the Act required depository
institutions to pay a one-time special assessment of 65.7 basis points on
their SAIF (Savings Association Insurance Fund)-assessable deposits, in order
to recapitalize the SAIF to the reserve level required by law. The Bank's
financial statements for the period ended September 30, 1996 and year ended
December 31, 1996 reflect a charge of $5.2 million for this special SAIF
assessment. As a result of the Act, the Bank's annual SAIF insurance premium
has been reduced to 6.4 basis points. In addition to this special SAIF
assessment, the Bank paid federal deposit insurance premiums of $285,000 and
$1.4 million in for the nine months ended September 30, 1997, and 1996,
respectively and $1.9 million, $1.7 million and $1.6 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
(16) RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. These standards are based
on a consistent application of a financial components approach that focuses on
control. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS 125 is
effective for transfers that occur after December 31, 1996 and will be applied
prospectively except for certain provisions that were deferred until January
1, 1998, by Statement 127 "Deferral of the Effective date of Certain
Provisions of FASB No. 125" issued in December 1996. The adoption of SFAS 125
did not have a material effect on the Bank's financial position or results of
operations.
In February 1997, the FASB issued Statement 128, "Earnings Per Share." SFAS
128 supersedes APB Opinion No. 15, "Earnings per Share" and specifies the
computation, presentation and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
SFAS 128 replaces Primary EPS and Fully Diluted EPS with Basic EPS and Diluted
EPS, respectively. SFAS 128 requires dual presentation of Basic and Diluted
EPS on the face of the income statement for entities with complex capital
structures and a reconciliation of information utilized to calculate Basic EPS
to that used to calculate Fully
F-29
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Diluted EPS. SFAS 128 is effective for financial statement periods ending
after December 15, 1997. Earlier application is not permitted. The Bank
adopted FASB 128 on December 31, 1997. All earnings per share data for prior
periods have been restated to conform to the provisions of FASB 128.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income."
SFAS 130 established standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. Under SFAS 130, comprehensive income is divided into net income
and other comprehensive income. Other comprehensive income includes items
previously recorded directly in equity, such as unrealized gains or losses on
securities available for sale. SFAS 130 is effective for interim periods and
annual periods beginning after December 15, 1997. Comparative financial
statements for earlier period are required to be reclassified to reflect
application of the provisions of SFAS 130. The Bank has not determined the
impact, if any, SFAS 130 will have on the Bank's financial statement
presentation.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected financial information about operating segments in interim
financial reports to shareholders. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Bank has not
determined the impact, if any, SFAS 131 will have on the Bank's financial
statement presentation.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value estimates, methods and assumptions were used to
measure the fair value of each class of financial instrument for which it is
practical to estimate that value.
Cash and Cash Equivalents
For such short-term investments, the carrying amount was considered to be a
reasonable estimate of fair value.
Federal Home Loan Bank-NY Stock
Federal Home Loan Bank-NY stock is valued at cost.
Investment and Mortgage-Backed Securities
For investment and mortgage-backed securities, fair values were based on
quoted market prices or dealer quotes. If a quoted market price was not
available, fair values were estimated using quoted market prices for similar
securities.
Loans Receivable, Net
Fair values were estimated for portfolios of performing and nonperforming
loans with similar financial characteristics. For certain analogous categories
of loans, such as residential mortgages, home equity loans, non-residential
mortgages, and consumer loans, fair value was estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value of other performing loan types was
estimated by discounting the future cash flows using market discount rates
that reflect the credit, collateral, and interest rate risk inherent in the
loan.
Deposits
The fair value of demand deposits, savings deposits and money market
accounts were the amounts payable on demand at September 30, 1997, December
31, 1996 and 1995. The fair values of certificates of deposit were based on
the discounted value of contractual cash flows. The discount rate was
estimated utilizing the rate currently offered for deposits of similar
remaining maturities.
F-30
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Borrowed Funds
For short-term borrowings, the carrying amount was considered to be a
reasonable estimate of fair value. For long-term borrowings, the fair value
was based upon the discounted value of the cash flows. The discount rates
utilized were based on rates currently available with similar terms and
maturities.
Off-Balance Sheet Instruments
For commitments to extend credit and letters of credit, the fair value would
approximate fees currently charged to enter into similar agreements.
