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PROSPECTUS RIDGEWOOD FINANCIAL, INC.
Up to 1,864,725 Shares (Proposed Holding Company for Ridgewood Savings Bank of New Jersey)
of Common Stock
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55 North Broad Street
Ridgewood, New Jersey
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Ridgewood Savings Bank of New Jersey is reorganizing from a New
Jersey-chartered mutual savings bank to a New Jersey- chartered stock savings
bank. As part of the reorganization, Ridgewood Savings Bank of New Jersey will
become a wholly owned subsidiary of Ridgewood Financial, Inc., a New
Jersey-chartered stock corporation. Upon consummation of the reorganization,
Ridgewood Financial, Inc. will own all of the shares of Ridgewood Savings Bank
of New Jersey. A majority of the common stock of Ridgewood Financial, Inc. to be
issued will be owned by a New Jersey-chartered mutual savings bank holding
company that will have the same directors and officers as Ridgewood Savings Bank
of New Jersey. A minority of the common stock of Ridgewood Financial, Inc. is
being offered to the public in accordance with a plan of reorganization and
stock issuance. The reorganization must be ratified by a majority of the votes
eligible to be cast by depositors of Ridgewood Savings Bank of New Jersey and
approved by state and federal banking agencies. No common stock will be sold if
Ridgewood Savings Bank of New Jersey, Ridgewood Financial, Inc. and the mutual
holding company do not receive the necessary votes or regulatory approvals or
Ridgewood Financial, Inc. does not receive orders for at least the minimum
number of shares. The common stock is expected to be quoted on The Nasdaq Stock
Market.
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OFFERING TERMS
An independent appraiser has estimated the market value of the
reorganized Ridgewood Savings Bank of New Jersey to be between $17,850,000 and
$24,150,000. Of this amount, 47%, between $8,389,500 and $11,350,500, is being
offered publicly, which establishes the number of shares to be offered. Subject
to regulatory approval, up to $13,053,075 (1,864,725 shares), an additional 15%,
may be sold. Based on these estimates, we are making the following offering of
shares of common stock:
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o Price Per Share: $7.00
o Number of Shares
Minimum/Maximum/Maximum, as adjusted: 1,198,500 to 1,621,500 to 1,864,725
o Underwriting Commissions and Expenses
Minimum/Maximum/Maximum, as adjusted: $600,000
o Net Proceeds
Minimum/Maximum/Maximum, as adjusted: $7,789,500 to $10,750,500 to $12,453,075
o Net Proceeds per Share
Minimum/Maximum/Maximum, as adjusted: $6.50 to $6.63 to $6.68
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Please refer to Risk Factors beginning on page 1 of this document.
Any transfer of subscription rights is prohibited.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation nor any state securities regulator has approved or disapproved these
securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe,
call the Stock Information Center at (201) 445-2109.
Ryan, Beck & Co.
The Date of this Prospectus is November 12, 1998
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RIDGEWOOD FINANCIAL, INC.
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THE PLAN OF REORGANIZATION AND STOCK ISSUANCE IS CONTINGENT UPON
RECEIPT OF ALL REQUIRED REGULATORY APPROVALS, RATIFICATION OF THE PLAN BY THE
DEPOSITORS OF THE BANK, AND THE SALE OF AT LEAST THE MINIMUM NUMBER OF SHARES
OFFERED PURSUANT TO THE PLAN.
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QUESTIONS AND ANSWERS
Q: What is the purpose of the reorganization and offering?
A: The reorganization will establish a stock holding company and the Bank will
convert to the stock form of ownership, which will enable it to raise
additional capital in order to compete and expand more effectively in the
financial services marketplace. Ridgewood Financial, Inc. will be able to
issue capital stock, which is a source of capital not available to mutual
savings banks, and this will enable depositors, employees and directors to
indirectly obtain an ownership interest in the Bank. The reorganization and
offering will also provide the Bank with greater flexibility to structure
and finance the expansion of its operations, including the potential
acquisition of other financial institutions, expansion of branch
facilities, and diversification into other financial services.
Q: Why are we creating a mutual holding company instead of selling all of our
stock?
A: We are using a structure (a bank that is wholly owned by a stock holding
company that is in turn majority owned by a mutual holding company and by
minority public stockholders) that we feel is best for Ridgewood Savings
Bank of New Jersey, our depositors and the communities we serve. If
Ridgewood Financial, Inc. offered all of its stock to the public, we would
be forced to invest a much larger amount of proceeds (at least twice as
much) and might feel pressured to make investments with substantially more
risk. We believe that the proceeds we will receive in the offering will be
sufficient to implement the business strategy we feel is appropriate. At
the midpoint of the offering range ($9,870,000), we estimate that we will
provide $4,635,000 to Ridgewood Savings Bank of New Jersey and we will
retain $3,645,400, which excludes the $789,600 that we will lend to the
employee stock ownership plan.
In addition, the mutual holding company structure enables Ridgewood Savings
Bank of New Jersey to achieve many of the benefits of a stock company while
reducing the threat of an acquisition by another institution, as can occur
following a full conversion from mutual to stock form. Sales of locally
based, independent savings institutions to larger, regional financial
institutions can result in closed branches, fewer choices for consumers,
employee layoffs and the loss of community support and involvement by local
savings institutions.
Q: Who will be the minority stockholders of Ridgewood Financial, Inc.?
A: Other than the mutual holding company that will own 53% of the common
stock, everyone who purchases common stock will be a minority stockholder.
As long as it exists, the mutual holding company will be the majority
stockholder of Ridgewood Financial, Inc.
Q: How do I purchase the stock?
A: You must complete and return the stock order form together with your
payment, on or before 12:00 noon, New Jersey time on December 18, 1998. If
we do not receive sufficient orders by that time, the offering may be
extended until February 1, 1999.
Q: How much stock may I purchase?
A: The minimum purchase is 50 shares (or $350). The maximum purchase is 28,571
shares (or $200,000), for any individual person or persons ordering through
a single account. No person or persons ordering through multiple accounts,
together with their associates, or group of persons acting together, may
purchase in total more than 28,571 shares (or $200,000). We may decrease or
increase the maximum purchase limitation without notifying you. In the
event that the offering is oversubscribed, there will not be enough shares
to fill all orders.
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Q: Who can purchase stock?
A: The stock will be offered in the following priority order:
o Priority 1 - Persons who had a deposit account with us of at least
$50.00 on May 31, 1997.
o Priority 2 - Tax qualified employee plans (the employee stock
ownership plan of Ridgewood Savings Bank of New Jersey).
o Priority 3 - Persons who had a deposit account with us of at least
$50.00 on September 30, 1998.
o Priority 4 - Persons who had a deposit account with us of at least
$50.00 on November 2, 1998.
If the persons described above do not subscribe for all of the shares,
the remaining shares may be offered, with the help of Ryan, Beck & Co., Inc., in
a community offering. In the event of a community offering, we will give a
preference to natural persons who reside in Bergen County, New Jersey (first
preference) and New Jersey (second preference). We may offer shares to others in
a public offering. In a syndicated public offering, we would offer any remaining
shares to the general public through a group of brokers/dealers organized by
Ryan, Beck. We have the right to reject any stock order in the community
offering, public offering or syndicated public offering.
Q: What happens if there are not enough shares to fill all orders?
A: If the offering is oversubscribed, we will allocate shares based on the
purchase priorities described above. If the offering is oversubscribed in a
particular category of the offering, then shares will be allocated among
all subscribers in that category.
Q: What particular factors should I consider when deciding whether to buy the
stock?
A: Before you decide to purchase stock, you should read this prospectus,
including the Risk Factors section on pages 1 - 4.
Q: As a depositor or borrower of Ridgewood Savings Bank of New Jersey, what
will happen if I do not purchase any stock?
A: You are not required to purchase stock. Your deposit account, certificate
account and any loans you may have with us will not be affected.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. In addition, you should contact:
Stock Information Center
Ridgewood Financial, Inc.
8 Franklin Avenue
Ridgewood, New Jersey
(201) 445-2109
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(ii)
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements. References
in this document to "we," "us," and "our" refer to Ridgewood Financial, Inc.,
because we are offering the stock. In certain instances where appropriate, "we,"
"us," or "ours" refers collectively to Ridgewood Financial, Inc. and Ridgewood
Savings Bank of New Jersey. Throughout this document we refer to Ridgewood
Savings Bank of New Jersey (whether in mutual or stock form) as the "Bank." We
also refer to ourselves as the "Company." Our mutual holding company is
Ridgewood Financial, MHC or the "MHC."
The Companies
Ridgewood Savings Bank of New Jersey
55 North Broad Street
Ridgewood, New Jersey 07450
(201) 445-4000
Ridgewood Savings Bank of New Jersey was founded in 1885 and primarily serves
northwestern Bergen County, New Jersey. The Bank is a community and customer
oriented mutual savings bank chartered by the State of New Jersey. The Bank
provides financial services primarily to individuals, families and small
businesses. The Bank emphasizes residential mortgage lending, primarily
originates one- to four-family mortgage loans and funds these loans with
deposits. The Bank originates other loans secured by real estate, purchases
investment and mortgage-backed securities, and uses borrowings as a secondary
source of funding. At June 30, 1998, the Bank had assets of $242.7 million,
deposits of $198.6 million and equity of $17.4 million. See page 5.
Ridgewood Financial, Inc.
55 North Broad Street
Ridgewood, New Jersey 07450
(201) 445-4000
Ridgewood Financial, Inc. is not an operating company and has not engaged in any
significant business to date. Its common stock will initially be owned by
minority owners (47%) and Ridgewood Financial, MHC (53%) and, although these
percentages may change in the future, Ridgewood Financial, MHC must always own a
majority of its stock. Ridgewood Financial, Inc. is a New Jersey-chartered stock
holding company that will own 100% of the stock of the Bank. See page 5.
Ridgewood Financial, MHC
55 North Broad Street
Ridgewood, New Jersey 07450
(201) 445-4000
Ridgewood Financial, MHC will become the mutual holding company for Ridgewood
Financial, Inc. at the completion of the reorganization. The mutual holding
company has not conducted any business but will be a New Jersey-chartered mutual
savings bank holding company owning a majority of the stock of Ridgewood
Financial, Inc. See page 6.
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(iii)
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The Reorganization and Offering and the Role of the Broker-Dealer
The reorganization from mutual to stock form and the stock offering include
the following steps:
o The Bank will establish the Company and the mutual holding company,
neither of which will have any assets prior to the completion of the
reorganization.
o The Bank will convert from a New Jersey-chartered mutual savings bank
to a New Jersey-chartered stock savings bank.
o Following the merger of an interim stock savings bank owned by the
mutual holding company into the Bank, the Bank will become a wholly
owned subsidiary of the Company.
o The Company expects to issue between 2,550,000 shares (minimum) and
3,450,000 shares (maximum) of its common stock in the reorganization;
53% of these shares (or between 1,351,500 shares and 1,828,500 shares)
will be issued to the mutual holding company, and 47% (or between
1,198,500 shares and 1,621,500 shares) will be sold to the public.
However, the Company may issue up to 3,967,500 shares (maximum, as
adjusted) in the reorganization; up to 2,102,775 of these shares (53%)
would be issued to the mutual holding company and up to 1,864,725
shares would be sold to the public.
In our sale of common stock to the public, Ryan, Beck, a registered
broker-dealer, will be paid a $150,000 fee and provide advisory assistance and
assist, on a best efforts basis, in the distribution of our common stock. Rnay,
Beck will be paid certain fees and expenses and receive indemnification from
certain claims and liabilities and Ryan, Beck will be present to supervise the
operation of the stock information center, answer questions, manage sales
efforts, and keep stock order records.
Description of the Mutual Holding Company Structure
This chart shows the corporate structure following completion of the
reorganization:
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| | | |
| Ridgewood Financial, MHC | | Minority Stockholders |
| | | |
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| 53% of the | 47% of the
| Common Stock | Common Stock
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| |
| Ridgewood Financial, Inc. |
| |
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|
| 100% of the Common Stock
|
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| |
| Ridgewood Savings Bank of New Jersey |
| |
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The mutual holding company structure differs in significant respects
from the holding company structure that is often used in a standard
mutual-to-stock conversion. In a standard conversion, a converting mutual
institution or its newly-formed holding company sells 100% of its common stock
in a stock offering. A savings institution that converts from the mutual to
stock form of organization using the mutual holding company structure sells less
than half of its shares at the time of the reorganization and stock offering. By
doing so, a converting institution using the mutual holding company structure
will raise less than half the capital that it would have raised in a standard
mutual-to-stock conversion.
The shares that are issued to the mutual holding company may be
subsequently sold to the Bank's depositors if the mutual holding company
converts from the mutual to the stock form of organization. See "--Conversion of
the Mutual Holding Company to the Stock Form of Organization." In addition,
because regulations generally prohibit the sale of a savings association in the
mutual holding company structure, the reorganization and stock offering will
permit the Bank to achieve many of the benefits of a stock company while
reducing the threat of an acquisition by another institution, as can occur
following a standard conversion from mutual to stock form. Sales of locally
based, independent savings institutions to larger, regional financial
institutions can result in closed branches, fewer choices for consumers,
employee layoffs and the loss of community support and involvement by local
savings institutions.
Because the mutual holding company is a mutual corporation, its actions
will not necessarily always be in the best interests of the Company's minority
stockholders. In making business decisions, the mutual holding company's board
of directors will consider a variety of constituencies, including the depositors
of the Bank, the employees of the Bank and the communities in which the Bank
operates. As the majority stockholder of the Company, the mutual holding company
is also interested in the continued success and profitability of the Bank and
the Company. Consequently, the mutual holding company will act in a manner that
furthers the general interests of all of its constituencies, including, but not
limited to, the interests of the minority stockholders of the Company. The
mutual holding company believes that the interests of the minority stockholders
of the Company and those of the mutual holding company's other constituencies
are, in many circumstances, the same, such as the profitability of the Company
and the Bank and continued service to the communities in which the Bank
operates.
Conversion of the Mutual Holding Company to the Stock Form of Organization
Federal and state regulations and the plan of reorganization permit the
mutual holding company to convert from the mutual to the capital stock form of
organization (a "conversion transaction"). If the mutual holding company were to
undertake a conversion transaction, the transaction would in most circumstances
be structured as follows:
o The mutual holding company and the Company would cease to exist.
o The Bank would form a new stock holding company.
o The new stock holding company would sell shares of its common
stock in an offering to certain of the Bank's depositors and
members of the public.
o In addition to the shares it would sell in the subscription
offering, the new stock holding company would issue shares of its
common stock to the Company's minority stockholders in exchange
for their shares of the Company's common stock.
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After the conversion transaction, the Company's minority stockholders
would own approximately the same percentage of the new stock holding company as
they owned of the Company. Purchasers in the conversion transaction's
subscription offering would own approximately the same percentage of the new
stock holding company as the mutual holding company owned in the Company prior
to the conversion transaction. However, if the mutual holding company waived any
dividends paid by the Company prior to the conversion transaction, then the
Company's minority stockholders would receive a smaller percentage of the new
stock holding company's common stock. See "Waiver of Dividends by the MHC" and
"MHC Conversion to Stock Form." There can be no assurance that the mutual
holding company will convert to the stock form, and the Board of Directors has
no plan to do so.
Stock Purchases
The shares of common stock will be offered on the basis of priorities.
As a depositor, you will receive non-transferable subscription rights to
purchase the shares. The shares will be offered first in a subscription offering
and any remaining shares may be offered in a community offering or public
offering or syndicated public offering. Ryan, Beck will assist us in selling our
common stock in the offering.
See pages 83-95.
Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. This also means that you may not enter
into any agreement or understanding to transfer subscription rights or the legal
or beneficial ownership of the shares to be purchased in the offering. If you
decide to purchase our shares, you must submit an order form and certify that
your purchase of shares is solely for your account and there is no agreement or
understanding regarding the sale or transfer of those shares. We intend to
pursue any and all remedies in the event we discover such an agreement or
understanding. We will not honor any stock order that we believe to involve such
an agreement or understanding.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the
estimated market value of the common stock by FinPro Financial Services, Inc.,
an appraisal firm experienced in appraisals of savings institutions. FinPro has
estimated, that in its opinion as of October 7, 1998, the aggregate pro forma
market value of the common stock ranged between $17,850,000 and $24,150,000
(with a mid-point of $21,000,000). The Board of Directors has decided to offer
47% of these shares, or between 1,198,500 and 1,621,500 shares to depositors and
the public. Of the total shares issued, 53% will not sold to depositors and the
public but will be issued to the mutual holding company. The estimated market
value of the shares is our estimated market value after giving effect to the
reorganization and the offering and may be increased by up to 15% following
regulatory review. If this additional 15% is required, we would issue 3,967,500
shares (maximum, as adjusted) with 2,102,775 of these shares (53%) issued to the
mutual holding company and 1,864,725 of these shares (47%) sold to the public.
The appraisal was based in part upon our financial condition and
operations and the effect of the additional capital we will raise in this
offering. The $7.00 price per share was determined by our board of directors.
The independent appraisal will be updated before we complete the reorganization.
If the estimated market value of the common stock is either below $17,850,000 or
above $27,772,500 you will be notified and will have the opportunity to modify
or cancel your order. The appraisal is not a recommendation about buying the
common stock. You should read the entire prospectus before making an investment
decision. See pages 92-94.
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Termination of the Offering
The subscription offering will terminate at 12:00 noon, New Jersey
time, on December 18, 1998. The community offering, public offering, or
syndicated public offering, if any, may terminate at any time without notice but
no later than February 1, 1999.
If we terminate the offering, we will promptly refund all funds
received for the purchase of common stock (including canceling all withdrawal
authorizations) together with interest earned on those funds (at the Bank's
passbook rate) from the date of receipt to the date the offering is terminated.
If we receive orders for less than 1,198,500 shares of common stock, subject to
both federal and state regulatory approval, we may seek to establish a new
offering range and resolicit potential purchasers. All persons who had
previously provided funds will be permitted to modify or cancel their purchase
orders. A resolicitation would not extend beyond February 1, 1999 without prior
federal and state regulatory approval. We will return all funds with interest on
or before March 18, 1999 if a resolicitation extends beyond that date.
Benefits to Management from the Offering
Our full-time employees will participate in the offering through
individual purchases and through purchases of stock by our employee stock
ownership plan, which is a type of retirement plan. We also intend to implement
a restricted stock plan and a stock option plan, which may benefit the president
and other officers and directors. We do not intend to adopt these within the
first year after the reorganization.
If all three of these plans are implemented, and if all options are
awarded, fully vest and are exercised and the related shares of stock are
retained and not sold, the individuals to whom options and shares are awarded
and individuals administering these plans will control up to 22% of the amount
of minority shares.
Employee Stock Ownership Plan. We expect that this plan will purchase
8% of the offering (149,178 shares or $1,044,246 at the maximum, as adjusted, of
the offering). In the event all of the common stock is purchased by persons who
had a deposit account on May 31, 1997, this plan may purchase stock in the
market. This plan provides additional voting control to our directors who serve
as trustees of the plan through their voting of unallocated shares in the plan
and any allocated shares that employees have not voted. The purchase of shares
by this plan will be funded by the proceeds of our offering (through our loan to
the plan).
Restricted Stock Plan. We expect that this plan will not be submitted
for stockholder approval within the first year of the reorganization. If
implemented, the plan would purchase up to 4% of the amount of shares sold in
the offering (74,589 shares at the maximum, as adjusted, of the offering range
at a cost of $522,123, assuming a purchase price of $7.00 per share). This plan
provides additional voting control to our directors who serve as trustees of the
plan and the individuals who receive awards (at no cost to them) of our stock.
Stock Option Plan. We expect that this plan will not be submitted for
stockholder approval within the first year of the reorganization. If
implemented, up to 10% of the amount of shares sold in the offering (186,472
shares at the maximum, as adjusted, of the offering range) would be reserved for
issuance through the exercise of options for common stock.
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(vii)
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Characteristics of the Bank
The financial highlights and strategy of the Bank include the following:
o Community Savings Institution - The Bank is a community-oriented
savings institution providing residential and commercial loans in its
primary market area, primarily secured by real estate along with a
variety of deposit products and other traditional financial services at
convenient locations and hours.
o Asset Growth - The Bank has expanded its office network by opening two
new offices in 1996 to better serve the community. As a result, total
assets of the Bank increased from approximately $217 million at
December 31, 1996 to $243 million at June 30, 1998; during this same
period, deposit accounts increased from approximately 12,400 to 15,300
accounts. Most of this asset growth has come from increases in mortgage
backed securities and not from loans receivable, net. Deposit account
growth resulted in aggregate deposit growth from approximately $171
million to $199 million between those same dates.
o Asset Composition and Quality - As of June 30, 1998, 79.4% of the
Bank's total loan portfolio consisted of locally-originated mortgage
loans secured by one-to-four family dwellings. At June 30, 1998, 89.1%
of the Bank's total assets consisted of residential mortgages,
mortgage-backed securities, investment securities and cash and cash
equivalents. The results of this asset mix are reflected in the Bank's
low level of non-performing assets. At June 30, 1998, the Bank's total
non-performing assets were less than 0.01% of total assets.
o Interest Rate Risk Management - In an attempt to lessen the interest
rate risk that results because the Bank's deposits typically adjust
more quickly to changes in interest rates than
its mortgage
loans and mortgage-backed securities, the Bank has implemented several
strategies to improve the match between asset and liability maturity
rates. These strategies include:
* The Bank generally originates 30-year, fixed rate
mortgages primarily for sale in the secondary market.
* Over the past five years, the Bank has increased its
origination of commercial real estate loans, which
generally have shorter maturities and higher yields
than single family residential mortgages, but possess
greater risks.