The estimated fair values of the Bank's financial instruments at September
30, 1997, December 31, 1996 and December 31, 1995, were as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- ----------------- -----------------
BOOK FAIR BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equiva-
lents................ $ 23,798 $ 23,798 $ 9,042 $ 9,042 $ 26,549 $ 26,549
FHLB-NY stock......... 8,045 8,045 7,428 7,428 6,276 6,276
Investment securi-
ties................. 40,959 41,108 38,955 38,980 39,003 39,617
Investment securities
available for sale... 18,024 18,024 14,831 14,831 2,058 2,058
Mortgage-backed
securities........... 228,158 231,667 252,383 255,052 288,143 291,689
Mortgage-backed secu-
rities available for
sale................. 122,371 122,371 120,797 120,797 89,339 89,339
Loans receivable,
net.................. 567,197 586,475 509,627 514,084 457,756 470,269
Loans available for
sale................. -- -- 287 290 424 428
FINANCIAL LIABILITIES:
Deposits.............. 809,449 810,060 794,595 795,545 806,338 808,639
Borrowed funds........ 124,465 124,172 88,640 88,648 39,496 39,671
OFF-BALANCE SHEET IN-
STRUMENTS:
Loan commitments...... 138 -- 393 -- 39
Standby letters of
credit............... -- 21 -- 13 -- 10
========= ========= ======== ======== ======== ========
</TABLE>
Limitations:
The foregoing fair value estimates were made at September 30, 1997, December
31, 1996 and 1995, based on pertinent market data and relevant information on
the financial instrument. These estimates do not include any premium or
discount that could result from an offer to sell, at one time, the Bank's
entire holdings of a particular financial instrument or category thereof.
Since no market exists for a substantial portion of the Bank's financial
instruments, fair value estimates were necessarily based on judgments with
respect to future expected loss experience, current economic conditions, risk
assessments of various financial instruments involving a myriad of individual
borrowers, and other factors. Given the innately subjective nature of these
estimates, the uncertainties surrounding them and the matters of significant
judgment that must be applied, these fair value estimations cannot be
calculated with precision. Modifications in such assumptions could
meaningfully alter these estimates.
F-31
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Since these fair value approximations were made solely for on- and off-
balance sheet financial instruments at September 30, 1997, December 31, 1996
and 1995, no attempt was made to estimate the value of anticipated future
business of the value of nonfinancial statement assets and liabilities. Other
important elements which are not deemed to be financial assets or liabilities
include the value of the Bank's retail branch delivery system, its existing
core deposit base, premises and equipment, and goodwill. Further, certain tax
implications related to the realization of the unrealized gains and losses
could have a substantial impact on these fair value estimates and have not
been incorporated into any of the estimates.
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data for the nine months
ended September 30, 1997 and years ended December 31, 1996 and 1995 (dollars
in thousands, except per share data, which includes four 10% stock dividends
and a 2-for-1 stock split):
<TABLE>
<CAPTION>
FIRST SECOND THIRD
NINE MONTHS ENDED SEPTEMBER 30, 1997 QUARTER QUARTER QUARTER
------------------------------------ ------- ------- -------
<S> <C> <C> <C> <C>
Interest income........................... $17,791 $18,263 $18,582
Interest expense.......................... 9,828 10,262 10,501
------- ------- -------
Net interest income before provision for
loan losses.............................. 7,963 8,001 8,081
Provision for loan losses................. 300 300 300
------- ------- -------
Net interest income after provision for
loan losses.............................. 7,663 7,701 7,781
Other operating income.................... 525 526 1,135
Operating expenses........................ 4,124 4,417 6,040
------- ------- -------
Income before income tax expense.......... 4,064 3,810 2,876
Income tax expense........................ 1,563 1,356 1,071
------- ------- -------
Net income................................ $ 2,501 $ 2,454 $ 1,805
======= ======= =======
Basic earnings per share.................. $ 0.32 $ 0.31 $ 0.23
======= ======= =======
Diluted earnings per share................ $ 0.31 $ 0.30 $ 0.22
======= ======= =======
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
---------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income........................... $16,788 $16,811 $16,900 $17,540
Interest expense.......................... 9,227 9,168 9,249 9,620
------- ------- ------- -------
Net interest income before provision for
losses................................... 7,561 7,643 7,651 7,920
Provision for loan losses................. 100 125 150 175
------- ------- ------- -------
Net interest income after provision for
loan losses.............................. 7,461 7,518 7,501 7,745
Other operating income.................... 485 395 502 613
Operating expenses........................ 4,510 5,218 10,394 4,579
------- ------- ------- -------
Income (loss) before income tax expense
(benefit)................................ 3,436 2,695 (2,391) 3,779
Income tax expense (benefit).............. 1,244 1,005 (873) 1,433
------- ------- ------- -------
Net income (loss)......................... $ 2,192 $ 1,690 $(1,518) $ 2,346
======= ======= ======= =======
Basic earnings per share.................. $ 0.28 $ 0.22 $ (0.19) $ 0.30
======= ======= ======= =======
Diluted earnings per share................ $ 0.31 $ 0.27 $ (0.19) $ 0.29