* Over the past five years, the Bank has increased its
origination of consumer loans, consisting primarily
of home equity loans, which generally have shorter
maturities, greater yields and a higher risk profile
than single family residential mortgages.
* The Bank has maintained a high percentage of
investment securities and mortgage-backed securities,
a significant portion of which are available for
sale.
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(viii)
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Use of the Proceeds Raised from the Sale of Common Stock
Ridgewood Financial, Inc. will use a portion of the net proceeds from
the offering to purchase all the common stock to be issued by the Bank in the
reorganization and to make a loan to an employee stock ownership plan of the
Bank to fund its purchase of stock in the offering. The Bank will invest the net
proceeds primarily in residential and commercial real estate loans,
mortgage-backed securities, consumer loans and other investment securities.
Proceeds may also be invested in new equipment and additional office facilities.
At the midpoint of the offering range ($9,870,000), we estimate that the mutual
holding company will receive $200,000, we will provide $4,635,000 to the Bank,
and we will retain $3,645,400, which excludes the $789,600 that we will lend to
the employee stock ownership plan.
See pages 6-7.
Restrictions on Repurchase of Stock
Current FDIC regulations prohibit us from repurchasing our common stock
for one year following the reorganization. In addition, securities rules
restrict the method, time, price, and number of shares of our common stock that
we can repurchase.
Dividends
We anticipate paying an annual cash dividend following the completion
of the full first quarter of operations following the reorganization in an
amount that has yet to be determined. There are restrictions on dividends. See
page 7.
Market for the Common Stock
We expect the common stock to be quoted on The Nasdaq Stock Market. If
we do not meet the requirements for the Nasdaq National Market, our common stock
will be traded on the Nasdaq SmallCap Market or the Nasdaq OTC Bulletin Board.
Ryan, Beck intends to make a market in the common stock but it is under no
obligation to do so and a liquid market may not develop or be maintained. See
pages 9-10.
Important Risks in Owning the Common Stock of Ridgewood Financial, Inc.
Before you decide to purchase stock in the offering, you should read
the Risk Factors section on pages 1-4 of this document.
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SELECTED FINANCIAL AND OTHER DATA
The following summary financial information for the six months ended
June 30, 1998 and 1997 and as of June 30, 1998 and 1997, respectively, were
derived from, and should be read in conjunction with, the unaudited financial
statements and notes on page 20 and pages F-31 to F-31. The summary financial
information for each of the years in the three-year period ended December 31,
1997 and as of December 31, 1997 and 1996 were derived from, and should be read
in conjunction with, the audited financial statements and notes on page 20 and
pages F-1 to F-31. The summary financial information for each of the years in
the two-year period ended December 31, 1994 and as of December 31, 1995, 1994
and 1993, respectively, were derived from audited financial statements not
included in this prospectus.
Selected Financial Condition and Other Data
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
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Total Amount of:
Assets............................. $242,662 $222,589 $229,065 $216,775 $179,460 $143,954 $130,209
Loans receivable, net.............. 104,627 107,427 105,715 107,959 96,206 86,406 95,339
Loans held for sale................ -- 3,735 750 3,756 199 504 37
Investment securities held to
maturity......................... 2,495 9,970 9,666 12,721 23,842 10,039 1,585
Investment securities available
for sale......................... 11,730 41,678 26,954 43,211 17,417 5,469 2,960
Mortgage-backed securities
held to maturity................. 12,794 15,496 14,356 16,611 19,179 33,877 21,047
Mortgage-backed securities
available for sale............... 85,679 26,363 50,099 19,359 13,041 -- --
Cash and cash equivalents.......... 19,528 11,109 15,398 6,364 4,822 4,605 6,798
Deposits........................... 198,602 185,958 193,889 170,551 147,017 120,193 115,566
Borrowed funds..................... 25,432 19,181 16,282 28,400 16,012 8,851 1,238
Total equity....................... 17,351 15,976 17,194 15,369 15,289 13,590 12,296
Number of:
Deposit accounts................... 15,270 13,746 14,688 12,427 10,310 8,262 7,765
Full service offices............... 3 3 3 3 1 1 1
</TABLE>
- --------------------------------------------------------------------------------
(x)
<PAGE>
- --------------------------------------------------------------------------------
Selected Operating Data
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
----------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ........... $ 8,027 $ 7,862 $15,834 $14,966 $11,915 $ 9,677 $10,073
Interest expense .......... 5,312 5,047 10,287 9,522 7,434 4,829 4,917
------- ------- ------- ------- ------- ------- -------
Net interest income ....... 2,715 2,815 5,547 5,444 4,481 4,848 5,156
Provision for loan losses . 132 6 12 12 60 60 113
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 2,583 2,809 5,535 5,432 4,421 4,788 5,043
Noninterest income ........ 118 63 232 146 71 89 108
Noninterest expense ....... 1,969 1,785 3,676 4,210(1) 2,708 2,446 2,252
------- ------- ------- ------- ------- ------- -------
Income before income taxes 732 1,087 2,091 1,368 1,784 2,431 2,899
Income taxes .............. 245 425 841 628 657 874 1,006
------- ------- ------- ------- ------- ------- -------
Net income ................ $ 487 $ 662 $ 1,250 $ 740 $ 1,127 $ 1,557 $ 1,893
======= ======= ======= ======= ======= ======= =======
</TABLE>
- -----------------
(1) Includes a one-time special assessment of $830,000 ($523,000 net of tax
based on a 37% statutory tax rate) to recapitalize the Savings
Association Insurance Fund (the "SAIF") of the FDIC. Excluding this
assessment, total noninterest expense would have been $3.4 million,
income taxes would have totalled $935,000 and net income would have
been $1.3 million.
- --------------------------------------------------------------------------------
(xi)
<PAGE>
- --------------------------------------------------------------------------------
Key Operating Ratios
<TABLE>
<CAPTION>
At or For
the Six Months At or For the Years Ended
Ended June 30, December 31,
------------------------ --------------------------------
1998(1) 1997(1) 1997 1996(2) 1995
----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets............................ 0.42 % 0.60 % 0.57 % 0.36 % 0.69 %
Return on average equity............................ 5.59 8.66 7.87 5.03 7.89
Average equity to average assets.................... 7.49 6.98 7.20 7.21 8.72
Equity to assets at period end...................... 7.15 7.18 7.51 7.09 8.52
Interest rate spread (3)............................ 2.08 2.39 2.30 2.48 2.40
Net interest margin................................. 2.38 2.64 2.58 2.75 2.79
Average interest-earning assets to average
interest-bearing liabilities...................... 1.07 X 1.05 X 1.06 X 1.06 X 1.08 X
Net interest income after provision for loan
losses to total non-interest expenses............. 1.31 X 1.57 X 1.51 X 1.29 X 1.63 X
Asset Quality Ratios:
Non-performing loans to total assets................ -- % 0.12 % -- % 0.14 % 0.22 %
Non-performing assets to total assets............... -- 0.12 -- 0.14 0.22
Non-performing loans to total loans................. 0.01 0.24 -- 0.28 0.41
Allowance for loan losses to total loans
at end of period.................................. 0.72 0.55 0.58 0.54 0.62
Allowance for loan losses to
non-performing loans.............................. 9,375.00 225.83 -- 193.61 148.25
</TABLE>
- -----------------
(1) Annualized where appropriate.
(2) 1996 included a one-time special assessment of $830,000.
(3) The interest rate spread is the difference between the weighted average
yield on average interest earning assets and the weighted average cost
of average interest bearing liabilities.
- --------------------------------------------------------------------------------
(xii)
<PAGE>
- --------------------------------------------------------------------------------
RECENT DEVELOPMENTS
The information set forth below at or for the periods ended September
30, 1998 and 1997, is unaudited and, in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results for the unaudited periods have been made. The
results of operations for the three and nine months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the entire
year or any other period. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements contained elsewhere in this prospectus.
Selected Financial Condition and Other Data
<TABLE>
<CAPTION>
At September 30, At December 31,
1998 1997
---------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Total Amount of:
Assets............................................. $250,516 $229,065
Loans receivable, net.............................. 105,499 105,715
Loans held for sale................................ 0 750
Investment securities held to maturity............. 2,450 9,666
Investment securities available for sale........... 11,345 26,954
Mortgage-backed securities held to maturity........ 12,060 14,356
Mortgage-backed securities available for sale...... 96,281 50,099
Cash and cash equivalents.......................... 18,924 15,398
Deposits........................................... 198,386 193,889
Borrowed funds..................................... 32,895 16,282
Total equity....................................... 17,780 17,194
Number of:
Deposit accounts................................... 15,354 14,688
Full service offices............................... 3 3
</TABLE>
- --------------------------------------------------------------------------------
(xiii)
<PAGE>
- --------------------------------------------------------------------------------
Selected Operating Data
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- -----------------------------
1998 1997 1998 1997
--------------- --------------- --------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income.................................. $4,152 $3,964 $12,179 $11,826
Interest expense................................. 2,806 2,597 8,118 7,644
----- ----- ------ ------
Net interest income.............................. 1,346 1,367 4,061 4,182
Provision for loan losses........................ 36 3 168 9
----- ------ ------ -------
Net interest income after provision
for loan losses................................ 1,310 1,364 3,893 4,173
Noninterest income............................... 39 46 157 109
Noninterest expense.............................. 1,109 937 3,078 2,722
----- ----- ------ ------
Income before income taxes....................... 240 473 972 1,560
Income taxes..................................... 59 187 304 612
----- ----- ------ ------
Net income....................................... $ 181 $ 286 $ 668 $ 948
====== ===== ====== ======
</TABLE>
Key Operating Ratios
<TABLE>
<CAPTION>
At or For the At or For the
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1998(1) 1997(1) 1998(1) 1997(1)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Performance Ratios:
Return on average assets..................................... 0.30% 0.52% 0.38% 0.58%
Return on average equity..................................... 4.13 7.12 5.10 8.13
Average equity to average assets............................. 7.24 7.26 7.40 7.08
Equity to assets at period end............................... 7.10 7.58 7.10 7.58
Interest rate spread(2)...................................... 1.96 2.24 2.04 2.34
Net interest margin.......................................... 2.27 2.53 2.34 2.60
Average interest-earning assets to average
interest-bearing liabilities............................... 1.06 1.06 1.07 1.06
Net interest income after provision for loan losses
to total non-interest expenses............................. 1.18 1.46 1.26 1.53
Asset Quality Ratios:
Non-performing loans to total assets......................... 0.03% 0.12% 0.03% 0.12%
Non-performing assets to total assets........................ 0.03 0.12 0.03 0.12
Non-performing loans to total loans.......................... 0.07 0.24 0.07 0.24
Allowance for loan losses to total loans at end of period.... 0.75 0.55 0.75 0.55
Allowance for loan losses to non-performing loans............ 1139.13 226.94 1139.13 226.94
</TABLE>
- -----------------
(1) Annualized where appropriate.
(2) The interest rate spread is the difference between weighted average
yield on average interest-earning assets and the weighted average cost
of average interest-bearing liabilities.
- --------------------------------------------------------------------------------
(xiv)
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RECENT DEVELOPMENTS
Comparison of Financial Condition at September 30, 1998 and December 31, 1997
Total assets increased by $21.4 million or 9.3% to $250.5 million at
September 30, 1998 from $229.1 million at December 31, 1997. This increase was
primarily due to an increase in available for sale mortgage-backed securities,
offset by decreases in investment securities, held to maturity mortgage-backed
securities, and loans held for sale. Cash and cash equivalents increased $3.5
million to $18.9 million at September 30, 1998 compared to $15.4 million at
December 31, 1997. Available for sale mortgage-backed securities increased by
$46.2 million to $96.3 million at September 30, 1998, from $50.1 million at
December 31, 1997, as new purchases and reinvestment of prepayments of
mortgage-backed securities were classified as available for sale. Between these
dates, total investment securities decreased by $22.8 million from $36.6 million
to $13.8 million at September 30, 1998 as a result of sales and redemptions of
callable securities.
The Bank's deposits increased by $4.5 million or 2.3% from December 31,
1997 to $198.4 million at September 30, 1998, due primarily to continued deposit
growth at both of its new branches opened in 1996. Borrowings increased $16.6
million to $32.9 million at September 30, 1998 from $16.3 million at December
31, 1997 as the Bank used borrowings to lengthen the maturities of its
liabilities to reduce interest rate risk and to generate additional income as
part of its leveraging strategy.
Total equity increased $586,000 to $17.8 million at September 30, 1998
due to net income of $668,000 offset by approximately $82,000 of unrealized
depreciation on securities available for sale, net of taxes.
After September 30, 1998, the Bank made an offer to purchase a building
in Ridgewood, New Jersey for approximately $4.0 million. The offer has been
accepted but is subject to certain conditions. If all conditions are met, the
Bank may acquire the property by December 31, 1998. The Bank expects to use the
property as an additional branch office and to house administrative operations.
The Bank has estimated that the acquisition and refurbishment costs for this
purpose could total approximately $6.0 million. These costs could be funded with
cash and cash equivalents without reducing liquidity below the level the Bank
feels is appropriate.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and September 30, 1997
Net Income. Net income decreased $105,000 to $181,000 for the three
months ended September 30, 1998 as compared to $286,000 for the same period in
1997. Net income decreased primarily due to a decrease of $21,000 in net
interest income, an increase in the provision for loan losses of $33,000, and an
increase in noninterest expenses of $172,000.
Net Interest Income. Net interest income decreased by approximately
$21,000 or 1.5% to $1.3 million for the three months ended September 30, 1998,
as compared to the same three months in 1997. The decrease in net interest
income was primarily due to a decline in the average yield on interest earning
assets and an increase in interest expense due to higher average balances of
deposits and borrowings. In addition, market conditions and competitive pressure
on the pricing of loans and deposits has resulted in a smaller interest rate
spread. Market conditions and/or competitive pressures in the future may further
reduce the spread between asset yields and the cost of funds.
- --------------------------------------------------------------------------------
(xv)
<PAGE>
- --------------------------------------------------------------------------------
Provision for Loan Losses. The provision for loan losses increased by
$33,000 to $36,000 for the three months ended September 30, 1998 from $3,000 for
the same three months of 1997. The increase was recognized in order to raise the
allowance for loan losses primarily as a result of management's review of the
risk inherent in the loan portfolio based in part on a comparison of loss
experience at the Bank and loss experience and reserve levels at peer
institutions. In addition, the allowance was increased as a result of the
changing composition of the loan portfolio from single family mortgages to
commercial real estate and consumer loans.
Noninterest income. Noninterest income decreased by $7,000 to $39,000
for the three months ended September 30, 1998, from $46,000 for the same period
in 1997.
Noninterest expenses. Noninterest expenses increased by $172,000 to
$1.1 million for the three months ended September 30, 1998 from $937,000 for the
same three months in 1997. The increase was due to higher salaries and benefits
expenses for the three months ended September 30, 1998 resulting from an
increase in staff, increases in medical insurance rates, recognition of expenses
for new benefit plans for senior executives and the Board of Directors, as well
as normal salary and merit increases. In addition, $75,000 was charged to
earnings due to replacement of all personal computers which did not meet year
2000 compliance tests.
Comparison of Operating Results for the Nine Months Ended September 30, 1998 and
September 30, 1997
Net Income. Net income decreased $280,000 to $668,000 for the nine
months ended September 30, 1998 as compared to $948,000 for the same period in
1997. Net income decreased due to a decline of $121,000 in net interest income,
an increase of $159,000 in loan loss provisions, and an increase in noninterest
expense of $356,000.
Net Interest Income. Net interest income decreased by approximately
$121,000 or 2.9% to $4.1 million for the nine months ended September 30, 1998.
The decrease was primarily due to a decrease in the average yield of interest
earning assets and an increase in average balances of deposits and borrowings,
partially offset by a modest decline in the average cost of interest-bearing
liabilities. However, market conditions and competitive pressure on the pricing
of loans and deposits has resulted in a smaller interest rate spread. Market
conditions and/or competitive pressure in the future may further reduce the
spread between asset yields and the cost of funds.
Provision for Loan Losses. The provision for loan losses increased
$159,000 for the nine months ended September 30, 1998, as compared to $9,000 for
the same nine months in 1997, thereby increasing the allowance for loan losses
to $786,000 at September 30, 1998.
Noninterest income. Noninterest income increased by $48,000 to $157,000
for the nine months ended September 30, 1998, from $109,000 for the nine months
ended September 30, 1997. These increases resulted from higher ATM fees,
increases in service fees on deposit accounts, gains on sales of loans and
securities, and higher loan servicing income.
Noninterest expenses. Noninterest expenses increased by $356,000 to
$3.1 million for the nine months ended September 30, 1998, from $2.7 million for
the nine months ended September 30, 1997. This resulted from an increase of
$148,000 in salaries and benefit costs, and an increase of $199,000 in other
noninterest expenses. Included in the increase in noninterest expenses was a
charge of $75,000 for replacement of personal computers which did not meet year
2000 compliance tests. In addition, computer service expense increased by
$45,000, resulting from an increase in account volumes and including
- --------------------------------------------------------------------------------
(xvi)
<PAGE>
- --------------------------------------------------------------------------------
$15,000 in year 2000 compliance costs. Further, consultants fees increased by
$26,000 due to increased use of consultants as well as costs associated with the
strategic planning.
Income Taxes. Income taxes decreased by approximately $308,000 to
$304,000 for the nine months ended September 30, 1998, as compared to $612,000
for the same nine months in 1997. The decrease was primarily due to the decrease
in income before taxes as discussed above, as well as an increase in tax exempt
income.
- --------------------------------------------------------------------------------
(xvii)
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Negative Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit largely depends on our net interest
income. Net interest income is the difference between the interest income we
earn on our interest-earning assets (such as mortgage loans and investment
securities) and the interest expense we pay on our interest-bearing liabilities
(such as deposits and borrowings). More than half of our mortgage loans have
rates of interest which are fixed for the term of the loan ("fixed rates") and
are generally originated with terms of up to 30 years, while our deposit
accounts have significantly shorter terms to maturity. Because our
interest-earning assets generally have fixed rates of interest and have longer
effective maturities than our interest-bearing liabilities, the yield on our
interest-earning assets generally will adjust more slowly to changes in interest
rates than the cost of our interest-bearing liabilities, which are primarily
time deposits. As a result, our net interest income may be adversely affected by
material and prolonged increases in interest rates. In addition, rising interest
rates may adversely affect our earnings because there may be a lack of customer
demand for loans. Declining interest rates may also adversely affect our net
interest income if adjustable rate or fixed rate mortgage loans are refinanced
at lower rates or prepaid, and we reinvest the resulting funds in lower yielding
assets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management."
Changes in interest rates can also affect the average life of loans and
mortgage-backed securities. Historically lower interest rates have resulted in
increased prepayments of loans and mortgage-backed securities, as borrowers
refinanced their mortgages in order to reduce their borrowing cost. Under these
circumstances, we are subject to reinvestment risk to the extent that we are not
able to reinvest such prepayments at rates which are comparable to the rates on
the prepaid loans or securities. Changes in interest rates may also result in
depositors shifting funds to other investments that yield higher rates of
return.
Increase in Non- 1- to 4-Family First Mortgage Lending and Nonconforming
Mortgage Loans
Over the past five years, we have significantly increased our
origination of commercial real estate loans and intend to continue to do so. We
also intend to continue to expand our origination of home equity loans and
consumer loan products, such as by offering automobile loans. We expect to begin
originating automobile loans during the first half of the 1999 calendar year
although the total amount of automobile loans should be immaterial for at least
one year after the offering. This type of lending has a greater degree of credit
risk than traditional one- to four-family residential lending, which could
result in an increase in non-performing assets and provisions for loan losses.
See "Business of the Bank-- Lending Activities--Consumer Loans." At June 30,
1998, our loan portfolio included commercial real estate loans (10%) and
consumer loans (10%). Nearly all of our consumer loans are home equity loans.
Because of the affluent nature of our market area, many of the mortgage
loans we originate for homes exceed the dollar limits (approximately $227,000)
for loans that can be easily sold into the secondary market. At June 30, 1998 we
had 84 of these loans that totalled $24.1 million or 28.6% of our $84.0 million
portfolio of one- to four-family first mortgage loans. We recently increased our
lending limit from $500,000 to $1.0 million for such a loan. While these loans
are generally made on the same terms and conditions as our lower aggregate
dollar amount mortgage loans, the relatively larger dollar amount of possible
loss on each loan makes these loans riskier than our other home mortgage
1
<PAGE>
loans. Because of the increase in our lending limit, the aggregate dollar amount
of these loans may increase in the future. See "Business of the Bank--Lending
Activities--One- to four-Family Lending."
Reduced Return on Equity After Reorganization
As a result of the reorganization, our equity will increase
substantially. Our ability to leverage this capital will be significantly
affected by competition for loans and deposits and economic conditions. Our
expenses will increase because of the costs associated with our employee stock
ownership plan, our expected stock benefit plans, and the costs of being a
public company. Our preparation costs for offering new types of consumer
products will also increase our expenses. We do not know if we will receive
sufficient income to offset these additional costs. Because of the increases in
our equity and expenses, our return on equity may decrease as compared to our
performance in previous years. Initially, we intend to invest the net proceeds
in short term investments which generally have lower yields than residential
mortgage loans. A lower return on equity could reduce the trading price of our
shares. For the six months ended June 30, 1998 our annualized return on average
equity was 5.59%.
Reduced Ownership Following a Mutual Holding Company Conversion
If the mutual holding company converted to stock form in the future,
our plan of reorganization provides that our stockholders would exchange their
common stock of the Company for common stock of the converted mutual holding
company on an equitable basis. If the mutual holding company were to convert to
stock form, the related stock offering would likely (1) provide subscription
rights to depositors of the Bank, (2) limit the maximum number of shares that
could be purchased by a person and (3) include shares received in exchange of
our common stock in the maximum number of shares that could be purchased. This
could mean that our stockholders who own a large amount of our common stock
might not be able to exercise their subscription rights for shares sold by the
converted mutual holding company or, possibly, be forced to sell some shares (if
the maximum purchase limit were below the number of shares that such a person
would own after they received shares in exchange of our shares they already
owned).
With regulatory approval, the mutual holding company may waive the
receipt of dividends that we pay. One of the conditions to such approval would
be that any waived dividends would reduce the percentage ownership that minority
stockholders would receive in exchange of their shares of our common stock if
the mutual holding company converted to stock form in the future. The plan of
reorganization also provides for such an adjustment. The mutual holding company
has not determined whether it will waive dividends that we pay and regulatory
agencies may not approve a waiver request. See "Waiver of Dividends by the MHC."
In addition, the value of assets owned by the mutual holding company would
reduce the percentage ownership that minority stockholders would receive if the
mutual holding company converted to stock form. See "MHC Conversion to Stock
Form."
You should not assume that the mutual holding company would be
permitted to convert to stock form or, even if permitted, that our stockholders
would be entitled to exchange or redeem their shares of our common stock.
Reliance Upon Local Economy and Competition Within Our Market Area.
We originate primarily residential real estate and consumer loans in
our market area. Our ability to originate loans that meet our underwriting
standards and the ability of mortgage borrowers to make monthly payments of
principal and interest is substantially dependent upon the strength of the local
economy. Competition from both local financial institutions and much larger
financial institutions
2
<PAGE>
headquartered outside our market area but with local offices makes it difficult
for us to generate sufficient loans. Our loan portfolio declined from $108.0
million at December 31, 1996 to $104.6 million at June 30, 1998. In its market
area, the Bank competes with commercial banks, savings institutions, credit
unions, finance companies, mutual funds, insurance companies, and brokerage and
investment banking firms operating locally and elsewhere. Many of these
competitors have substantially greater resources and lending limits than we have
and offer services that we do not or cannot provide. Our profitability depends
upon our continued ability to successfully compete in our market area. Further,
economic stagnation or decline in economic activity in our market area could
have an adverse effect on our financial condition or results of operations.
Takeover Restrictions
Mutual Holding Company Structure. Under federal and state regulations
and the plan of reorganization, the mutual holding company must own a majority
of our common stock at all times after the offering. The mutual holding company
will be controlled by the same directors and officers who control the Bank.
Because of this, our directors and management will be able to control a majority
of our common stock.
Provisions in the Company's Governing Instruments. Our certificate of
incorporation and bylaws provide for, among other things, a staggered board of
directors, noncumulative voting for directors, limits on the calling of special
meetings, and limits on a person or group voting shares in excess of 10% of the
outstanding shares. These restrictions may discourage proxy contests and other
takeover attempts, particularly those which have not been negotiated with the
Board of Directors, and thus may perpetuate current management. See "Certain
Restrictions on Acquisition of the Company."
Ownership and Control of Common Stock by Management. Our directors and
executive officers are expected to purchase up to 168,995 shares of our common
stock in the offering (12.0% at the midpoint of the offering range). In
addition, approximately 8% of the shares of common stock issued in the offering
are expected to be purchased by the employee stock ownership plan (the "ESOP").
Shares owned by the ESOP but not yet allocated to the accounts of participants
will be voted by the independent directors for the ESOP. Further, because of the
mutual holding company's ownership of our stock, current officers and directors
will control between 14.1% and 10.4% of the total number of minority shares
outstanding, based on the sale of between 1,198,500 and 1,621,500 shares of
common stock. To the extent we implement stock benefit plans, ownership and
control by management could increase. Including expected purchases by our
directors and executive officers and control of the ESOP, this control could
increase to between 32.8% and 29.5% of the total number of minority shares
outstanding, based on the sale of between 1,198,500 and 1,621,500 shares of
common stock. See "Management--Executive Compensation--Employee Stock Ownership
Plan" and "--Potential Stock Benefit Plans."
Certain provisions of employment agreements with our key officers
provide for cash payments in the event of a change in control. These provisions
increase the cost of an acquisition and may discourage a future attempt to
acquire the Company, and thus generally may serve to perpetuate current
management. See "Management--Executive Compensation--Employment Agreements."
Limited Market for Common Stock
We have never issued capital stock and there is not, at this time, any
market for the common stock. We have applied to have the common stock quoted on
the National Market of The Nasdaq Stock Market. At least 1.1 million of our
shares must be held by non-affiliates in order for our common stock to be
initially quoted on the National Market. If the common stock is not listed on
the National Market,
3
<PAGE>
we expect that the common stock will be quoted on the Nasdaq SmallCap Market
(requires that at least 1.0 million of our shares must be held by
non-affiliates) or the Nasdaq OTC Bulletin Board.
Due to the relatively small size of the offering (due, in part from the
public offering of less than half of the shares to be issued), you have no
assurance that an active and liquid market for the common stock will exist. You
should consider the potentially illiquid nature of an investment in the common
stock and recognize that the absence of an established market might make it
difficult to buy or sell the common stock. See "Market for Common Stock."
Possible Negative Effect of ESOP
The ESOP currently intends to purchase up to 8% of the common stock
offered in the offering. The net proceeds of the offering available for
investment by the Bank will be reduced by the cost of the shares (including the
costs of borrowing, if any) bought by the ESOP. The ESOP will also increase
compensation expense and adversely affect net income. See "Pro Forma Data" and
"Management-- Executive Compensation--Employee Stock Ownership Plan."
Financial Institution Regulation and Possible Legislation
The Bank is subject to extensive regulation and supervision as a New
Jersey-chartered, FDIC- insured savings bank. The regulatory authorities have
extensive discretion in connection with their supervision and enforcement
activities and their examination policies, including the imposition of
restrictions on operations, the classification of assets and the imposition of
an increase in allowance for loan losses. In addition, the Company, as a bank
holding company, will be subject to extensive regulation and supervision.
Regulatory changes, whether by the New Jersey Department of Banking and
Insurance (the "Department") , the FDIC, the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), or Congress, could have a material
impact on us. See "Regulation."
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to our operations. Data processing is
also essential to most other financial institutions and many other companies.
Most of the Bank's material data processing that could be affected by
this problem is provided by a third party service bureau. The service bureau has
advised the Bank that it expects to resolve this problem before the year 2000.
However, if this problem is not resolved before the year 2000, the Bank would
likely experience significant data processing delays, mistakes or failures.
These delays, mistakes or failures could have a significant adverse impact on
the Bank's financial condition and its results of operations. The Bank expects
to spend approximately $200,000 through December 31, 1998 to upgrade our
computer system for year 2000 compliance. We expect to capitalize this cost. At
June 30, 1998, none of the estimated $200,000 had been capitalized. In addition
to this $200,000, we expect to expense approximately $80,000 between July 1,
1998 and December 31, 1998 for non-compliant computer equipment. The Bank does
not expect to incur material additional expense for year 2000 compliance after
December 31, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Evaluation."
4
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
The Bank is a New Jersey-chartered mutual savings bank, originally
chartered in 1885 as The Ridgewood Building and Loan Association. In 1942, the
Bank became a New Jersey-chartered savings and loan association. In December
1992, the Bank converted its mutual charter from a New Jersey- chartered savings
and loan association to a New Jersey-chartered savings bank. The Bank became a
member of the FHLB System in 1933 and the Bank's deposits are currently insured
by the SAIF as administered by the FDIC. The Bank is regulated by the Department
and the FDIC.
The Bank is a community-oriented retail savings bank offering
traditional deposit products, residential real estate mortgage loans and, to a
lesser extent, consumer loans and other loans. The Bank, through its three
offices located in Ridgewood and Mahwah, New Jersey provides retail banking
services, with an emphasis on one-to-four family residential mortgages.
Currently, the Bank originates 20 year and 30 year conforming fixed rate
residential mortgage loans primarily for sale in the secondary market. All other
mortgage loans are originated for its portfolio. At June 30, 1998, net loans
receivable amounted to approximately $104.6 million or 43.1% of total assets, of
which approximately $84.0 million or 79.4% of such total was secured by
one-to-four family residential real estate. The Bank invests excess liquidity in
mortgage-backed and investment securities (consisting primarily of U.S.
government and government agency securities and obligations of states and
political subdivisions). Investment and mortgage-backed securities amount to
$112.7 million or 46.4% of total assets at June 30, 1998. At June 30, 1998, the
Bank had total assets, deposits and total equity of $242.7 million, $198.6
million, and $17.4 million, respectively. See "Business of the Bank."
RIDGEWOOD FINANCIAL, INC.
We are a New Jersey-chartered corporation organized on July 31, 1998 at
the direction of the Bank to acquire all of the capital stock that the Bank will
issue upon its conversion from the mutual to stock form of ownership. The
Company has not engaged in any significant business to date but will serve as a
holding company of the Bank following the reorganization. A majority of our
shares will, in turn, be owned by the mutual holding company. The Company has
applied for approval to acquire control of the Bank. The Company will retain up
to 50% of the net proceeds from the issuance of common stock as its initial
capitalization less the amount retained by the mutual holding company. The
Company will use the balance of the net proceeds to purchase all of the common
stock of the Bank to be issued upon conversion. Part of the proceeds retained by
the Company will be used to fund the loan to the ESOP. Upon consummation of the
reorganization, the Company will have no significant assets other than that
portion of the net proceeds of the offering retained by the Company (less the
loan to the ESOP) and the shares of the Bank's capital stock acquired in the
reorganization, and will have no significant liabilities. Cash flow to the
Company will be dependent upon earnings from the investment of the portion of
net proceeds retained by it in the reorganization and any dividends received
from the Bank. See "Use of Proceeds."
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies. Although there are no current arrangements, understandings,
or agreements regarding any such opportunities, the Company will be in a
position after the reorganization, subject to regulatory limitations and the
Company's financial condition, to take advantage of any such acquisition and
expansion opportunities that may arise. However, some of these activities could
be deemed to entail a greater risk than the activities permissible for New
Jersey-chartered savings institutions such as the Bank.
5
<PAGE>
RIDGEWOOD FINANCIAL, MHC
As part of the reorganization, the Bank will organize Ridgewood
Financial, MHC (the "MHC") as a New Jersey-chartered mutual savings bank holding
company. As long as they remain depositors of the Bank, persons who had
liquidation rights with respect to the Bank as of the date of the reorganization
will continue to have such rights solely with respect to the MHC after the
reorganization.
The MHC's principal assets will be the shares of common stock received
and up to $200,000 received as its initial capitalization in the reorganization.
Immediately after consummation of the reorganization, it is expected that the
MHC will not engage in any business activity other than its investment in a
majority of the common stock of the Company and its initial capitalization. The
MHC will be a mutual corporation chartered under New Jersey law and regulated by
the Department and the Federal Reserve. The MHC will be subject to the
limitations and restrictions imposed on bank holding companies under federal and
state laws. See "Regulation--Company--General."
USE OF PROCEEDS
The net proceeds will depend on the total number of shares of common
stock sold in the offering, which will be dependent on the independent valuation
and marketing considerations, and the expenses incurred in connection with the
offering. Although the actual net proceeds from the sale of the common stock
cannot be determined until the offering is completed, it is estimated that net
proceeds, assuming the sale of 1,198,500 and 1,621,500 shares of stock at $7.00
per share, would be approximately $7,789,500 and $10,750,500 respectively. The
actual net proceeds may vary from these estimates because, among other things,
actual expenses may be more or less than those estimated.
Of the net proceeds at least one half will be used by the Company to
purchase 100% of the common stock of the Bank that is issued. Of the remainder
of the net proceeds, the mutual holding company will receive $200,000 as its
initial capitalization and the Company will retain the rest. The net proceeds
from the offering will be used for general corporate purposes and will increase
the Bank's total capital to expand investment and lending, internal growth, and
possible external growth through the acquisition of branch offices, expansion
into new lending areas, and other acquisitions. Regardless of the offering, the
Bank intends to acquire property in Ridgewood, New Jersey that will become the
administrative center of the Company, MHC and the Bank and also serve as a
branch office of the Bank. See "Management's Discussion and Analysis of Recent
Developments." Net proceeds will initially be invested in U.S. government and
federal agency securities, marketable securities, or a combination of both.
The Company intends to use a portion of the net proceeds it retains to
make a loan directly to the ESOP to enable the ESOP to purchase stock in the
offering, or in the open market to the extent the stock is not available to fill
the ESOP's subscription. In the event the ESOP does not purchase common stock in
the offering, the ESOP may purchase shares of common stock in the market after
the reorganization. In the event the purchase price of the common stock is
higher than $7.00 per share, the amount of proceeds required for the purchase by
the ESOP will increase and the resulting stockholders' equity will decrease. Net
proceeds may also be used to make contributions to the ESOP which in turn would
be used to repay the loan.
6
<PAGE>
The net proceeds may vary because total expenses of the reorganization
may be more or less than those estimated. The net proceeds will also vary if the
number of shares to be sold in the offering are adjusted to reflect a change in
the estimated pro forma market value of the Company and the Bank. Payments for
shares made through withdrawals from existing Bank deposit accounts will not
result in the receipt of new funds for investment by the Bank but will result in
a reduction of the Bank's deposits and interest expense as funds are transferred
from interest bearing certificates or other deposit accounts.
DIVIDEND POLICY
Subject to regulatory and other considerations which generally limit
the authority of the Bank to pay, and the amount of, dividends, the Company
intends to establish a cash dividend policy following the offering commencing
after the completion of one full calendar quarter after the reorganization. The
initial amount of the dividends is as yet undetermined. Dividends will be
subject to determination and declaration by the Company's Board of Directors,
which will take into account, among other factors, the Company's financial
condition, results of operations, tax considerations, industry standards,
economic conditions, regulatory restrictions which affect the payment of
dividends by the Bank to the Company, and other factors. If the MHC elects not
to waive receipt of dividends from the Company or if the Department or Federal
Reserve does not approve such a waiver, the amount of dividends may be adversely
affected. See "Waiver of Dividends by the MHC." There can be no assurance that
dividends will be paid on the common stock or that, if paid, such dividends will
not be reduced or eliminated in future periods.
The Company will not be permitted to pay dividends on its capital stock
if its stockholders' equity would be reduced below the amount required for the
liquidation account. See "The Reorganization-- Effects of the
Reorganization--Liquidation Rights". Under New Jersey law, a savings bank is
required to maintain at all times surplus in an amount which is at least equal
to its required capital as set forth in the New Jersey Banking Act of 1948, as
amended ("Banking Code"). Dividends may be declared by the Company and paid to
stockholders only out of accumulated net earnings after any required transfers
to surplus and only if the Company's surplus would not be reduced by the payment
of such dividend. Furthermore, as a condition to non-objection by the FDIC, the
Company has agreed that it will not initiate any action within one year of
completion of the reorganization in the furtherance of payment of a special
distribution or return of capital (as distinguished from a regular or special
dividend payment in the ordinary course of business) to stockholders of the
Company. See also "Waiver of Dividends by the MHC."
In addition to the foregoing, earnings of the Company and the Bank
appropriated to bad debt reserves and deducted for federal income tax purposes
are not available for payment of cash dividends or other distributions to
stockholders without payment of taxes at the then-current tax rate by the
Company and the Bank on the amount of earnings deemed to be removed from the
reserves for such distribution. See "Taxation" and Note 10 of the financial
statements. The Bank does not contemplate any distribution out of its bad debt
reserve which would cause such tax liability.
WAIVER OF DIVIDENDS BY THE MHC
The MHC, prior to the declaration of any dividends by the Company, will
determine whether to apply to the Federal Reserve for permission to waive the
receipt of any dividends paid by the Company to its stockholders. Any waiver of
dividends, if approved by the Federal Reserve, will be subject to various
conditions. There can be, however, no assurances that the Federal Reserve will
approve such application or if such approval is obtained, that the MHC will
continue to waive dividends. The Company and MHC are not aware of any mutual
bank holding company regulated by the Federal Reserve
7
<PAGE>
that has been permitted to waive the receipt of dividends from its
majority-owned bank subsidiary holding company. In waiving dividends, the Board
of Directors must conclude, among other things, that a dividend waiver by the
MHC, which permits retention of capital by the Company and the Bank, is in the
best interest of the MHC because, among other reasons: (i) the MHC has no need
for the dividend for its business operations; (ii) the cash that would be
received by the MHC could be invested by the Company and the Bank at a more
favorable rate of return; (iii) such waiver increases the capital of the Company
and the Bank and enhances the Bank's business so that customers will continue to
have access to the offices and services of the Bank; and (iv) such waiver
preserves the net worth of the MHC through its principal asset (the Company and
the Bank), which would be available for distribution in the unlikely event of a
voluntary liquidation of the Company and the Bank after satisfaction of claims
of depositors, other creditors and minority shareholders.
If the MHC determines that the waiver of dividends is in the best
interest of the parties involved: (1) The MHC will make prior application to the
Federal Reserve for approval to waive any dividends declared on the capital
stock of the Company. Such application will be made on an annual basis with
respect to any year in which the MHC intends to waive such dividends; (2) If a
waiver is granted, dividends waived by the MHC will not be available for payment
to minority shareholders and will be excluded from the capital accounts of the
Bank for purposes of calculating any dividend payments to minority shareholders;
(3) If a waiver is granted, (i) the Bank will, so long as the MHC remains a
mutual holding company, establish a restricted capital account in the cumulative
amount of any dividends waived by the MHC for the benefit of the mutual members
of the MHC, (ii) the restricted capital account would be senior to the claims of
minority stockholders of the Company and would not decrease notwithstanding
changes in depositors of the Bank, and (iii) this restricted capital account
would be added to any liquidation account in the Bank established in connection
with a conversion of the MHC to stock form and would not be available for
distribution to minority shareholders; (4) In any conversion of the MHC from
mutual to stock form, the Bank, Company and MHC will comply with the
requirements of the Federal Reserve which, for any dividends waived, may affect
the related appraisal by reducing the resulting percentage ownership of minority
stockholders through a reduction in the exchange ratio of shares of common stock
for shares of the converted holding company; and (5) In the event that the
Federal Reserve adopts regulations regarding dividend waivers by mutual holding
companies, the MHC will comply with the applicable requirements of such
regulations. See "Risk Factors--Reduced Ownership Following a Mutual Holding
Company Conversion" and "MHC Conversion to Stock Form."
Immediately after consummation of the reorganization, it is expected
that the MHC's operations will consist of activities relating to its investment
in a majority of the common stock of the Company and its initial capitalization.
In the future, the MHC may accept dividends paid by the Company to be used for
other purposes, including purchasing common stock from time to time in the open
market or from the Company, if permitted. The Company may establish an open
market purchase dividend reinvestment plan, pursuant to which stockholders may
elect to have cash dividends used to purchase additional shares of common stock
in the open market. The MHC may participate in any such plan. There can be no
assurances that the MHC will accept dividends paid by the Company, or if such
dividends are accepted, that the MHC will purchase shares of common stock in the
open market. Any purchases of common stock other than from the MHC will increase
the percentage of the Company's outstanding shares of common stock held by the
MHC and increase the number of shares eligible to be sold in any subsequent
secondary offering or mutual to stock conversion of the MHC.
MHC CONVERSION TO STOCK FORM
Following completion of the reorganization, the MHC may elect to
convert to stock form in accordance with applicable state and federal law, if
any. The MHC's directors, who will be the initial
8
<PAGE>
directors of the Bank and the Company, have no current plans to convert the MHC
to stock form. The terms of such a conversion cannot be determined at this time
and there is no assurance when, if ever, a conversion will occur. In the event
of a conversion, minority shareholders will be entitled to exchange their shares
of common stock for shares of the converted MHC in a manner that is fair and
reasonable to such shareholders and the MHC. This will include an appropriate
downward adjustment in the exchange ratio to account for assets of the MHC and
waived dividends, if any. See "Risk Factors-- Reduced Ownership Following a
Mutual Holding Company Conversion" and "Waiver of Dividends by the MHC."
Alternatively, minority shareholders will receive cash for their shares in an
amount equal to the fair market value of their shares given the circumstances of
the conversion. Such value will be determined in the same manner as if shares
were to be exchanged, including the factoring of any waived dividends or any
assets of the MHC. The fair market value shall be established by an independent
appraisal utilized in the conversion. Moreover, in the event that the MHC
converts to stock form in a conversion, any options or other convertible
securities held by any trustee, officer, or employee of the Company, will be
convertible into the right to acquire shares of the converted MHC (or its
successor) on the same basis as outstanding common stock (pursuant to applicable
exchange ratios); provided, however, that if such shares cannot be so converted,
the holders of such options or other convertible securities shall be entitled to
receive cash equal to the fair value of such options or convertible securities.
Any exchange or redemption will be subject to the approval of the Department and
the Federal Reserve, and the Department and the Federal Reserve have made no
determination as to the permissibility of any exchange or redemption described
in the plan of reorganization.
Although the plan of reorganization allows for such an event, there can
be no assurances when, if ever, a conversion will occur, or what conditions may
be imposed by the Department and Federal regulators. If a conversion does not
occur, the MHC will always own a majority of the common stock of the Company.