======= ======= ======= =======
</TABLE>
F-32
<PAGE>
FIRST SAVINGS BANK SLA, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1995 QUARTER QUARTER QUARTER QUARTER
---------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income............................ $15,111 $15,983 $16,635 $16,844
Interest expense........................... 7,865 8,970 9,407 9,449
------- ------- ------- -------
Net interest income before provision for
loan losses............................... 7,246 7,013 7,228 7,395
Provision for loan losses.................. 75 75 75 85
------- ------- ------- -------
Net interest income after provision for
loan losses............................... 7,171 6,938 7,153 7,310
Other operating income..................... 713 652 286 520
Operating expenses......................... 4,397 4,589 4,422 4,422
------- ------- ------- -------
Income before income tax expense........... 3,487 3,001 3,017 3,408
Income tax expense......................... 1,098 1,252 1,003 1,258
------- ------- ------- -------
Net income................................. $ 2,389 $ 1,749 $ 2,014 $ 2,150
======= ======= ======= =======
Basic earnings per share................... $ 0.31 $ 0.22 $ 0.26 $ 0.27
======= ======= ======= =======
Diluted earnings per share................. $ 0.30 $ 0.22 $ 0.25 $ 0.27
======= ======= ======= =======
</TABLE>
(19) SUBSEQUENT EVENT
The Bank adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("FASB 128") on December 31, 1997. All earnings per share
data for prior periods have been restated to conform to the provision of FASB
128.
F-33
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
- --------------------------------------------------------------------------------
4 [MAP APPEARS HERE]
* CORPORATE HEADQUARTERS:
Woodbridge
1000 Woodbridge Center Drive
. BRANCH OFFICES:
. Edison
980 Amboy Avenue
2100 Oak Tree Road
. Fanwood
206 South Avenue
. Fords
33 Lafayette Road
. Hazlet
Rte. 35 & Bethany Road
. Hopelawn
101 New Brunswick Avenue
. Iselin
1220 Green Street
. Metuchen
599 Middlesex Avenue
. Middletown
1580 Rte. 35 South
. Milltown
97 North Main Street
. Old Bridge
Rte. 9 & Ticetown Road
. Perth Amboy
339 State Street
. Piscataway
100 Stelton Road
. Woodbridge
325 Amboy Avenue
Rte. 1 & St. Georges Avenue
1000 Woodbridge Center Drive
LOAN DEPARTMENT:
1000 Woodbridge Center Drive
Woodbridge
First
Savings
________________________________ Bank, SLA
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRST SOURCE BANCORP, INC., THE BANK OR SANDLER O'NEILL.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURIS-
DICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JU-
RISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF FIRST SOURCE BANCORP, INC. OR THE BANK SINCE ANY OF
THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HERE-
OF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 5
Selected Financial and Other Data........................................ 16
Risk Factors............................................................. 23
First Source Bancorp, Inc................................................ 28
First Savings Bancshares, MHC............................................ 28
First Savings Bank, SLA.................................................. 29
Regulatory Capital Compliance............................................ 30
Use of Proceeds.......................................................... 31
Dividend Policy.......................................................... 33
Market for the Common Stock.............................................. 35
Capitalization........................................................... 36
Pro Forma Data........................................................... 38
First Savings Bank, SLA and Subsidiaries................................. 43
Consolidated Statements of Income........................................ 43
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 44
Business of the Bank..................................................... 60
Federal and State Taxation............................................... 81
Regulation............................................................... 83
Management of the Company................................................ 90
Management of the Bank................................................... 91
Beneficial Ownership of Capital Stock.................................... 104
The Conversion and Reorganization........................................ 106
Comparison of Stockholders' Rights....................................... 126
Restrictions on Acquisition of the Company and the Bank.................. 131
Description of Capital Stock of the Company.............................. 136
Description of Capital Stock of the Bank................................. 137
Transfer Agent and Registrar............................................. 138
Experts.................................................................. 138
Legal and Tax Opinions................................................... 138
Additional Information................................................... 139
Index of Consolidated Financial Statements............................... F-1
</TABLE>
----------------
UNTIL MARCH 22, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED COMMU-
NITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS
IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBU-
TION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OB-
LIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
14,391,900 SHARES
LOGO
First
Source
Bancorp, Inc.
(PROPOSED HOLDING COMPANY FOR FIRST SAVINGS BANK, SLA)
COMMON STOCK
--------------------
PROSPECTUS
--------------------
FEBRUARY 11, 1998
Sandler O'Neill & Partners, L.P.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