MARKET FOR COMMON STOCK
The Company has never issued capital stock. Consequently, there is not,
at this time, any market for the common stock. The Company has received
preliminary approval to have the common stock quoted on the National Market of
the Nasdaq Stock Market. If the number of shares of common stock sold to our
non-affiliates is not at least 1.1 million, we will not meet the requirements of
that market and we will seek approval for quotation of our common stock on the
Nasdaq SmallCap Market. If the number of shares of common stock sold to our
non-affiliates is not at least 1.0 million, we will not meet the requirements of
that market and we will ask market makers to seek quotation of our common stock
on the Nasdaq OTC Bulletin Board. One of the conditions for Nasdaq quotation
(National Market and SmallCap Market) is that at least three market makers make,
or agree to make, a market in the stock. The Company will seek to encourage and
assist at least three market makers to make a market in the common stock. Ryan,
Beck has indicated its intent to make a market in the common stock upon the
completion of the offering, subject to compliance with applicable laws and
regulations, but is under no obligation to do so. While the Company anticipates
that prior to the completion of the offering it will obtain a commitment from at
least two other broker-dealers to make a market in the common stock, there can
be no assurance that there will be three or more market makers for the common
stock.
An active and liquid market for the common stock may not develop or be
maintained. Accordingly, prospective purchasers should consider the potentially
illiquid nature of an investment in the common stock and recognize that the
absence of an established market might make it difficult to buy or sell the
common stock.
9
<PAGE>
The aggregate price of the common stock is based upon an independent
appraisal of the pro forma market value of the common stock. However, there can
be no assurance that an investor will be able to sell the common stock purchased
in the offering at prices in the range of the pro forma book values of the
common stock or at or above the purchase price. See "Pro Forma Data" and "The
Offering--Stock Pricing and Number of Shares to be Offered."
10
<PAGE>
CAPITALIZATION
Set forth below is the historical capitalization, including deposits
and borrowed funds, of the Bank as of June 30, 1998, and the pro forma
capitalization of the Company after giving effect to the shares issued to the
MHC in the reorganization, the sale of shares offered pursuant to the offering
and other assumptions set forth under "Pro Forma Data." A change in the number
of shares to be sold in the offering may affect materially such pro forma
capitalization.
<TABLE>
<CAPTION>
Pro Forma Capitalization at June 30, 1998(1)
----------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
1,198,500 1,410,000 1,621,500 1,864,725
Actual, as of Shares at Shares at Shares at Shares at
June 30, $7.00 per $7.00 per $7.00 per $7.00 per
1998 share share share share(2)
--------------- ---------- ----------- --------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3)................................... $ 198,602 $ 198,602 $ 198,602 $ 198,602 $ 198,602
Borrowed funds................................ 25,432 25,432 25,432 25,432 25,432
Total deposits and borrowed funds............. 224,034 224,034 224,034 224,034 224,034
Stockholders' equity:
Preferred stock, no par value, 5,000,000
shares authorized; none to be issued........ -- -- -- -- --
Common stock, $0.10 par value, 10,000,000
shares authorized, assuming shares
outstanding as shown(4)................... -- 255 300 345 397
Additional paid-in capital(4)................. -- 7,535 8,970 10,406 12,056
Retained earnings(4)(5)....................... 17,453 17,253 17,253 17,253 17,253
Accumulated other comprehensive income........ (102) (102) (102) (102) (102)
Less:
Common stock acquired by ESOP(6)............ -- 671 790 908 1,044
Common stock acquired by
stock programs(7)......................... -- 336 395 454 522
-------- -------- -------- -------- --------
Total equity/stockholders' equity............. $ 17,351 $ 23,934 $ 25,236 $ 26,540 $ 28,038
======== ======== ======== ======== ========
</TABLE>
- ------------------
(1) The number of shares to be issued to the MHC at the minimum, midpoint,
maximum and maximum, as adjusted, of the estimated pro forma value of the
common stock will be 1,351,500 and 1,590,000 and 1,828,500 and 2,102,775
shares of common stock, respectively.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect changes
in market and financial conditions.
(3) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Such withdrawals would reduce deposits by the
amount of such withdrawals.
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to any stock option plans that may be adopted by the Company
and the Bank and presented for approval by the minority stockholders after
the offering. An amount equal to 10% of the shares of common stock sold in
the offering would be reserved for issuance upon the exercise of options to
be granted under the stock option plans no earlier than one year following
the reorganization. See "Management - Potential Stock Benefit Plans."
(5) The reduction in retained earnings of the Bank reflects the retention by
the MHC of $200,000 upon consummation of the reorganization.
(6) Assumes that 8.0% of the shares sold in the offering will be purchased by
the ESOP, and that the funds used to acquire the ESOP shares will be
borrowed from the Company. For an estimate of the impact of the loan on
earnings, see "Pro Forma Data." The Bank intends to make scheduled
discretionary contributions to the ESOP sufficient to enable the ESOP to
service and ultimately retire its debt. The amount of shares to be acquired
by the ESOP is reflected as a reduction of stockholders' equity. See
"Management--Executive Compensation--Employee Stock Ownership Plan." If the
ESOP is unable to purchase common stock in the reorganization due to an
oversubscription in the offering by Eligible Account Holders, and the
purchase price in the open market is greater than the initial $7.00 price
per share, there will be a corresponding reduction in stockholders' equity.
(7) Assumes that an amount equal to 4% of the shares of common stock sold in
the offering is purchased by stock programs no earlier than one year
following the reorganization. The common stock purchased by the stock
programs is reflected as a reduction of stockholders' equity. See
"Management--Potential Stock Benefit Plans--Stock Programs."
11
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the offering is completed. Actual expenses may differ from
estimated expenses. However, net investable proceeds to the Company are
estimated to be between $6.6 million and $9.2 million (or $10.7 million in the
event the independent valuation is increased by 15%) based upon the following
assumptions: (i) an amount equal to 4% of the shares offered will be awarded
pursuant to the stock programs (which will be adopted no sooner than one year
following the offering), funded through open market purchases; (ii) Ryan, Beck
will receive an advisory and marketing fee equal to $150,000 and (iii) other
fixed expenses incurred in connection with the offering are estimated to be
$450,000. As part of the reorganization, the MHC will be capitalized at
$200,000, which will result in a reduction of the Company's assets and equity by
the same amount. It is assumed that of the common stock to be issued, 53% will
be held by the mutual holding company and 47% will be publicly sold without the
use of brokers or dealers other than Ryan, Beck. Directors and executive
officers and their associates are expected to purchase 168,995 shares. The
employee stock ownership plan is assumed to purchase 8% of the common stock
sold. The four columns in the following charts show an offering at the minimum,
midpoint, maximum, and maximum, as adjusted of the offering range. The maximum,
as adjusted of the offering range represents an increase of up to 15% from the
maximum of the offering range.
Pro forma earnings have been calculated assuming the common stock had
been sold at the beginning of the periods and the net proceeds had been invested
at an average yield of 5.41% for the six months ended June 30, 1998 and the year
ended December 31, 1997, which approximates the yield on a one-year U.S.
Treasury bill on June 30, 1998. The yield on a one-year U.S. Treasury bill,
rather than an arithmetic average of the average yield on interest-earning
assets and average rate paid on deposits, has been used to estimate income on
net proceeds because it is believed that the one-year U.S. Treasury bill rate is
a more accurate estimate of the rate that would be obtained on an investment of
net proceeds from the offering. The pro forma after-tax yield is assumed to be
3.41% for the six months ended June 30, 1998 and the year ended December 31,
1997, based on an effective tax rate of 37.00%. The effect of withdrawals from
deposit accounts for the purchase of common stock has not been reflected.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of common
stock, as adjusted (in the case of pro forma net earnings per share) to give
effect to the purchase of shares by the ESOP. Pro forma stockholders' equity
amounts have been calculated as if the common stock had been sold on June 30,
1998 and December 31, 1997, respectively, and, accordingly, no effect has been
given to the assumed earnings effect of the transactions.
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 consolidated assets and liabilities
of the Company computed in accordance with generally accepted accounting
principles ("GAAP"). 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 six months ended June 30, 1998 and at
and for the year ended December 31, 1997, 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 reorganization. No effect has
been given in the tables to the possible issuance of additional shares reserved
for future issuance pursuant to a stock option plan that may be adopted by the
Board of Directors of the Company no earlier than one year following the
12
<PAGE>
reorganization, 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 the bad debt reserve in liquidation. See "The
Reorganization--Effects of the Reorganization--Liquidation Rights" and
"Management--Potential Stock Benefit Plans--Stock Option Plans."
13
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended June 30, 1998
-----------------------------------------------------------------------
$17,850,000 $21,000,000 $24,150,000 $27,772,500
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
--------------- --------------- --------------- ---------------
Sale of Sale of Sale of Sale of
1,198,500 1,410,000 1,621,500 1,864,725
Shares Shares Shares Shares
at $7 per share at $7 per share at $7 per share at $7 per share
--------------- --------------- --------------- ---------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds .................................. $ 8,390 $ 9,870 $ 11,351 $ 13,053
Less expenses ................................... 600 600 600 600
Less capital to MHC ............................. 200 200 200 200
----------- ----------- ----------- -----------
Estimated net proceeds to the Company ........ 7,590 9,070 10,551 12,253
Less ESOP funded by the Company ................. 671 790 908 1,044
Less stock programs adjustment .................. 336 395 454 522
----------- ----------- ----------- -----------
Estimated investable net proceeds ............ $ 6,583 $ 7,885 $ 9,189 $ 10,687
=========== =========== =========== ===========
Net income:
Historical ................................... $ 487 $ 487 $ 487 $ 487
Pro forma income on net proceeds ............. 112 134 157 182
Pro forma ESOP adjustments(1) ................ (21) (25) (29) (33)
Pro forma stock programs adjustment(2) ....... (21) (25) (29) (33)
----------- ----------- ----------- -----------
Pro forma net income(1)(3)(4) ................ $ 557 $ 571 $ 586 $ 603
=========== =========== =========== ===========
Per share net income
Historical ................................... $ 0.20 $ 0.17 $ 0.15 $ 0.13
Pro forma income on net proceeds ............. 0.05 0.05 0.05 0.05
Pro forma ESOP adjustments(1) ................ (0.01) (0.01) (0.01) (0.01)
Pro forma stock programs adjustment(2) ....... (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
Pro forma net income per share(1)(3)(4) ...... $ 0.23 $ 0.20 $ 0.18 $ 0.16
=========== =========== =========== ===========
Shares used in calculation of income per share(1) 2,458,914 2,892,840 3,326,766 3,825,781
Stockholders' equity:
Historical ................................... $ 17,351 $ 17,351 $ 17,351 $ 17,351
Estimated net proceeds ....................... 7,590 9,070 10,551 12,253
Less: Common Stock acquired by the ESOP(1).... (671) (790) (908) (1,044)
Less: Common stock acquired by stock
programs(2) ......................... (336) (395) (454) (522)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(1)(3)(4) ...... $ 23,934 $ 25,236 $ 26,540 $ 28,038
=========== =========== =========== ===========
Stockholders' equity per share:
Historical (4) ............................... $ 6.80 $ 5.78 $ 5.03 $ 4.37
Estimated net proceeds ....................... 2.98 3.02 3.06 3.09
Less: Common Stock acquired ESOP(1)........... (0.26) (0.26) (0.26) (0.26)
Less: Common Stock acquired by stock
programs(2).......................... (0.13) (0.13) (0.13) (0.13)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(4) .. $ 9.39 $ 8.41 $ 7.70 $ 7.07
=========== =========== =========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share ................ 74.55% 83.23% 90.91% 99.01%
=========== =========== =========== ============
Offering price to pro forma
net income per share (annualized) ............. 15.22X 17.50X 19.44X 21.88X
=========== =========== =========== ============
Shares used in calculation of book value/share .. 2,550,000 3,000,000 3,450,000 3,967,500
</TABLE>
- -----------------
(1) Assumes that 8% of the shares of common stock sold in the offering will be
purchased by the ESOP and that the ESOP will borrow funds from the Company.
The common stock acquired by the ESOP 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 loan. This table assumes a 10 year amortization period. See
"Management--Executive Compensation--Employee Stock Ownership Plan." The
pro forma net income assumes: (i) that the Bank's contribution to the ESOP
for the principal portion of the debt service requirement for the six
months ended June 30, 1998 were made at the end of
14
<PAGE>
the period; (ii) that 4,794 and 5,640 and 6,486 and 7,459 shares at the
minimum, midpoint, maximum, and 15% above the maximum of the range,
respectively, were committed to be released during the six months ended
June 30, 1998 at an average fair value of $7.00 per share and were
accounted for as a charge to expense in accordance with Statement of
Position ("SOP") No. 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net earnings per
share calculations, while all ESOP shares were considered outstanding for
purposes of the stockholders' equity per share calculations. See also "Risk
Factors--Possible Negative Effect of ESOP" for a discussion of possible
added costs for the ESOP.
(2) Gives effect to the stock programs that may be adopted following the
reorganization and presented for approval at a meeting of stockholders to
be held no earlier than one year after completion of the reorganization. If
the stock programs are approved by the stockholders, the stock programs
would be expected to acquire an amount of common stock equal to 4% of the
shares of common stock sold in the offering, or 47,940 and 56,400 and
64,860 and 74,589 shares of common stock respectively at the minimum,
midpoint, maximum and 15% above the maximum of the range through open
market purchases. Funds used by the stock programs to purchase the shares
will be contributed to the stock programs by the Bank. In calculating the
pro forma effect of the stock programs, it is assumed that the required
stockholder approval has been received, that the shares were acquired by
the stock programs at the beginning of the six months ended June 30, 1998
through open market purchases, at $7.00 per share, and that 10% of the
amount contributed was amortized to expense during the six months ended
June 30, 1998. The issuance of authorized but unissued shares of common
stock to the stock programs instead of open market purchases would dilute
the voting interests of existing stockholders by approximately 1.85% and
pro forma net earnings per share would be $0.23, $0.20, $0.18 and $0.16 at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be $9.21,
$8.26, $7.55 and $6.94 at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively. There can be no assurance that
stockholder approval of the stock programs will be obtained, or the actual
purchase price of the shares will be equal to $7.00 per share. See
"Management-- Potential Stock Benefit Plans - Stock Programs."
(3) The retained earnings of the Company and the Bank will continue to be
substantially restricted after the reorganization. See "Dividend Policy,"
"The Reorganization - Effects of the Reorganization--Liquidation Rights"
and "Regulation."
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plans that may be adopted following the
reorganization which, in turn, would be presented for approval at a meeting
of stockholders to be held no earlier than one year after the completion of
the reorganization. If the stock option plans are presented and approved by
stockholders, an amount equal to 10% of the common stock sold in the
offering, or 119,850 and 141,000 and 162,150 and 186,473 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plans. The issuance of common
stock pursuant to the exercise of options under the stock option plans will
result in the dilution of existing stockholders' interests. Assuming
stockholder approval of the stock option plans and the exercise of all
options at the end of the period at an exercise price of $7.00 per share,
the pro forma net earnings per share would be $0.22, $0.19, $0.17, and
$0.15, respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range for the six months ended June 30, 1998; pro forma
stockholders' equity per share would be $9.28, $8.35, $7.66 and $7.06,
respectively at the minimum, midpoint, maximum and 15% above the maximum of
the range for the six months ended June 30, 1998. See
"Management--Potential Stock Benefit Plans--Stock Option Plans."
15
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
$17,850,000 $21,000,000 $24,150,000 $27,772,500
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
--------------- --------------- --------------- ---------------
Sale of Sale of Sale of Sale of
1,198,500 1,410,000 1,621,500 1,864,725
Shares Shares Shares Shares
at $7 per share at $7 per share at $7 per share at $7 per share
--------------- --------------- --------------- ---------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds....................................... $ 8,390 $ 9,870 $ 11,351 $ 13,053
Less expenses........................................ 600 600 600 600
Less capital to MHC.................................. 200 200 200 200
----------- ------------ ----------- -----------
Estimated net proceeds............................ 7,590 9,070 10,551 12,253
Less ESOP funded by the Company...................... 671 790 908 1,044
Less stock programs adjustment....................... 336 395 454 522
----------- ------------ ----------- -----------
Estimated investable net proceeds................. $ 6,583 $ 7,885 $ 9,189 $ 10,687
=========== ============ =========== ===========
Net income:
Historical........................................ $ 1,250 $ 1,250 $ 1,250 $ 1,250
Pro forma income on net proceeds.................. 224 269 313 364
Pro forma ESOP adjustments(1)..................... (42) (50) (57) (66)
Pro forma stock programs adjustment(2)............ (42) (50) (57) (66)
----------- ------------- ----------- -----------
Pro forma net income(1)(3)(4)..................... $ 1,390 $ 1,419 $ 1,449 $ 1,482
=========== ============= =========== ===========
Per share net income
Historical........................................ $ 0.51 $ 0.43 $ 0.38 $ 0.33
Pro forma income on net proceeds.................. 0.09 0.09 0.09 0.09
Pro forma ESOP adjustments(1)..................... (0.02) (0.02) (0.02) (0.02)
Pro forma stock programs adjustment(2)............ (0.02) (0.02) (0.02) (0.02)
----------- ------------ ----------- -----------
Pro forma net income per share(1)(3)(4)........... $ 0.56 $ 0.48 $ 0.43 $ 0.38
=========== ============ =========== ===========
Shares used in calculation of income per share(1).... 2,463,708 2,898,480 3,333,252 3,833,240
Stockholders' equity:
Historical........................................ $ 17,194 $ 17,194 $ 17,194 $ 17,194
Estimated net proceeds............................ 7,590 9,070 10,551 12,253
Less: Common Stock acquired by the ESOP(1) (671) (790) (908) (1,044)
Less: Common stock acquired by stock
programs(2)........................ (336) (395) (454) (522)
----------- ------------ ----------- -----------
Pro forma stockholders' equity(1)(3)(4)........... $ 23,777 $ 25,079 $ 26,383 $ 27,881
=========== ============ =========== ===========
Stockholders' equity per share:
Historical (4).................................... $ 6.74 $ 5.73 $ 4.98 $ 4.33
Estimated net proceeds............................ 2.98 3.02 3.06 3.09
Less: Common Stock acquired ESOP(1)...... (0.26) (0.26) (0.26) (0.26)
Less: Common Stock acquired by stock
programs(2)........................ (0.13) (0.13) (0.13) (0.13)
----------- ------------ ----------- -----------
Pro forma stockholders' equity per share(4)....... $ 9.33 $ 8.36 $ 7.65 $ 7.03
========== ============ =========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share..................... 75.03% 83.73% 91.50% 99.57%
========== ============ =========== ==========
Offering price to pro forma
net income per share............................... 12.50X 14.58X 16.28X 18.42X
========== ============ =========== ==========
Shares used in calculation of book value/share....... 2,550,000 3,000,000 3,450,000 3,967,500
</TABLE>
- -------------
(1) Assumes that 8% of the shares of common stock sold in the offering will be
purchased by the ESOP and that the ESOP will borrow funds from the Company.
The common stock acquired by the ESOP 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 loan. This table assumes
16
<PAGE>
a 10 year amortization period. See "Management--Executive
Compensation--Employee Stock Ownership Plan." The pro forma net income
assumes: (i) that the Bank's contribution to the ESOP for the principal
portion of the debt service requirement for the year ended December 31,
1997 were made at the end of the period; (ii) that 9,588 and 11,280 and
12,972 and 14,918 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, 1997 at an average fair value of $7.00
per share and were accounted for as a charge to expense in accordance with
Statement of Position ("SOP") No. 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net earnings per share calculations, while all ESOP shares were considered
outstanding for purposes of the stockholders' equity per share
calculations. See also "Risk Factors--Possible Negative Effect of ESOP" for
a discussion of possible added costs for the ESOP.
(2) Gives effect to the stock programs that may be adopted following the
reorganization and presented for approval at a meeting of stockholders to
be held no earlier than one year after completion of the reorganization. If
the stock programs are approved by the stockholders, the stock programs
would be expected to acquire an amount of common stock equal to 4% of the
shares of common stock sold in the offering, or 47,940 and 56,400 and
64,860 and 74,589 shares of common stock respectively at the minimum,
midpoint, maximum and 15% above the maximum of the range through open
market purchases. Funds used by the stock programs to purchase the shares
will be contributed to the stock programs by the Bank. In calculating the
pro forma effect of the stock programs, it is assumed that the required
stockholder approval has been received, that the shares were acquired by
the stock programs at the beginning of the year ended December 31, 1997
through open market purchases, at $7.00 per share, and that 20% of the
amount contributed was amortized to expense during the year ended December
31, 1997. The issuance of authorized but uninsured shares of common stock
to the stock programs instead of open market purchases would dilute the
voting interests of existing stockholders by approximately 1.85% and pro
forma net earnings per share would be $0.56, $0.48, $0.43 and $0.38 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be $9.15,
$8.21, $7.51 and $6.90 at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively. There can be no assurance that
stockholder approval of the stock programs will be obtained, or the actual
purchase price of the shares will be equal to $7.00 per share. See
"Management- -Potential Stock Benefit Plans--Stock Programs."
(3) The retained earnings of the Company and the Bank will continue to be
substantially restricted after the reorganization. See "Dividend Policy,"
"The Reorganization--Effects of the Reorganization--Liquidation Rights" and
"Regulation."
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plans that may be adopted following the
reorganization which, in turn, would be presented for approval at a meeting
of stockholders to be held no earlier than one year after the completion of
the reorganization. If the stock option plans are presented and approved by
stockholders, an amount equal to 10% of the common stock sold in the
offering, or 119,850 and 141,000 and 162,150 and 186,473 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plans. The issuance of common
stock pursuant to the exercise of options under the stock option plans will
result in the dilution of existing stockholders' interests. Assuming
stockholder approval of the stock option plans and the exercise of all
options at the end of the period at an exercise price of $7.00 per share,
the pro forma net earnings per share would be $0.54, $0.47, $0.41, and
$0.37, respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range for the year ended December 31, 1997; pro forma
stockholders' equity per share would be $9.22, $8.30, $7.62, and $7.03,
respectively at the minimum, midpoint, maximum and 15% above the maximum of
the range for the year ended December 31, 1997. See "Management--Potential
Stock Benefit Plans--Stock Option Plans."
17
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
Under FDIC regulations, depository institutions such as the Bank are
required to maintain a minimum ratio of qualifying total capital to total
risk-based assets and off-balance sheet instruments, as adjusted to reflect
their relative credit risks, of 8%. At least one-half of total risk-based
capital is to be comprised of common equity, retained earnings, non-cumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, less goodwill ("Tier I capital"). The remainder of total risk-based
capital may consist of a limited amount of subordinated debt, other preferred
stock, certain other instruments and a limited amount of general reserves for
loan losses ("Tier II capital").
The FDIC also has established an additional capital adequacy guideline
referred to as the leverage capital ratio, which measures the ratio of Tier I
capital to total assets less goodwill. Depository institutions are required to
maintain a minimum leverage capital ratio of between 3% and 5%, or more. The
actual required ratio is based on the FDIC's assessment of the individual
depository institution's asset quality, earnings performance, interest-rate risk
and liquidity.
For purposes of New Jersey law, all New Jersey-chartered banking
institutions are expected to maintain a Tier 1 leverage capital ratio of 3%. At
June 30, 1998, the Bank exceeded all regulatory capital requirements.
The Federal Reserve has established guidelines regarding the capital
adequacy of bank holding companies, such as the Company. These requirements are
substantially similar to those adopted by the FDIC for depository institutions,
as set forth above. See "Regulation--Company--Regulatory Capital Requirements"
and "--Regulation--Bank--Regulatory Capital Requirements."
The pro forma tables do not take into account the dilutive effect of
any stock options because the stock options to be issued under the contemplated
stock option plan are exercisable over a ten-year period. Any stock option plan
would be submitted for approval by stockholders to obtain certain favorable
securities law treatment and for listing on the Nasdaq National Market. The
options are not directly attributable to the reorganization or the offering as
no funds will be received or paid until such options vest. Furthermore, no such
plans will be implemented without stockholder approval and will not be
implemented within one year of the reorganization. See "Management--Executive
Compensation-- Potential Stock Benefit Plans--Stock Option Plans." See footnote
(4) under "Pro Forma Data" for pro forma earnings per share and pro forma
stockholders' equity per share for the period indicated assuming all options are
exercised at the close of the offering (which is impossible).
18
<PAGE>
The following table presents the Bank's historical and pro forma
capital position relative to its capital requirements as of June 30, 1998. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see "Use of Proceeds," "Capitalization" and "Pro Forma Data."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the FDIC. For a discussion of the capital standards
applicable to the Bank, see "Regulation--Bank--Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma as of June 30, 1998(1)
--------------------------------------------------------------------------------------
$13.1 Million
Actual, As of $8.4 Million Offering $9.9 Million Offering $11.4 Million Offering Offering
June 30, 1998 (1,198,500 shares at (1,410,000 shares at (1,621,500 shares at (1,864,725 shares
$7 per share) $7 per share) $7 per share) at $7 per share)
--------------------- --------------------- -------------------- -------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............. $17,351 7.15% $20,139 8.20% $20,701 8.41% $21,265 8.62% $21,912 8.86%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Leverage Capital:
Actual or Pro Forma.... $17,449 7.49% $20,237 8.59% $20,799 8.80% $21,363 9.02% $22,010 9.27%
Required .............. 9,317 4.00 9,429 4.00 9,451 4.00 9,474 4.00 9,500 4.00
------ ----- ------ ----- ------ ----- ----- ----- ------ -----
Excess................. $ 8,132 3.49% $10,808 4.59% $11,348 4.80% $11,889 5.02% $12,510 5.27%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tier I Risk-Based Capital
Actual or Pro Forma.... $17,449 19.40% $20,237 22.16% $20,799 22.70% $21,363 23.25% $22,010 23.87%
Required(3)............ 3,597 4.00 3,653 4.00 3,664 4.00 3,676 4.00 3,688 4.00
------ ----- ------ ----- ------ ----- ------- ----- ------ -----
Excess................. $13,852 15.40% $16,584 18.16% $17,135 18.70% $17,687 19.25% $18,322 19.87%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Total Risk-Based
Capital(4):
Actual or Pro Forma.... $18,199 20.24% $20,987 22.98% $21,549 23.52% $22,113 24.06% $22,760 24.68%
Required............... 7,195 8.00 7,306 8.00 7,329 8.00 7,351 8.00 7,377 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess................. $11,004 12.24% $13,681 14.98% $14,220 15.52% $14,762 16.06% $15,383 16.68%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- -----------------
(1) See "Pro Forma Data." Proceeds are assumed to be invested in interest
earning assets which have a 50% risk-weighting.
(2) GAAP, average or risk-weighted assets as appropriate.
(3) Regulations of the FDIC require Tier I risk based capital that varies based
upon an institution's regulatory examination rating.
(4) Risk-weighted assets as of June 30, 1998, totalled $89.9 million.
19
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
STATEMENTS OF INCOME
The Statements of Income of the Bank for the two years ended December
31, 1997 have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, whose report thereon appears elsewhere in the prospectus.
The statement of income for the year ended December 31, 1995 was audited by
Dorfman, Abrams, Music & Co., whose report thereon appears elsewhere herein.
With respect to information for the six months ended June 30, 1998 and 1997,
which is unaudited, in the opinion of management, all adjustments necessary for
a fair presentation of such periods have been included and are of a normal
recurring nature. Results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. These Statements of Income should be read in conjunction with
the Financial Statements and Notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
-------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable ....................................... $ 4,150 $ 4,245 $ 8,562 $ 8,267 $ 7,697
Investment securities .................................. 184 417 756 1,134 1,300
Mortgage-backed securities ............................. 481 565 1,068 1,171 1,682
Securities available for sale .......................... 2,700 2,369 4,778 3,998 894
Other .................................................. 512 266 670 396 342
-------- -------- -------- -------- --------
Total interest income .............................. 8,027 7,862 15,834 14,966 11,915
Interest expense:
Deposits ............................................... 4,792 4,289 8,982 7,650 6,553
Borrowed funds ......................................... 520 758 1,305 1,872 881
-------- -------- -------- -------- --------
Total interest expense ............................. 5,312 5,047 10,287 9,522 7,434
-------- -------- -------- -------- --------
Net interest income ................................ 2,715 2,815 5,547 5,444 4,481
Provision for loan losses ................................... 132 6 12 12 60
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 2,583 2,809 5,535 5,432 4,421
-------- -------- -------- -------- --------
Noninterest income:
Fees and service charges ............................... 67 47 114 73 58
Gain (loss) on sale of securities ...................... 24 -- 19 45 (29)
Gain on sale of loans .................................. 21 3 45 14 38
Other .................................................. 6 13 54 14 4
-------- -------- -------- -------- --------
Total noninterest income ........................... 118 63 232 146 71
-------- -------- -------- -------- --------
Noninterest expenses:
Salaries and benefits .................................. 1,036 942 1,926 1,691 1,385
Occupancy and equipment ................................ 555 501 1,034 878 586
Advertising and promotion .............................. 76 68 150 178 152
SAIF deposit insurance premium ......................... 59 54 110 250 286
SAIF assessment ........................................ -- -- -- 830 --
Other expenses ......................................... 243 220 456 383 299
-------- -------- -------- -------- --------
Total noninterest expenses ......................... 1,969 1,785 3,676 4,210 2,708
-------- -------- -------- -------- --------
Income before income taxes ......................... 732 1,087 2,091 1,368 1,784
Income taxes ................................................ 245 425 841 628 657
-------- -------- -------- -------- --------
Net income .................................... $ 487 $ 662 $ 1,250 $ 740 $ 1,127
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements beginning on page F-7
which are an integral part of these statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between the interest income earned on
assets, primarily loans, mortgage-backed securities, investments, and other
interest earning assets less the interest expense on its liabilities, primarily
deposits and borrowings. Net interest income may be affected significantly by
general economic and competitive conditions, particularly those with respect to
market interest rates, and policies of regulatory agencies. Furthermore, the
Bank's lending activity is concentrated in loans secured by real estate in the
Bank's market area and therefore the Bank's operations are affected by local
market conditions. The results of operations are also influenced by the level of
noninterest expenses, such as employees' salaries and benefits, occupancy and
equipment costs, noninterest income such as loan related fees and fees on
deposit related services, and the Bank's provision for loan losses.
Management Strategy/Highlights
The Bank has historically focused on offering deposit products and
residential mortgage loans to customers in the town of Ridgewood and townships
of Allendale, Franklin Lakes, Glen Rock, Ho-Ho- Kus, Mahwah, Midland Park,
Oakland, Paramus, Ramsey, Ridgewood, Saddle River, Upper Saddle River, Waldwick
and Wyckoff, all of which are located in northwestern Bergen County. The Bank
generates net income primarily by originating and selling loans, investing in
debt and equity securities and mortgage-backed securities, attracting and
retaining deposits by paying competitive interest rates, borrowing from the
Federal Home Loan Bank of New York and maintaining a high standard of customer
service as a local community savings bank.
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services. During the past
several years, the competing financial institutions headquartered in Ridgewood
have essentially all been acquired by state-wide and regional bank and thrift
holding companies. As a result, the Bank is the only remaining local institution
headquartered and managed in Ridgewood, New Jersey. The Bank believes that its
"hometown" advantage provides an opportunity to expand its operations as the
only local, independent financial institution. The Bank also believes it has the
ability to grow as a result of the relatively high level of income and
businesses operating in its primary market area.
The Bank's strategy is to attempt to take advantage of the favorable
demographic and economic conditions in its market area by continuing to increase
in size, focus on attracting core deposits, and gradually shift its assets into
higher yielding loans. Total assets of the Bank have increased from $130.2
million at December 31, 1993, to $242.7 million at June 30, 1998. Much of this
increase was attributable to the opening of two new branch offices in 1996.
Management believes that these two new offices, which are located in Ridgewood
and Mahwah, will help the Bank continue to meet the financial services needs of
its customers in an effective and personalized manner.
Highlights of the Bank's business strategy include the following:
- Maintaining asset quality. Strong asset quality is an important
component to the Bank's long-term growth and financial success.
Therefore, management is committed to
21
<PAGE>
maintaining its underwriting standards in originating loans. At
June 30, 1998, the Bank's non-performing assets totaled $8,000
and the allowance for loan losses was $750,000.
- Managing interest rate 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 because its
liabilities generally have shorter terms to repricing or maturity
than its assets. The main objective in managing interest rate
risk is to minimize the adverse impact of changes in interest
rates on the Bank's net interest income while adjusting its
asset/liability structure to obtain the maximum yield-cost on
that structure. Management has reduced the Bank's exposure to
interest rate risk by originating and retaining adjustable rate
mortgage loans, periodically selling longer-term fixed rate loans
in the secondary market and investing a portion of the Bank's
assets in shorter duration investment securities and
mortgage-backed securities.
- Expanding the loan portfolio. Management believes that many small
businesses and consumers in the Bank's market area are not being
adequately served because of the extensive consolidation among
financial institutions. Commercial real estate loans have
increased from $2.5 million at December 31, 1993, to $10.7
million at June 30, 1998, and consumer loans have increased from
$4.6 million to $11.1 million during this same time period.
Together, commercial real estate and consumer loans represented
20.6% of the total loan portfolio at June 30, 1998. Commercial
real estate and consumer loans provide higher yields and shorter
terms to maturity than residential mortgage loans although these
types of loans are generally considered to have more credit risk.
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
Total assets increased by $13.6 million or 5.9% to $242.7 million at
June 30, 1998 from $229.1 million at December 31, 1997. This increase was
primarily due to an increase in available for sale mortgage-backed securities
and cash and cash equivalents, offset by decreases in investment securities,
held to maturity mortgage backed securities, loans held for sale and loans
receivable. Cash and cash equivalents increased $4.1 million to $19.5 million at
June 30, 1998 compared to $15.4 million at December 31, 1997. Available for sale
mortgage-backed securities increased by $35.6 million or 71.0% to $85.7 million
at June 30, 1998, from $50.1 million at December 31, 1997, as new purchases and
reinvestment of prepayments of mortgage-backed securities were classified as
available for sale. At the same time total investment securities decreased by
$22.4 million or 61.2% from $36.6 million to $14.2 million for the six months
ended June 30, 1998 as a result of sales and redemptions of callable securities.
Net loans receivable decreased $1.1 million and loans held for sale decreased
$750,000 as a result of the sale of $750,000 of loans held for sale during the
six months ended June 30, 1998. Many of the agency bonds in the investment
securities portfolio had provisions allowing for the agency to redeem its bonds
prior to the stated maturity. Due to the decline in interest rates, many of
these bonds were redeemed and the investment securities portfolio declined. In
addition, investment securities were sold to reduce the Bank's interest rate
risk. Future investment securities purchases will be classified as available for
sale which will result in the reduction in investment securities held to
maturity. Investment securities available for sale are not expected to further
decline as they have in the past due to the reduction in amount in the portfolio
that can be redeemed prior to stated maturity. The portfolio of mortgage-backed
securities available for sale is expected to increase due to its current use in
interest rate risk management and also as a result of the receipt of proceeds
from the offering.
The Bank's deposits increased by $4.7 million or 2.4% to $198.6 million
at June 30, 1998, due primarily to continued deposit growth at both of its new
branches opened in 1996. Borrowings increased
22
<PAGE>
$9.1 million or 56.2% to $25.4 million at June 30, 1998 from $16.3 million at
December 31, 1997 as the Bank used borrowings to lengthen the maturities of its
liabilities to reduce interest rate risk and to generate additional income as
part of its leveraging strategy.
Total equity increased $157,000 to $17.4 million at June 30, 1998 due
to net income of $487,000 for the six months ended June 30, 1998 offset by
$330,000 of unrealized losses on securities available for sale, net of taxes.
Regardless of whether the offering is completed, the Bank is exploring
the purchase of a building to serve as an additional branch office and to house
administrative operations of the Bank. The Bank has estimated that the
acquisition and refurbishment costs for this purpose could total approximately
$6.0 million. The Bank could fund these costs with cash and cash equivalents and
other maturing assets without reducing liquidity below required levels.
Comparison of Operating Results For the Six Months Ended June 30, 1998 and June
30, 1997
Net Income. Net income decreased $175,000 or 26.4% to $487,000 for the
six months ended June 30, 1998 as compared to $662,000 for the same period in
1997. Net income decreased primarily due to a decrease of $100,000 in net
interest income, an increase in the provision for loan losses of $126,000, and
an increase in noninterest expenses of $184,000.
Net Interest Income. Net interest income decreased by $100,000 or 3.6%
to $2.7 million for the period ended June 30, 1998 compared to the same period
in 1997. The decrease was primarily due to a decline in the average yield on
interest earning assets, from 7.38% for the period ended June 30, 1997, compared
to 7.05% for the same period in 1998. The average balances of interest bearing
liabilities increased by $11.4 million or 5.6% from $202.3 million to $213.7
million, which was slightly offset by a decrease in the average cost of interest
bearing liabilities of 2 basis points from 4.99% for the six months ended June
30, 1997, to 4.97% for the six months ended June 30, 1998.
The Bank's interest rate spread, which is the difference between the
yield on average interest earning assets and the cost of interest bearing
liabilities, declined to 2.08% for the six months ended June 30, 1998, from
2.39% for the six months ended June 30, 1997. This was primarily attributed to
redemptions of callable bonds, higher prepayments on mortgage backed securities
and loans receivable, with the proceeds reinvested in lower yielding assets due
to the general decline of market interest rates for these instruments. In
addition, competitive pressure on the pricing of loans and deposits has resulted
in a smaller interest rate spread. Competitive pressure in the future may
further reduce the spread between asset yields and the cost of funds.
Interest Income. Interest income increased $165,000 to $8.0 million for
the six months ended June 30, 1998, from $7.9 million for the same period in
1997. The increase was due to an increase in the average balance of available
for sale securities of $15.8 million or 22.8% from $69.1 million for the six
months ended June 30, 1997 to $84.9 million for the six months ended June 30,
1998, while the average balance of other interest earning assets increased $8.6
million or 95.4% to $17.7 million for the six months ended June 30, 1998, offset
by a decrease in the average balance of mortgage backed and investment
securities and loans receivable. The average yield on interest earning assets
declined 33 basis points to 7.05% from 7.38% for the six months ended June 30,
1998 compared to the same six months in 1997. The weighted average yield
declined as a result of the redemption and prepayment of higher coupon loans and
securities with reinvestment of proceeds into lower coupon instruments during a
low interest rate environment along with a flat yield curve.
23
<PAGE>
Interest on loans receivable decreased by $95,000 or 2.2% to $4.1
million for the six months ended June 30, 1998 from $4.2 million for the six
months ended June 30, 1997. The decrease was due to a $1.4 million or 1.3%
decrease in the average balance of loans receivable, which declined due to
prepayments and amortization on mortgage loans in excess of new originations.
Further contributing to the decrease was the decline in the average yield of
loans receivable from 7.94% for the six months ended June 30, 1997, to 7.87% for
the same period in 1998 because of lower interest rates on loans originated
during the 1998 period and the prepayment/amortization of higher rate loans.
Interest expense. Interest expense increased $265,000 to $5.3 million
for the six months ended June 30, 1998, from $5.0 million for the same period of
the preceding year. The increase was due to an $11.4 million increase in the
average balance of interest bearing liabilities, slightly offset by a decrease
of 2 basis points in the average cost of interest bearing liabilities. Interest
expense on time deposits (certificates of deposit) increased $402,000 to $4.2
million for the six months ended June 30, 1998 due to an increase in the average
balance of time deposits of $12.3 million to $150.6 million as well as an
increase in the average cost of time deposits from 5.45% to 5.54% for the same
six month period, due to market driven pricing of time deposits and the Bank's
use of those deposits as a primary source of funds. The increase in the average
cost of time deposits was partially offset by a decrease of $8.0 million or
30.7% in the average balance of borrowings to $18.0 million for the six months
ended June 30, 1998 from $26.0 million for the six months ended June 30, 1997,
and a decline of 6 basis points in the average cost of borrowings to 5.77% for
the six months ended June 30, 1998, from 5.83% for the same period in 1997.
Provision for loan losses. The provision for loan losses increased by
$126,000 to $132,000 for the six months ended June 30, 1998 from $6,000 for the
first six months of 1997. The increase was recognized in order to raise the
allowance for loan losses primarily as a result of management's review of the
risk inherent in the loan portfolio based in part on a comparison of loss
experience at the Bank and loss experience and reserve levels at peer
institutions. In addition, the allowance was increased as a result of the
changing composition of the loan portfolio from single family mortgages to
commercial real estate and consumer loans.
Noninterest income. Non-interest income increased by $55,000 or 87.3%
to $118,000 for the six months ended June 30, 1998, from $63,000 for the same
period in 1997. Fees and service charges increased $20,000 due to an increase in
fee based DDA accounts and increases in ATM transaction fees mostly due to
higher non-customer use of Bank ATMs. Gains on sales of securities and loans
increased by $24,000 and $18,000 respectively, for the six months ended June 30,
1998 compared to the same period in 1997.
Noninterest expenses. Non-interest expenses increased by $184,000 to
$2.0 million for the six months ended June 30, 1998 from $1.8 million for the
same six months in 1997. The increase was due to higher salaries and benefits
expenses of $94,000 for the six months ended June 30, 1998 resulting from an
increase in staff, increases in medical insurance rates, recognition of expenses
for new benefit plans for senior executives and the Board of Directors, as well
as normal salary and merit increases. Occupancy and equipment expenses increased
$54,000, mostly attributable to increases in computer service expense of $27,000
resulting from an increase in account volumes and including $10,000 in year 2000
compliance costs. As a result of the reorganization, our expenses will increase
because of the costs associated with our employee stock ownership plan, the
restricted stock plan we expect to implement and the costs of being a public
company.
24
<PAGE>
Income Taxes. Income taxes decreased by approximately $180,000 to
$245,000 for the six months ended June 30, 1998, as compared to $425,000 for the
same period one year ago. The decrease was primarily due to the decrease in
income before taxes as discussed above and an increase in levels of tax exempt
securities.
Comparison of Financial Condition at December 31, 1997 and December 31, 1996
Total assets increased by $12.3 million or 5.7% to $229.1 million at
December 31, 1997 from $216.8 million at December 31, 1996. This increase was
primarily due to an increase in mortgage-backed securities and federal funds
sold, offset by decreases in loans receivable, investment securities, and loans
held for sale. Mortgage-backed securities increased by $28.5 million or 79.2%,
while investment securities decreased by $19.3 million or 34.5% due to
restructuring of assets and liabilities in order to reduce interest rate risk.
Net loans receivable decreased $2.2 million, and loans held for sale decreased
$3.0 million, primarily due to sales of loans totaling $3.6 million.
The Bank's deposits, increased by $23.3 million or 13.7% to $193.9
million at December 31, 1997, due primarily to continued deposit growth at both
of its new branches opened during 1996. Federal Home Loan Bank advances
decreased $12.1 million to $16.3 million or 42.7% at December 31, 1997 from
$28.4 million at December 31, 1996. The Bank used deposit pricing strategies to
lengthen, the terms of its interest-bearing liabilities while paying off short
term borrowings to reduce interest rate risk.
Total equity increased $1.8 million to $17.2 million at December 31,
1997 due to net income of $1.3 million for the year ended December 31, 1997 and
approximately $575,000 of unrealized appreciation on securities available for
sale, net of taxes.
Comparison of Operating Results For the Years Ended December 31, 1997 and
December 31, 1996
Net Income. Net income increased $510,000 or 68.9% to $1.3 million for
the year ended December 31, 1997 as compared to $740,000 for the year ended
December 31, 1996. Net income increased primarily as a result of a decrease of
$534,000 in noninterest expenses. This decrease was mainly due to the absence of
the one-time SAIF Special Assessment which occurred in 1996.
Net Interest Income. Net interest income increased by $103,000 or 1.9%
to $5.5 million for the year ended December 31, 1997. The increase was primarily
due to an increase in the average balance of interest earning assets of $16.8
million or 8.5% from $198.3 million to $215.1 million, but was offset by a 19
basis point decline in the average yield on interest earning assets. The average
balance of interest bearing liabilities increased by $15.6 million or 8.3% from
$187.7 million to $203.2 million, and were subject to a slight decrease in the
average cost of interest bearing liabilities of 1 basis point from 5.07% for the
year ended December 31, 1996, to 5.06% for the year ended 1997.
The Bank's interest rate spread, which is the difference between the
yield on average interest earning assets less the cost of interest bearing
liabilities, declined to 2.30% for the year ended December 31, 1997, from 2.48%
for the year ended December 31, 1996.
Interest Income. Interest income increased to $15.8 million for the
year ended December 31, 1997, from $15.0 million for the year ended December 31,
1996. The increase was due to higher average balances in loans receivable and
available for sale securities, offset by a decrease in the average balance of
securities held to maturity. The decrease in securities held to maturity was due
to higher prepayments, redemptions and sales of investment securities. The
increase in available for sale securities
25
<PAGE>
was due to classification of reinvested funds as available for sale. The average
yield of interest earning assets decreased from 7.55% for the year ended
December 31, 1996, to 7.36% for the year ended December 31, 1997, due to lower
interest rates on such instruments for the 1997 period as compared to 1996.
Interest on loans receivable increased by $295,000 or 3.6% to $8.6
million for the year ended December 31, 1997 from $8.3 million for the year
ended December 31, 1996. The increase was due to a $4.6 million increase or 4.5%
in the average balance of loans receivable resulting from a net increase in one-
to four-family residential mortgage loans, due to continued acceptance of the
Bank's first time home-buyers program and marketing of loan products. That
increase was offset somewhat by a decrease of 7 basis points in the average
yield because of lower interest rates on originated loans during the 1997
period.
Interest expense. Interest expense increased $765,000 to $10.3 million
for the year ended December 31, 1997. The increase was due to a $15.6 million
increase in the average balance of interest bearing liabilities, partially
offset by a decrease of 1 basis point in the average cost of interest bearing
liabilities. Interest expense on time deposits increased $1.2 million partially
offset by a $567,000 decrease in interest on borrowings. The increase was due to
increased time deposit balances primarily from the two new branches opened
during 1996. These funds were used to reduce short term borrowings in order to
lower the Bank's interest rate risk position.
Provision for loan losses. The provision for loan losses for 1997
remained at $12,000, thereby increasing the allowance for loan losses to
$618,000 for the year ended December 31, 1997. This increase in the allowance
reflects the Bank's decision to provide for loan losses based on management's
evaluation of the inherent risk in the Bank's loan portfolio, as well as
management's evaluation of the general economic conditions in the Bank's market
area.
Noninterest income. Noninterest income increased by $86,000 or 58.9% to
$232,000 for the year ended December 31, 1997, from $146,000 for the year 1996.
Fees and service charges increased $41,000 due to an increase of $14,000 in ATM
fees due to the first full year of operation in 1997, and an increase of $39,000
in checking account fees. Gains on loan sales increased by $31,000, which were
mostly offset by a decrease of $26,000 in gains on sales of securities.
Noninterest expenses. Noninterest expenses decreased by $534,000 to
$3.7 million for the year ended December 31, 1997 from $4.2 million for the year
ended December 31, 1996. The decrease was primarily due to the absence of the
one-time special SAIF assessment, paid in 1996 to the FDIC by all SAIF members
to recapitalize the SAIF, which amounted to $830,000 for the Bank. In addition,
deposit insurance premiums decreased $140,000 to $110,000 for the year ended
December 31, 1997 from $250,000 for the year ended December 31, 1996, as the
FDIC lowered insurance premiums shortly following the one-time special SAIF
assessment. These decreases were partially offset by increases of $235,000 in
salaries and benefits due to the impact of a full year of operation with
increased personnel resulting from the Bank's two de-novo branches opened during
1996, as well as normal salary and merit increases. Additional increases for the
year ended December 31, 1997 in occupancy and equipment expenses of $156,000
were mostly attributable to the first full year of operation for the two
additional branch offices. Other noninterest expenses increased by $73,000 to
$456,000 for the year ended December 31, 1997, from $383,000 for the year ending
December 31, 1996, mostly attributed to an increase of $32,000 for other real
estate expense stemming from various foreclosure costs.
26
<PAGE>
Income Taxes. Income taxes increased by approximately $213,000 or 33.9%
to $841,000 for 1997 as compared to $628,000 for 1996. The increase was
primarily due to the increase in income before taxes as discussed above,
partially offset by an increase in tax exempt income.
Comparison of Financial Condition at December 31, 1996 and December 31, 1995
Total assets increased by $37.3 million or 20.8% to $216.8 million at
December 31, 1996 from $179.5 million at December 31, 1995. This increase was
due primarily to increases in investment and mortgage-backed securities, loans
held for sale and loans receivable. Mortgage-backed securities increased by $3.8
million, while investment securities increased by $14.7 million or 35.6%, as a
result of the Bank's leverage strategy during 1996 which was implemented to
generate additional income in order to offset the expected increase in operating
expenses due to two new branch offices. Loans receivable increased $11.8 million
to $108.0 million at December 31, 1996 from $96.2 million at December 31, 1995.
Loans held for sale increased $3.6 million to $3.8 million at December 31, 1996
from $199,000 at December 31, 1995. Loan originations increased as a result of
market driven loan pricing during a period of higher than usual refinancings as
well as the origination of higher balance commercial real estate loans.
The Bank's deposits increased by $23.5 million or 16.0% to $170.6
million at December 31, 1996, due to continued deposit growth at its existing
branch as well as new deposit growth from both of the Bank's new branches.
Federal Home Loan Bank advances increased $12.4 million or 77.4% to $28.4
million at December 31, 1996 from $16.0 million at December 31, 1995, due to the
Bank's leverage strategy during 1996 as discussed above.
Total equity increased $81,000 to $15.4 million at December 31, 1996
due to net income of $740,000 earned during the year ended December 31, 1996,
which was offset by approximately $659,000 of unrealized depreciation on
securities available for sale, net of taxes.
Comparison of Operating Results For The Years Ended December 31, 1996 and
December 31, 1995
Net Income. Net income decreased $387,000 or 34.3% to $740,000 for the
year ended December 31, 1996 as compared to $1.1 million for the year ended
December 31, 1995. Net income decreased primarily due to an increase of $1.5
million in non-interest expenses, largely due to the one-time SAIF Special
Assessment which occurred in the third quarter of 1996.
Net Interest Income. Net interest income increased by $963,000 or 21.5%
to $5.4 million for the year ended December 31, 1996. The increase was primarily
due to an increase in the average balances of interest earning assets of $37.5
million or 23.3%, from $160.8 million to $198.3 million for the year ended
December 31, 1996, while the average yield increased from 7.41% to 7.55% for the
year ended December 31, 1996. The average balance of interest bearing
liabilities increased by $39.4 million or 26.5% from $148.3 million to $187.7
million and the average cost increased from 5.01% to 5.07% for the year ended
December 31, 1996.
The Bank's interest rate spread, which is the difference between the
yield on average interest earning assets less the cost of interest bearing
liabilities, increased to 2.48% for the year ended December 31, 1996, from 2.40%
for the year ended December 31, 1995. The average balance of loans receivable
increased $8.5 million to $102.4 million for the year ended December 31, 1996
while the average yield declined 13 basis points. In addition, the average
balance of available for sale securities increased $42.4 million from $13.7
million to $56.1 million for the year ended December 31, 1996 and the average
yield increased from 6.53% to 7.13% for the same periods. These increases in
average balances were
27
<PAGE>
accompanied by increases in the average balances of certificates of deposit from
$103.3 million to $122.0 million and borrowings from $13.8 million to $32.2
million for the year ended December 31, 1996.
Interest Income. Interest income increased to $15.0 million for the
year ended December 31, 1996, from $11.9 million for the year ended December 31,
1995. Interest on loans receivable increased $570,000 as a result of an $8.5
million increase in the average balance of loans receivable. This was due to a
net increase in one- to four-family residential mortgage loans and commercial
real estate loans, somewhat offset by a decrease in the average yield of 13
basis points due to lower interest rates on loans originated during the 1996
period. The increase in loans receivable was a result of the Bank's ability to
increase mortgage loan originations resulting from higher levels of loan
refinancings during a lower interest rate environment. In addition, interest
income from available for sale securities increased $3.1 million to $4.0
million. This was due to the increase of $42.4 million in the average balance of
available for sale securities while the yield increased 60 basis points for the
year ended December 31, 1996. The increase in available for sale securities was
due to the Bank's leverage strategy during 1996 which was to generate additional
income to offset the expected increase in operating expenses due to the two
branch openings.
Conversely, the average balances of securities held to maturity
declined $15.0 million for the year ended December 31, 1996. Overall, there was
an increase of 14 basis points in the weighted average yield of interest earning
assets to 7.55% for the year ended December 31, 1996, as compared to a weighted
average yield of 7.41% for the year ended December 31, 1995.
Interest expense. Interest expense increased $2.1 million to $9.5
million for the year ended December 31, 1996. The increase was due to a $39.4
million increase in the average balance of interest bearing liabilities as well
as an increase of 6 basis points in the average cost of interest bearing
liabilities. The average balance of certificates of deposit increased $18.7
million to $122.0 million for the year ended December 31, 1996 from $103.3
million for the year ended December 31, 1995, while borrowings increased $18.4
million to $32.2 million from $13.8 million for the same period. Certificates of
deposit increased due to the Bank offering higher rates on CD's relative to the
competition in conjunction with the opening of two new branches. The increase in
borrowings was due to the Bank's strategy of leveraging in order to increase
income to help offset the anticipated increase in operating expenses arising
from the opening of the two new branches.
Provision for loan losses. The provision for loan losses decreased by
$48,000 for the year ended December 31, 1996 to $12,000 from $60,000 for the
year ended December 31, 1995. This decrease reflects the Bank's decision to
increase the allowance for loan losses albeit at a lower rate than the previous
year, based on management's evaluation of the inherent risk in the Bank's loan
portfolio, as well as management's evaluation of the general economic conditions
in the Bank's market area.
Noninterest income. A $15,000 increase in fees and service charges and
a $74,000 increase in gains on sales of investment securities were partially
offset by $24,000 less in gains on sales of loans. As a consequence, noninterest
income increased by $75,000 or 105.6% to $146,000 for the year ended December
31, 1996, from $71,000 for the year ended 1995.
Noninterest expenses. Noninterest expenses increased by $1.5 million or
55.5% to $4.2 million for the year ended December 31, 1996 from $2.7 million for
the year ended December 31, 1995. The increase was primarily due to the one-time
special SAIF assessment paid in 1996 to the FDIC by all SAIF members to
recapitalize the SAIF, which amounted to $830,000 for the Bank. In addition,
salaries and benefits increased $306,000 to $1.7 million for the year ended
December 31, 1996 from $1.4 million for the same period in 1995, reflecting an
increase in personnel required by the Bank's two de-novo branches
28
<PAGE>
opened during 1996, as well as normal salary and merit increases. Occupancy and
equipment expenses increased by $292,000 due to the branch expansion during 1996
as well as ongoing expenses relating to the original office. Other noninterest
expenses increased by $84,000 to $383,000 for the year ended December 31, 1996,
from $299,000 for the year ending December 31, 1995.
Income Taxes. Income taxes decreased by approximately $29,000 to
$628,000 for 1996 as compared to $657,000 for 1995. The decrease was primarily
due to the decrease in income before taxes as discussed above, offset by an
increase in income taxes to reflect the tax effect of the post 1987 bad debt
reserve.
Average Balance Sheet. The following table sets forth certain
information relating to the Bank's average balance sheet and reflects the
average yield on assets and average cost of liabilities for the periods
indicated and the average yields earned and rates paid. Such yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented.
29
<PAGE>
<TABLE>
<CAPTION>
For the Six Month Periods Ended June 30,
-------------------------------------------------------------------------------
1998 1997
---------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost(1) Balance Interest Yield/Cost(1)
------- -------- ------------- ------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net (2)................ $105,493 $4,150 7.87% $106,880 $4,245 7.94%
Securities held to maturity (3) 19,805 665 6.72 28,166 982 6.97
Securities available for sale (4)........ 84,851 2,700 6.36 69,095 2,369 6.86
Other interest-earning assets (5)........ 17,656 512 5.80 9,038 266 5.89
-------- ------ -------- ------
Total interest-earning assets.......... 227,805 8,027 7.05 213,179 7,862 7.38
Noninterest-earning assets............... 5,126 5,793
-------- --------
Total assets........................... $232,931 $218,972
======= =======
INTEREST-BEARING LIABILITIES:
Deposit accounts:
DDA accounts............................ $ 13,159 $ 121 1.84 $ 9,361 $ 88 1.88
Savings accounts........................ 28,049 443 3.16 24,303 369 3.04
Money market ........................... 3,835 57 2.97 4,268 63 2.95
Certificates of deposit................. 150,645 4,171 5.54 138,353 3,769 5.45
Borrowed funds........................... 18,009 520 5.77 25,995 758 5.83
-------- ------ -------- ------
Total interest-bearing liabilities..... 213,697 5,312 4.97 202,280 5,047 4.99
----- ------
Noninterest-bearing liabilities.......... 1,797 1,407
-------- --------
Total liabilities...................... 215,494 203,687
Total equity............................... 17,437 15,285
-------- --------
Total liabilities and total equity..... $232,931 $218,972
======= =======
Net interest income..................... $2,715 $2,815
===== =====
Interest rate spread (6)................ 2.08% 2.39%
Net interest margin (7)................. 2.38% 2.64%
Ratio of average interest-earning assets
to average interest-bearing liabilities. 1.07X 1.05X
</TABLE>
- -----------------------
(1) Annualized.
(2) Loans receivable, net includes non-accrual loans. Interest includes loan
origination fees, which are immaterial.
(3) Includes mortgage-backed and investment securities held to maturity. Yields
on tax exempt obligations were not computed on a tax equivalent basis.
(4) Investments, mortgage-backed securities, and loans held for sale are
carried at market value. Yields on tax exempt obligations were not computed
on a tax equivalent basis.
(5) Includes federal funds sold, Federal Home Loan Bank stock and
interest-earning deposits.
(6) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(7) Net interest margin represents net interest income divided by average
interest-earning assets.
30
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ------------------------------ ---------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable, net (1)............... $106,991 $ 8,562 8.00% $102,411 $ 8,267 8.07% $ 93,918 $ 7,697 8.20%
Securities held to maturity (2)......... 26,181 1,824 6.97 32,755 2,305 7.04 47,788 2,982 6.24
Securities available for sale (3)....... 70,563 4,778 6.77 56,097 3,998 7.13 13,700 894 6.53
Other interest-earning assets (4)....... 11,382 670 5.89 7,051 396 5.62 5,434 342 6.29
-------- ------- -------- -------- -------- -------
Total interest-earning assets......... 215,117 15,834 7.36 198,314 14,966 7.55 160,840 11,915 7.41
Noninterest-earning assets.............. 5,569 5,591 3,057
-------- -------- --------
Total assets.......................... $220,686 $203,905 $163,897
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposit accounts:
DDA accounts........................... $ 10,358 195 1.88 $ 7,170 139 1.94 $ 5,223 103 1.97
Savings accounts....................... 25,260 785 3.11 22,218 663 2.98 21,487 634 2.95
Money market deposit accounts.......... 4,051 121 2.99 4,068 122 3.00 4,493 133 2.96
Certificates of deposit................ 141,564 7,881 5.57 122,001 6,726 5.51 103,261 5,683 5.50
Borrowed funds.......................... 22,012 1,305 5.93 32,210 1,872 5.81 13,833 881 6.37
-------- -------- ------ -------- -------
Total interest-bearing liabilities.... 203,245 10,287 5.06 187,667 9,522 5.07 148,297 7,434 5.01
------ ------ ------
Noninterest-bearing liabilities......... 1,552 1,538 1,314
-------- -------- --------
Total liabilities..................... 204,797 189,205 149,611
Total equity.............................. 15,889 14,700 14,286
-------- -------- --------
Total liabilities and total equity.... $220,686 $203,905 $163,897
======= ======= =======
Net interest income.................... $5,547 $ 5,444 $ 4,481
===== ====== ======
Interest rate spread (5)............... 2.30% 2.48% 2.40%
Net interest margin (6)................ 2.58% 2.75% 2.79%
Ratio of average interest-earning assets.
to average interest-bearing liabilities. 1.06X 1.06X 1.08X
</TABLE>
- -----------------------
(1) Loans receivable, net includes non-accrual loans. Interest includes loan
origination fees, which are immaterial.
(2) Includes mortgage-backed and investment securities held to maturity. Yields
on tax exempt obligations were not computed on a tax equivalent basis.
(3) Investments, mortgage-backed securities, and loans held for sale are
carried at market value. Yields on tax exempt obligations were not computed
on a tax equivalent basis.
(4) Includes federal funds sold, Federal Home Loan Bank stock and
interest-earning deposits.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
31
<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 change due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31, Years Ended December 31,
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
------------------------------ ----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease) Increase (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 income:
Loans receivable, net ....... $ (57) $ (38) $ (95) $ 368 $ (73) $ 295 $ 694 $ (124) $ 570
Securities held to maturity . (273) (44) (317) (459) (22) (481) (960) 283 (677)
Securities available for sale 513 (182) 331 991 (211) 780 2,996 108 3,104
Other interest earning assets 250 (4) 246 250 24 274 93 (39) 54
------- ------- ------- ------- ------- ------- ------- ------- -------
Total ..................... $ 433 $ (268) $ 165 $ 1,150 $ (282) $ 868 $ 2,823 $ 228 $ 3,051
======= ======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
NOW Accounts ................ $ 35 $ (2) $ 33 $ 60 $ (4) $ 56 $ 38 $ (2) $ 36
Passbook accounts ........... 59 15 74 92 30 122 23 6 29
Money market accounts ....... (6) -- (6) (1) -- (1) (13) 2 (11)
Certificates of deposit ..... 339 63 402 1,084 71 1,155 1,031 12 1,043
Borrowed funds .............. (230) (8) (238) (604) 37 (567) 1,082 (91) 91
------- ------- ------- ------- ------- ------- ------- ------- -------
Total ..................... $ 197 $ 68 $ 265 $ 631 $ 134 $ 765 $ 2,161 $ (73) $ 2,088
======= ======= ======= ======= ======= ======= ======= ======= =======
Net change in interest income . $ 236 $ (336) $ (100) $ 519 $ (416) $ 103 $ 662 $ 301 $ 963
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
32
<PAGE>
Asset and Liability Management
The Bank, like many other financial institutions, is vulnerable to an
increase in interest rates to the extent that interest-bearing liabilities
generally mature or reprice more rapidly than interest-earning assets. The
lending activities of the Bank have historically emphasized the origination of
long-term, fixed rate loans secured by single family residences, and the primary
source of funds has been deposits with substantially shorter maturities. While
having interest-bearing liabilities that reprice more frequently than
interest-earning assets is generally beneficial to net interest income during a
period of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
To reduce the effect of interest rate changes on net interest income
the Bank has adopted various strategies to enable it to improve matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include: (1) purchasing investment
securities with maturities that match specific deposit maturities; (2)
emphasizing origination of shorter-term consumer loans, which in addition to
offering more rate flexibility, typically bear higher interest rates than
residential mortgage loans; (3) purchasing mortgage-backed securities to provide
monthly cash flows; and (4) originating adjustable-rate loans. Although consumer
loans inherently generally possess a higher credit risk than residential
mortgage loans, the Bank believes that its underwriting standards will minimize
this risk.
A principal part of the Bank's strategy is to manage interest rate risk
and reduce the exposure of the Bank's net interest income to changes in market
interest rates. Accordingly, the Board of Directors has established an
Asset/Liability Committee that is responsible for evaluating the interest rate
risk inherent in the Bank's assets and liabilities, determining the level of
risk that is appropriate given the Bank's business strategy, operating
environment, capital, liquidity and performance objectives, and managing this
risk consistent with the guidelines approved by the Board of Directors. The
Asset/Liability Committee consists of senior management operating under a policy
adopted by the Board of Directors and meets at least quarterly to review the
Bank's asset/liability policies and interest rate position.
Exposure to interest rate risk is actively monitored by management. The
Bank's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Bank uses the FDIC Regulatory Analysis Model to monitor its
exposure to interest rate risk, which calculates changes in market value of
portfolio equity and net income. Reports generated from assumptions provided and
modified by management are reviewed by the Asset/Liability Management Committee
and reported to the Board of Directors quarterly. The Balance Sheet Shock Report
shows the degree to which balance sheet line items and the market value of
portfolio equity are potentially affected by a 200 basis point upward and
downward parallel shift (shock) in the Treasury yield curve. An Income Shock
Report shows the degree to which income statement line items and net income are
potentially affected by a 200 basis point upward and downward parallel shift in
the Treasury yield curve. The Bank also receives reports that show the impact on
portfolio equity of upward and downward shifts in interest rates of between 0
and 400 basis points.
33
<PAGE>
The following table sets forth, as of June 30, 1998, an estimate of the
projected changes in the economic value of equity ("EVE") of instantaneous and
permanent increases and decreases in market interest rates in the amount of 100,
200, 300, and 400 basis points ("bp"). One hundred basis points equals one
percent. Dollar amounts are expressed in thousands.
<TABLE>
<CAPTION>
Economic Value of Equity EVE as % of PV of Assets
Change ------------------------------------------------ -------------------------
in Rates $ Amount $ Change % Change EVE Ratio BP
-------- -------- -------- -------- --------- --
Change
------
<S> <C> <C> <C> <C> <C>
+400 bp $10,677 $-11,084 -50.9% 4.6% -420 bp
+300 13,509 -8,252 -37.9 5.9 -290
+200 16,347 -5,414 -24.9 7.0 -180
+100 19,223 -2,538 -11.7 8.0 -80
0 21,761 8.8
-100 22,947 1,186 5.5 9.1 30
-200 22,298 537 2.5 8.8 --
-300 21,400 -361 -1.7 8.3 -50
-400 20,984 -777 -3.6 8.1 -70
</TABLE>
This table shows that the Bank's economic value of equity would
decrease with rising interest rates while decreasing or increasing with falling
interest rates. However, computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions, including relative
levels of market interest rates, loan repayments and deposit runoffs, and may
not be indicative of actual results. The computations do not reflect any actions
the Bank may undertake in response to changes in interest rates although
management cannot always predict future interest rates or their effect on the
Bank. Certain shortcomings are inherent in the method of analysis presented in
the computation of EVE. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in differing
degrees to changes in market interest rates. Additionally, certain assets, such
as adjustable rate loans, have features that restrict changes in interest rates
during the initial term and over the remaining life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable rate debt may decrease in
the event of an interest rate increase.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, wholesale funding
from the Federal Home Loan Bank, principal and interest payments on loans, and
securities, and to a lesser extent, proceeds from the sale of loans and/or
securities. While maturities and scheduled amortization of loans and securities
provide an indication of the timing of the receipt of funds, changes in interest
rates, economic conditions, and competition strongly influence mortgage
prepayment rates and deposit flows, reducing the predictability of the timing of
sources of funds.
The primary investing activities of the Bank are the origination of
one- to four-family residential and, to a lesser extent, commercial real estate
and multi-family mortgage loans, and the purchase of mortgage-backed and
mortgage-related and debt securities. During the six
34
<PAGE>
months ended June 30, 1998 and the fiscal years ended December 31, 1997, 1996,
and 1995, the Bank's disbursements for loan originations totaled $10.2 million,
$14.1 million, $29.9 million, and $24.7 million, respectively. Purchases of
mortgage-backed, mortgage-related and debt securities totaled $48.1 million,
$42.4 million, $57.2 million, and $25.9 million for the six months ended June
30, 1998, and the fiscal years ended December 31, 1997, 1996, and 1995,
respectively. These activities were funded primarily by deposits and borrowings,
principal repayments and prepayments on loans, mortgage-backed and
mortgage-related securities, and debt securities. In addition, sales of loans
and securities available for sale provided additional liquidity to the Bank.
Loan sales totaled $771,000 for the six months ended June 30, 1998 and $3.6
million, $750,000, and $4.4 million for the fiscal years ended December 31,
1997, 1996, 1995, respectively. Proceeds from sales of available for sale
securities totaled $7.0 million for the six months ended June 30, 1998 and $17.5
million, $15.7 million, and $10.2 million for the fiscal years ended December
31, 1997, 1996, and 1995 respectively. The Bank experienced a net increase in
total deposits of $4.7 million, $23.3 million, $23.5 million, and $26.8 million
for the six months ended June 30, 1998 and the fiscal years ended December 31,
1997, 1996, and 1995, respectively. Deposit flows are affected by the level of
market interest rates, as well as the interest rates and products offered by
local competitors and the Bank and other factors.
The Bank closely monitors its liquidity position on a daily basis.
Excess short-term liquidity is invested in overnight federal funds sold. On a
longer term basis, the Bank invests in various lending products, mortgage-backed
and mortgage-related and investment securities. The Bank may borrow funds from
the Federal Home Loan Bank subject to certain limitations. Based on the level of
qualifying collateral available to secure advances at June 30, 1998, the Bank's
borrowing limit from the Federal Home Loan Bank was approximately $72.8 million,
with unused borrowing capacity of $47.4 million at that date. Other sources of
liquidity include borrowings under repurchase agreements and sales of available
for sale securities.
The Bank's most liquid assets are cash and cash equivalents, which
include interest-bearing deposits and short-term highly liquid investments (such
as federal funds sold) with original maturities of less than three months that
are readily convertible to known amounts of cash. The level of these assets is
dependent on the Bank's operating, financing and investing activities during any
given period. At June 30, 1998 and December 31, 1997, 1996, and 1995, cash and
cash equivalents totaled $19.5 million, $15.4 million, $6.4 million, and $4.8
million, respectively, which amounted to 8.0%, 6.7%, 3.0% and 2.7% of total
assets at those dates.
Loan commitments totaled $11.8 million at June 30, 1998, comprised of
$2.9 million in one- to four-family loan commitments, $1.1 million in
construction loan commitments, $7.6 million in home equity loan commitments, and
$192,000 in checking line of credit loan commitments. Management of the Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments. Certificates of deposit which are scheduled to mature in less
than one year from June 30, 1998 totaled $108.6 million. Based upon past
experience and the Bank's current pricing strategy, management believes that a
significant portion of such deposits will remain with the Bank.
At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $17.4 million, or 7.49% of
adjusted assets, which is above the required level of $9.3 million, or 4.0% of
adjusted assets and total risk-based capital of $18.2 million, or 20.24% of
adjusted assets, which is above the required level of $7.2 million, or 8.0%.
35
<PAGE>
The liquidity of a banking institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits, and
to take advantage of interest rate market opportunities. Funding of loan
requests, providing for liability outflows, and management of interest rate
fluctuations require continuous analysis in order to match the maturities of
specific categories of short-term loans and investments with specific types of
deposits and borrowings. Savings bank liquidity is normally considered in terms
of the nature and mix of the banking institution's sources and uses of funds.
More than half of the Bank's time deposits will mature within the next
18 months. The Bank expects that most of these deposits will be renewed. The
Bank does not anticipate a material negative impact resulting from the failure
of depositors to renew these deposits because the Bank has sufficient liquidity
in the form of cash and cash equivalents, and maturing mortgage backed and
investment securities. The Bank also has the ability to borrow funds on a short,
intermediate and long term basis through Federal Home Loan Bank advances.
Management is not aware of any known trends, events or uncertainties
that will have or are reasonably likely to have a material effect on the Bank's
liquidity, capital or operations nor is management is aware of any current
recommendation by regulatory authorities, which if implemented, would have such
an effect.
Recent Accounting Pronouncements
Effective January 1, 1998, the Bank adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Under Statement No. 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. Comparative financial
statements provided for earlier periods have been reclassified to reflect the
application of the provisions of Statement No. 130.
Statement No. 130 requires total comprehensive income and its
components to be displayed on the face of a financial statement for annual
financial statements. For the Bank, comprehensive income is determined by adding
unrealized investment holding gains or losses during the period to net income.
In February 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 132 "Employers
Disclosures about Pensions and Other Postretirement Benefits" (Statement No.
132). Statement 132 revises employers' disclosures about pension and other
postretirement benefits plans. It does not change the measurement or recognition
of those plans. It standardized the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information in changes in the benefit obligations and fair value of plan assets
that will facilitate financial analysis and eliminates certain required
disclosure of previous accounting pronouncements.
Statement No. 132 is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Restatement of disclosures
for earlier periods provided for
36
<PAGE>
comparative purposes is required unless the information is not readily
available. As Statement No. 132 affects disclosure requirements, it is not
expected to have an impact on the financial statements of the Bank.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(Statement No. 133). Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Statement No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Initial application of
this Statement should be as of the beginning of an entity's fiscal quarter, on
that date, hedging relationships must be designated a new and documented
pursuant to the provisions of this Statement. Earlier application of all of the
provisions of Statement No. 133 is encouraged, but it is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
Statement. This Statement should not be applied retroactively to financial
statements of prior periods. The Bank has not determined the impact, if any,
Statement No. 133 will have on the Bank's financial statement presentation.
Year 2000 Evaluation
Rapid and accurate data processing is essential to the Bank's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in prior years) are
expected to read entries for the year 2000 as the year 1900 or as zero and
incorrectly attempt to compute payment, interest, delinquency and other data. We
have been evaluating both information technology (computer systems) and
non-information technology systems (e.g., vault timers, electronic door lock and
heating, ventilation and air conditioning controls). We have examined all of our
non-information technology systems and have either received certifications of
year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the year 2000. We expect
to further test the systems we control and receive third party certification,
where appropriate, that they will continue to function. We do not expect any
material costs to address our non- information technology systems and have not
had any material costs to date. We have determined that the information
technology systems we use have substantially more year 2000 risk than the
non-information technology systems we use. We have evaluated our information
technology systems risk in three areas: (1) our own computers, (2) computers of
others used by our borrowers, and (3) computers of others who provide us with
data processing.
Our own computers. We expect to spend approximately $200,000 through
December 31, 1998 to upgrade our computer system. We expect to capitalize this
cost. This upgrade is expected to eliminate the year 2000 risk in our computers.
We do not expect to have material costs to address this risk area after December
31, 1998. At June 30, 1998, none of the estimated $200,000 had been capitalized.
In addition to this $200,000, we expect to expense approximately $80,000 between
July 1, 1998 and December 31, 1998 for non-compliant computer equipment.
Computers of others used by our borrowers. We have evaluated most of
our borrowers and do not believe that the year 2000 problem should, on an
aggregate basis, impact their ability to make payments to the Bank. We believe
that most of our residential borrowers are not
37
<PAGE>
dependent on their home computers for income and that none of our commercial
borrowers are so large that a year 2000 problem would render them unable to
collect revenue or rent and, in turn, continue to make loan payments to the
Bank. As a result, we have not contacted residential borrowers concerning this
issue and do not consider this issue in our residential loan underwriting
process. We have begun contacting our commercial borrowers with loans of
$250,000 or more and considering this issue during commercial loan underwriting.
At June 30, 1998 these loans constituted $9.1 million or 86.1% of our $10.7
million commercial loan portfolio. We do not expect any material costs to
address this risk area.
Computers of others who provide us with data processing. This risk is
primarily focused on one third party service bureau that provides virtually all
of the Bank's data processing. This service bureau is not year 2000 compliant
but has advised us that it expects to be compliant before the year 2000. If this
problem is not solved before the year 2000, we would likely experience
significant delays, mistakes or failures. These delays, mistakes or failures
could have a significant impact on our financial condition and results of
operations.
Contingency Plan. We are monitoring our service bureau to evaluate
whether our data processing system will fail. We are being provided with
periodic updates on the status of testing and upgrades being made by the service
bureau. If our service bureau fails, we will attempt to locate an alternative
service bureau that is year 2000 compliant. If we are unsuccessful, we will
enter deposit and loan transactions by hand in our general ledger and compute
loan payments and deposit balances and interest with our existing computer
system. We can do this because of our relatively small number of loan and
deposit accounts and our internal bookkeeping system. Our computer systems are
independently able to generate labels and mailings for all of our customers and
we periodically test this system and print and store this material. If this
labor intensive approach is necessary, management and our employees will become
much less efficient. However, we believe that we would be able to operate in
this manner indefinitely, until our existing service bureau, or their
replacement, is able to again provide data processing services. If very few
financial institution service bureaus were operating in the year 2000, our
replacement costs, assuming we could negotiate an agreement, could be material.
Effect of Inflation and Changing Prices
The Bank's financial statements and related data presented 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 changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit costs. These
expenses normally fluctuate more in line with changes in the general price level
and are very closely monitored by management for both the effects of inflation
and increases related to such items as staffing levels, usage of supplies and
occupancy costs.
38
<PAGE>
BUSINESS OF THE COMPANY
Upon consummation of the reorganization we will own all of the stock of
the Bank. We have not engaged in any significant business to date. We will
retain up to 50% of the net proceeds from the issuance of common stock (less
$200,000 for the initial capitalization of the mutual holding company). We will
use the balance of the net proceeds to purchase all of the common stock of the
Bank to be issued at the conclusion of the reorganization. Part of the proceeds
we retain will be used to fund the loan to the ESOP. Prior to the
reorganization, we will not transact any material business. In the future, we
may pursue other business activities, including the merger with or acquisition
of other financial institutions or other entities, borrowing funds for
investment in the Bank and diversification of operations. There are, however, no
current plans for such activities. We may sell or issue a portion of our common
stock, subject to applicable regulatory approvals, provided that the MHC owns at
least a majority of our common stock as long as the MHC remains in existence.
Initially, we will not maintain offices separate from those of the Bank or
employ any persons other than their officers. Company officers will not be
separately compensated for such service.
BUSINESS OF THE BANK
General
The Bank provides retail banking services, with an emphasis on one- to
four-family residential mortgage loans, home equity loans and lines of credit,
commercial, and consumer loans as well as certificates of deposit, passbook
accounts and NOW accounts. At June 30, 1998, the Bank had total assets, deposits
and equity of $242.7 million, $198.6 million, and $17.4 million, respectively.
The Bank attracts deposits from the general public and uses these
deposits primarily to originate loans and to purchase mortgage-backed and other
securities. The principal sources of funds for the Bank's lending and investing
activities are deposits, Federal Home Loan Bank (FHLB) advances, the repayment
and maturity of loans and sale, maturity, and call of securities. The principal
source of income is interest on loans and mortgage-backed and investment
securities. The principal expense is interest paid on deposits and FHLB
advances.
Market Area
The Bank's primary market area for loans and deposits is northwestern
Bergen County, New Jersey and includes the townships of Allendale, Franklin
Lakes, Glen Rock, Ho-Ho-Kus, Mahwah, Midland Park, Oakland, Paramus, Ramsey,
Ridgewood, Saddle River, Upper Saddle River, Waldwick and Wyckoff. These
townships consist primarily of single family homes. There are approximately
140,000 residents and 48,000 households within the Bank's primary market area.
This market area could be characterized as affluent.
39
<PAGE>
Lending Activities
General. The Bank primarily originates one- to four-family residential
real estate loans and, to a lesser extent, commercial real estate loans,
consumer loans and other loans. Consumer loans consist of home equity and home
improvement lines of credit and loans, student loans and loans secured by
savings accounts. Commercial real estate loans consist primarily of mortgage
loans secured by small commercial office/retail space, retail businesses and
small and medium sized apartment buildings.
40
<PAGE>
Analysis of Loan Portfolio
<TABLE>
<CAPTION>
At June 30, At December 31,
---------------- ---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------------- ----------------- ----------------- ---------------- ----------------- ----------------
$ % $ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- --- --- --
(Dollars in thousands)
Type of Loans:
First Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1- to 4-family......... $ 83,990 79.44% $ 86,140 80.70% $ 90,500 82.96% $88,685 91.02% $79,757 90.96% $89,651 92.70%
Commercial and Other..... 10,661 10.08 10,313 9.66 10,613 9.73 3,170 3.25 2,732 3.12 2,458 2.54
Consumer loans:
Equity................. 10,583 10.01 9,645 9.04 7,519 6.89 5,185 5.32 4,688 5.35 3,968 4.10
Lines of credit........ 154 0.15 134 0.13 78 0.07 78 0.08 14 0.01 -- --
Education.............. 186 0.18 160 0.15 120 0.12 84 0.09 189 0.21 172 0.18
Loans to depositors,
secured by savings... 152 0.14 350 0.32 256 0.23 235 0.24 304 0.35 466 0.48
------- ------ -------- ----- ------- ----- ------- ----- ------- ------ ------- ------
105,726 100.00% 106,742 100.00% 109,086 100.00% 97,437 100.00% 87,684 100.00% 96,715 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Less:
Net deferred loan
fees.................... 349 409 521 638 750 912
Allowance for
loan losses............ 750 618 606 593 528 464
-------- -------- ------- ------- ------ -------
Total loans
receivable, net.......... $104,627 $105,715 $107,959 $96,206 $86,406 $95,339
======= ======= ======= ======= ======= =======
Loans held for sale........ $ -- $ 750 $ 3,756 $ 199 $ 504 $ 37
======= ======= ======= ======= ======= =======
</TABLE>
41
<PAGE>
Loan Maturity Tables
The following table sets forth the maturity of the Bank's loan portfolio at June
30, 1998. The table does not include prepayments or scheduled principal
repayments. For the six months ended June 30, 1998 and the year ended December
31, 1997, prepayments and scheduled principal repayments on loans totaled $14.7
million and $23.0 million, respectively. All loans are shown as maturing based
on contractual maturities.
<TABLE>
<CAPTION>
1- to 4-Family Consumer Consumer
First Commercial Consumer Lines of Consumer Secured
Mortgage and Other Equity Credit Education by Deposits Total
-------- ---------- ------ --------- --------- ----------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year ....... $ 4,874 $ 599 $ 6 $ 98 $ 186 $ 152 $ 5,915
Over 1 to 3 years . 3,739 5,415 171 56 -- -- 9,381
Over 3 to 5 years . 3,907 210 670 -- -- -- 4,787
Over 5 to 10 years 22,027 3,863 2,029 -- -- -- 27,919
Over 10 to 20 years 13,877 364 7,707 -- -- -- 21,948
Over 20 years ..... 35,566 210 -- -- -- -- 35,776
-------- -------- -------- -------- -------- -------- --------
Total amount due .... $ 83,990 $ 10,661 $ 10,583 $ 154 $ 186 $ 152 105,726
======== ======== ======== ======== ======== ========
Less:
Allowance for loan losses....... 750
Net deferred loan fees.......... 349
-------
Loans receivable, net......... $104,627
=======
</TABLE>
42
<PAGE>
The following table sets forth the dollar amount of all loans due after
June 30, 1999 which have pre-determined interest rates and which have floating
or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In Thousands)
First mortgage - 1 to 4 family...... $43,305 $35,811 $79,116
Commercial and other................ 9,099 963 10,062
Consumer - equity................... 6,424 4,153 10,577
Consumer - lines of credit.......... -- 56 56
Consumer - education................ -- -- --
Consumer - loans to depositors,
secured by savings... -- -- --
------- ------ ------
Total........................... $58,828 $40,983 $99,811
====== ====== ======
One- to four-Family Lending. The Bank's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in the Bank's market area. The Bank generally
originates one- to four-family residential mortgage loans in amounts up to 80%
of the lesser of the appraised value or selling price of the mortgaged property
without requiring mortgage insurance. The Bank will originate a mortgage loan in
an amount up to 90% of the lesser of the appraised value or selling price of a
mortgaged property, however, mortgage insurance for the borrower is required.
The Bank generally originates and retains fixed rate and adjustable rate loans
for retention in its portfolio. A mortgage loan originated by the Bank, whether
fixed rate or adjustable rate, can have a term of up to 30 years. The Bank also
originates one- to four-family conforming fixed rate loans for terms of 20 and
30 years primarily for sale in the secondary mortgage market. These loans are
sold without recourse to the Bank by the buyer and the Bank receives a servicing
fee. Servicing fee income has been immaterial during the past five years. All
other mortgage products are generally held in portfolio and are serviced by the
Bank. The Bank offers fixed rate loans with a 15 year amortization period and a
variety of adjustable rate loans. The adjustable rate loans typically have a 15
to 30 year amortization period. The Bank offers these loans with a fixed rate
for the first five, seven or ten years with repricing following every year after
that initial fixed period. Also offered are loans with payment schedules and an
amortization schedule of 30 years but with full payment due in either five or
seven years (balloon loans). In addition, a five year fixed period is offered
with subsequent repricing once every five years and a maximum adjustment of 2%
per adjustment period. Adjustable rate loans limit the periodic interest rate
adjustment and the minimum and maximum rates that may be charged over the term
of the loan based on the type of loan and various adjustable-rate mortgage loan
products are offered and are targeted from time-to-time at discounted rates.
The Bank's one- to four-family residential loans (both fixed rate and
adjustable rate) are generally underwritten in accordance with Federal National
Mortgage Association ("FNMA") guidelines, regardless of whether they will be
sold in the secondary market. However, the Bank originates some shorter-term
loans and adjustable rate, large dollar amount loans that exceed FNMA
guidelines. At June 30, 1998 we had 84 of these loans that totalled $24.1
million or 28.6% of our $84.0 million portfolio of one- to four-family first
mortgage loans. We recently increased our lending limit from $500,000 to $1.0
million for such a loan. While these loans are generally made on the same terms
and conditions as our lower aggregate dollar amount mortgage loans, the
relatively larger dollar amount of possible loss on each loan
43
<PAGE>
makes these loans riskier than our other home mortgage loans. Any exceptions to
our underwriting policy for such a loan must be approved by the Board of
Directors. Because of the increase in our lending limit, the aggregate dollar
amount of these loans may increase in the future.
Substantially all of the Bank's residential mortgages include "due on
sale" clauses, which are provisions giving the Bank the right to declare a loan
immediately payable if the borrower sells or otherwise transfers an interest in
the property to a third party.
Property appraisals on real estate securing the Bank's single-family
residential loans are made by state certified and licensed independent
appraisers approved by the Board of Directors. Appraisals are performed in
accordance with applicable regulations and policies. The Bank obtains title
insurance policies on all first mortgage real estate loans originated. Borrowers
generally advance funds with each monthly payment of principal and interest, to
a loan escrow account from which the Bank makes disbursements for such items as
real estate taxes and hazard insurance premiums and mortgage insurance premiums
as they become due. The Bank charges a fee equal to a percentage of the loan
amount (commonly referred to as points) but may waive those points to attract
first-time borrowers.
Commercial Real Estate and Other Loans. The Bank originates commercial
real estate mortgage loans and, to a much lesser extent, commercial business
loans. The Bank's commercial real estate mortgage loans are permanent loans
secured by improved property such as office buildings, retail stores, and
apartment buildings. Essentially all originated commercial real estate loans are
within the Bank's market area and all are within the State of New Jersey. As of
June 30, 1998, the Bank had 20 loans secured by commercial real estate,
totalling $10.7 million, or 10.1% of the Bank's total loan portfolio, with an
average principal balance of $533,000. The largest commercial real estate loan
had a balance of $2.2 million on June 30, 1998 and was performing in accordance
with its contractual terms. Typically, commercial real estate loans are
originated in amounts up to 70% of the appraised value of the mortgaged
property.
The Bank maintains a small number of commercial lines of credit made to
local businesses and professionals. At June 30, 1998, $98,000, or 0.1%, of the
Bank's total loan portfolio consisted of commercial lines of credit. Many of
these lines of credit are also secured by real property. Commercial real estate
and business loans generally are deemed to entail significantly greater risk
than that which is involved with single family real estate lending. The
repayment of commercial loans typically is dependent on the successful
operations and income stream of the commercial real estate and the borrower.
Such risks can be significantly affected by economic conditions. In addition,
commercial lending generally requires substantially greater oversight efforts
compared to residential real estate lending.
Consumer Loans. As of June 30, 1998 consumer loans amounted to $11.1
million or 10.5% of the Bank's total loan portfolio and consist primarily of
home equity and home improvement loans. To a lesser extent, the Bank originates
lines of credit, student loans, loans secured by savings accounts and other
consumer loans. Consumer loans are originated in the Bank's market area and
generally have maturities of up to 15 years. As of June 30, 1998, the Bank had
67 overdraft accounts with an available line of $248,100. For savings account
loans, the Bank will lend up to 90% of the account balance. Student loans are
originated and serviced through Student Loan Marketing Association (Sallie Mae),
affording the Bank the ability to offer all of the student loan programs
available to students without the burden of servicing them.
44
<PAGE>
Consumer loans have a shorter term and generally provide higher
interest rates than residential loans. The consumer loan market can be helpful
in improving the spread between average loan yield and costs of funds and at the
same time improve the matching of the rate sensitive assets and liabilities.
Management is considering adding new consumer loan products, including
automobile loans and additional personal loan options.
Consumer loans entail greater risks than one-to-four-family residential
mortgage loans, particularly consumer loans secured by rapidly depreciable
assets such as automobiles or loans that are unsecured. In such cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections are dependent on the borrower's continuing
financial stability, and therefore are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Even for consumer loans
secured by real estate (most of our consumer loan portfolio) the risk to the
Bank is greater than that inherent in the single-family loan portfolio in that
the security for consumer loans is generally not the first lien on the property
and ultimate collection of amounts due may be dependent on whether any value
remains after collection by a holder with a higher priority than the Bank.
Finally, the application of various Federal and state laws, including Federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At June 30, 1998, there were
no consumer loans 90 days or more delinquent. See also "--Non-performing Loans
and Problem Assets--Collection Procedures."
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount. For home improvement and home equity loans and lines of credit, the
Bank lends a maximum of 80% of the value of the property. See "--Non-performing
Loans and Problem Assets" for information regarding the Bank's loan loss
experience and reserve policy.
Loans to One Borrower. Under New Jersey and federal law, savings banks
have, subject to certain exemptions, lending limits to one borrower in an amount
equal to 15% of the institution's capital accounts. As of June 30, 1998, the
Bank's largest aggregation of loans to one borrower was $2.3 million, consisting
of loans secured by commercial real estate, in the Ridgewood, New Jersey area,
which was within the Bank's legal lending limit to one borrower of $2.7 million
at such date. At June 30, 1998, the loans were current. The increase in the
capital of the Bank from this offering will increase its lending limit.
Loan Solicitation and Processing. The Bank's primary source of mortgage
loan applications is referrals from existing or past customers. The Bank also
originates loans solicited by independent mortgage brokers. The Bank advertises
in local newspapers and on the internet through "Loan Search", a free service
for New Jersey consumers seeking mortgage loans.
Upon receipt of any loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an independent fee appraiser. In connection with the loan approval process,
the Bank's officers analyze the loan applications and the property involved. All
residential, home equity, multi-
45
<PAGE>
family, construction and commercial real estate loans are processed at the
Bank's main office by the Bank's loan committee which consists of two designated
officers together with one outside director. The loan committee approves all
loans, other than loans over $500,000 and commercial loans over $50,000, which
require approval of the Board of Directors.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved,
these terms and conditions include the amount of the loan, interest rate basis,
amortization term, a brief description of real estate to be mortgaged to the
Bank, tax escrow and the notice of requirement of insurance coverage to be
maintained to protect the Bank's interest. The Bank requires title insurance on
first mortgage loans and fire and casualty insurance on all properties securing
loans, which insurance must be maintained during the entire term of the loan.
Loan Purchases and Sales. The Bank sells most conforming fixed rate
mortgage loans it originates for 30 year and 20 year terms in the secondary
mortgage market to FNMA. In 1995, the Bank sold without recourse $4.3 million in
adjustable rate mortgages to a private institutional investor at a premium and
may, from time-to-time, sell such loans or other loans to investors in the
future. The Bank originates and holds home equity and home improvement loans
until maturity. In 1996, the Bank entered into an agreement with Sallie Mae to
sell all qualifying student loans held by the Bank. The Bank originates student
loans through Sallie Mae and currently sells these loans prior to repayment. The
Bank has not purchased loans in the secondary market but may consider doing so
in the future.
The following table shows the balance of loans sold during the periods
presented. All of these sales were made into the secondary market.
Six Months ended
June 30, Years ended December 31,
- ------------------------ -----------------------------------------------------
1998 1997 1996 1995
- ------------------------ ------------------ ----------------- ------------
(In thousands)
$750 $3,592 $736 $4,337
=== ===== === =====
Loan Commitments. The Bank generally grants commitments to fund fixed
and adjustable-rate single-family mortgage loans for periods of 60 days at a
specified term and interest rate. The total amount of the Bank's commitments to
extend credit as of June 30, 1998, December 31, 1997, 1996 and 1995 was $6.2
million, $2.2 million, $937,000 and $3.9 million, respectively.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank receives loan origination and commitment fees for originating or
purchasing loans. In accordance with GAAP, all loan origination fees net of
certain loan origination costs over the related life of the loan are amortized.
The points (percentage based fee the Bank charges to originate a loan)
the Bank generally charges range up to 3% of the loan amount on residential
mortgages, construction loans and commercial real estate loans. The total amount
of deferred loan fees and net discounts on loans originated and purchased as of
June 30, 1998 was $349,000.
The Bank also receives other fees and charges relating to existing
loans, which include prepayment penalties on commercial loans, late charges, and
fees collected in connection with a change in borrower or other loan
modifications. These fees and charges have not constituted a material source of
income.
46
<PAGE>
Non-performing Loans and Problem Assets.
Collection Procedures. The Bank's collection procedures provide that
when a loan is 15 to 20 days delinquent, the borrower is notified. If the loan
becomes 30 days or more delinquent, the borrower is sent a written delinquent
notice requiring payment. If the delinquency continues, subsequent efforts are
made to contact the delinquent borrower. In certain instances, the Bank may
modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his financial affairs and the Bank attempts to work with
the borrower to establish a repayment schedule to cure the delinquency. As to
mortgage loans, if the borrower is unable to cure the delinquency or reach a
payment agreement with the Bank within 90 days, the Bank will institute
foreclosure actions. If a foreclosure action is taken and the loan is not
reinstated, paid in full or refinanced, the property is sold at judicial sale at
which the Bank may be the buyer if there are no adequate offers to satisfy the
debt. Any property acquired as the result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold or otherwise disposed of by the Bank. When REO is acquired, it is recorded
at the lower of the unpaid principal balance of the related loan or its fair
market value less estimated selling costs. The initial writedown of the property
is charged to the allowance for loan losses.
As to consumer and unsecured commercial loans, the main thrust of the
Bank's collection efforts is through telephone contact and a sequence of
collection letters. If the Bank is unable to resolve the delinquency within 90
days, the delinquent loans are referred to the Bank's local counsel for
collection. Adjustors are required to evaluate each assigned account on a
case-by-case basis, within the parameters of the Bank's policies. All
collections are done in accordance with the Fair Debt Collection Practices Act.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when they are determined to be impaired, which, generally, is when they
are more than 90 days delinquent. Loans may be placed on a non-accrual status at
any time if, in the opinion of management, the collection of additional interest
is doubtful. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
At June 30, 1998, the Bank had $6,000 of loans that were held on a non-accrual
basis and held no REO.
47
<PAGE>
Non-performing Assets. The following table sets forth information with
respect to the Bank's non-performing assets for the periods indicated. During
the periods indicated the Bank had no restructured loans.
<TABLE>
<CAPTION>
At June 30, At December 31,
----------- -------------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ---------- ----------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
First mortgage loans:
1- to 4-family............................. $ 6 $ -- $ 313 $ 397 $ 650 $ 1,668
Commercial and other....................... -- -- -- -- -- --
Consumer loans:
Equity..................................... -- -- -- -- 58 115
Lines of credit............................ -- -- -- -- -- --
Education.................................. -- -- -- 3 8 --
Loans to depositors,
secured by savings....................... -- -- -- -- -- --
-------- -------- -------- --------- -------- ------
Total........................................ $ 6 $ -- $ 313 $ 400 $ 716 $ 1,783
======== ======== ========= ======== ======== ======
Loans past due 90+ days and
still accruing............................... $ 2 $ -- $ -- $ -- $ -- $ --
======== ======== ========= ======== ======== ======
Real estate owned.............................. $ -- $ -- $ -- $ -- $ -- $ 138
======== ======== ========= ======== ======== ======
Total non-performing assets.................... $ 8 $ -- $ 313 $ 400 $ 716 $ 1,921
======== ======== ========= ======== ======== ======
Total non-accrual loans to net loans........... 0.01% --% 0.28% 0.41% 0.82% 1.87%
======= ======== ========= ======== ======== ======
Total non-accrual loans to total assets........ --% --% 0.14% 0.22% 0.50% 1.37%
======== ======== ========= ======== ======== ======
Total non-performing assets to total assets.... --% --% 0.14% 0.22% 0.50% 1.48%
======== ======== ========= ======== ======== ======
</TABLE>
48
<PAGE>
During the six months ended June 30, 1998 and the years ended December
31, 1997, 1996, and 1995, approximately $0, $0, $13,000 and $22,000,
respectively of interest would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current according to the original loan
agreements for the entire period. These amounts were not included in the Bank's
interest income for the respective periods. The amount of interest income on
loans accounted for on a non-accrual basis that was included in income during
the same periods was insignificant during the six months ended June 30, 1998 and
the years ended December 31, 1997, 1996, and 1995, respectively. At June 30,
1998, the Bank had no loans classified as troubled debt restructuring.
Classified Assets. Management, in compliance with regulatory
guidelines, has instituted an internal loan review program, whereby loans are
classified as special mention, substandard, doubtful or loss. When a loan is
classified as substandard or doubtful, management is required to establish a
valuation reserve for loan losses in an amount that is deemed prudent. When
management classifies a loan as a loss asset, a reserve equal to 100% of the
loan balance is required to be established or the loan is to be charged-off.
This allowance for loan losses is composed of an allowance for both inherent
risk associated with lending activities and particular problem assets.
An asset is considered substandard if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full, highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a loss
reserve is not warranted. Assets which do not currently expose the insured
institution to a sufficient degree of risk to warrant classification in one of
the aforementioned categories but possess credit deficiencies or potential
weaknesses are required to be designated special mention by management. In
addition, each loan that exceeds $500,000 and each group of loans to one
borrower that exceeds $500,000 is monitored more closely due to the potentially
greater losses from such loans.
Management's evaluation of the classification of assets and the
adequacy of the reserve for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process.
Internal Classification of Assets
At
June 30,
1998
(In thousands)
Special mention............................. $ 765
Substandard................................. 82
Doubtful ................................... --
Loss ....................................... --
----
Total.................................. $ 847
===
49
<PAGE>
Allowance for Loan Losses and REO. At least quarterly, the Bank's
management evaluates the need to establish reserves against losses on loans and
other assets based on estimated losses on specific loans and on any real estate
held for sale or investment when a finding is made that a loss is estimable and
probable. Such evaluation includes a review of all loans for which full
collectibility may not be reasonably assured and considers, among other matters,
the estimated market value of the underlying collateral of problem loans, prior
loss experience, economic conditions and overall portfolio quality. Also
considered are trends in the loan portfolio, expected future loss experience,
and industry reserve levels. Provisions for losses are charged against earnings
in the period they are established. The Bank had $750,000 in allowances for loan
losses at June 30, 1998. The Bank held no REO at that date.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP, there can be no assurance that regulators,
in reviewing the Bank's loan portfolio, will not request the Bank to
significantly increase its allowance for loan losses, or that general economic
conditions, a deteriorating real estate market, or other factors will not cause
the Bank to significantly increase its allowance for loans losses, therefore
negatively affecting the Bank's financial condition and earnings.
In making loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
It is the Bank's policy to review its loan portfolio, in accordance
with regulatory classification procedures, on at least a quarterly basis.
Additionally, the Bank maintains a program of reviewing loan applications prior
to making the loan and immediately after loans are made in an effort to maintain
loan quality.
50
<PAGE>
The following table sets forth certain information regarding the Bank's
allowance for loan losses at or for the dates indicated.
<TABLE>
<CAPTION>
At or for six months ended
June 30, At or for years ended December 31,
---------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period .................... $ 618 $ 606 $ 606 $ 593 $ 528 $ 464 $ 372
Provision for loan losses ......................... 132 6 12 12 60 60 112
Charge-offs ....................................... -- -- -- 2 -- -- 23
Recoveries ........................................ -- -- -- 3 5 4 3
-------- -------- -------- -------- -------- -------- --------
Balance at end of period .......................... $ 750 $ 612 $ 618 $ 606 $ 593 $ 528 $ 464
======== ======== ======== ======== ======== ======== ========
Total loans receivable(1) ......................... $104,627 $111,162 $106,465 $111,715 $ 96,405 $ 86,910 $ 95,376
======== ======== ======== ======== ======== ======== ========
Average loans outstanding(1) ...................... $105,493 $110,586 $109,954 $105,170 $ 94,040 $ 87,369 $107,403
======== ======== ======== ======== ======== ======== ========
Allowance for loan losses as a
percent of total loans .......................... 0.72% 0.55% 0.58% 0.54% 0.62% 0.61% 0.49%
======== ======== ======== ======== ======== ======== ========
Net loans charged off as a
percent of average loans outstanding............. --% --% --% --% --% --% 0.02%
======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------------
(1) includes loans held for sale
51
<PAGE>
The following table exhibits a breakdown by loan category of the
allowance for loan losses.
At June 30,
1998 1997
------------------ ------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
First mortgage -
1- to 4-family.......... $596 79.44% $509 81.76%
Commercial and other...... 75 10.08 53 9.33
Consumer - equity......... 75 10.01 46 8.19
Consumer - lines of credit 1 0.15 2 0.34
Consumer - education...... 1 0.18 1 0.13
Consumer - loans
to depositors,
secured by savings...... 2 0.14 1 0.25
Unallocated .............. -- -- -- --
---- ------ ---- ------
Total allowance
for loan losses.... $750 100.00% $612 100.00%
=== ====== === ======
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------ ------------------ -------------------- ------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage -
1- to 4-family.......... $499 80.70% $512 82.96% $542 91.02% $478 90.96% $434 92.70%
Commercial and other...... 60 9.66 54 9.73 18 3.25 15 3.12 8 2.54
Consumer - equity......... 56 9.04 38 6.89 30 5.32 32 5.35 20 4.10
Consumer - lines of credit 1 0.13 -- 0.07 -- 0.08 -- 0.01 -- --
Consumer - education...... 1 0.15 1 0.12 2 0.09 1 0.21 1 0.18
Consumer - loans
to depositors,
secured by savings...... 1 0.32 1 0.23 1 0.24 2 0.35 1 0.48
Unallocated .............. -- -- -- -- -- -- -- -- -- --
--- ------ --- ------ ---- ------ --- ------ --- ------
Total allowance
for loan losses.... $618 100.00% $606 100.00% $593 100.00% $528 100.00% $464 100.00%
=== ====== === ====== === ====== === ====== === ======
</TABLE>
52
<PAGE>
Investment Activities
General. New Jersey-chartered savings banks have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various Federal agencies, certain certificates of
deposits of insured banks and savings institutions, municipal securities,
corporate debt securities and loans to other banking institutions.
The Bank maintains liquid assets which may be invested in specified
short-term securities and certain other investments. See
"Regulation--Bank--Federal Home Loan Bank System" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources". Liquidity levels may be increased or decreased depending
upon the yields on investment alternatives and upon management's judgment as to
the attractiveness of the yields then available in relation to other
opportunities and its expectation of future yield levels, as well as
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities. The Bank maintains an investment
securities portfolio and a mortgage-backed securities portfolio as part of its
investment portfolio. At June 30, 1998, the Bank had an investment securities
portfolio of $14.2 million (5.9% of total assets) and a mortgage-backed
securities portfolio of $98.5 million (40.6% of total assets), consisting
primarily of U.S. Government Treasury Securities, U.S. government agency
obligations, obligations of states and political subdivisions. At June 30, 1998,
the market value of the investment securities portfolio was $14.2 million and
the market value of the mortgage-backed securities portfolio was $98.6 million.
See Notes 2 and 3 of the financial statements.
Investment Policies. The investment policy of the Bank, which is
established by the Board of Directors, is designed to foster earnings and
liquidity within prudent interest rate risk guidelines, while complementing the
Bank's lending activities. The policy provides for available for sale, held to
maturity, and trading classifications. However, the Bank does not currently use
a trading classification and does not anticipate doing so in the future. The
policy permits investments in high credit quality instruments with diversified
cash flows while permitting the Bank to maximize total return within the
guidelines set forth in the Bank's interest rate risk, funds and liquidity
management policy. Permitted investments include but are not limited to U. S.
government obligations, government agency or government-sponsored agency
obligations, state, county and municipal obligations, mortgage backed securities
and collateralized mortgage obligations guaranteed by government or
government-sponsored agencies, investment grade corporate debt securities, and
commercial paper. The Bank also invests in Federal Home Loan Bank overnight and
term deposits, certificates of deposit of insured banks, and federal funds, but
these instruments are not considered part of the investment portfolio.
The policy also includes several specific guidelines and restrictions
to insure adherence with safe and sound activities. The policy prohibits
investments in zero coupon securities with maturities over five years, high risk
mortgage derivative products (as defined by federal banking regulators),
transactions with forward settlement dates in excess of 90 days, dual indexed
notes, and inverse floaters. In addition, the policy limits the maximum amount
of any single transaction. The Bank does not participate in hedging programs,
interest rate swaps, or other activities involving the use of off-balance sheet
derivative financial instruments. Further, the Bank does not invest in
securities which are not rated investment grade.
The Board has charged the President, Executive Vice President, and
Chief Financial Officer to implement the policy. The policy statement requires
authorization by at least two of these three officers for approval of securities
transactions. All transactions are reported to the Board of Directors monthly,
with the entire portfolio reported quarterly, including market values and
unrealized gains (losses).
53
<PAGE>
Investment Securities. The Bank maintains a portfolio of investment
securities held to maturity. The Bank also maintains a portfolio of investment
securities available for sale to enhance total return on investments. These
assets are accounted at fair market value. During the six months ended June 30,
1998 and the year ended December 31, 1997 the Bank sold $7.0 million and $17.5
million of securities, respectively. As of June 30, 1998, the market value of
investment securities available for sale was $11.7 million, with a cost basis of
$11.6 million.
Mortgage-backed Securities. The Bank invests in mortgage-backed
securities to provide earnings, liquidity, cash flows, and diversification to
the Banks' overall balance sheet. These mortgage-backed securities are
classified as either available for sale or held to maturity. These securities
are participation certificates issued and guaranteed by the Government National
Mortgage Association ("GNMA") the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Association ("FHLMC") and secured by interest
in pools of mortgages. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage-backed securities secured
by single-family mortgages.
The Bank also invests in mortgage-related securities, primarily CMOs,
issued or sponsored by GNMA, FNMA, FHLMC, as well as private issuers. CMOs are a
type of debt security that aggregates pools of mortgages and mortgage-backed
securities and creates different classes of CMO securities with varying
maturities and amortization schedules as well as a residual interest with each
class having different risk characteristics. The cash flows from the underlying
collateral are usually divided into "tranches" or classes whereby tranches have
descending priorities with respect to the distribution of principal and interest
repayment of the underlying mortgages and mortgage backed securities as opposed
to pass through mortgage backed securities where cash flows are distributed pro
rata to all security holders. Unlike mortgage backed-securities from which cash
flow is received and prepayment risk is shared pro rata by all securities
holders, cash flows from the mortgages and mortgage backed securities underlying
CMOs are paid in accordance with a predetermined priority to investors holding
various tranches of such securities or obligations. A particular tranche or
class may carry prepayment risk which may be different from that of the
underlying collateral and other tranches. CMOs attempt to moderate reinvestment
risk associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity. Management believes these securities represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.
Other Securities. Other securities used by the Bank, but not
necessarily included in the investment portfolio, consist of equity securities,
interest-bearing deposits and federal funds sold. Equity securities owned
consist of 400 shares of Federal National Mortgage Association common stock
(included in the investment securities portfolio) and 19,486 shares of Federal
Home Loan Bank of New York (FHLB NY) common stock. As an approved FNMA
Seller-Servicer and as a member of the FHLB NY, ownership of common shares is
required. The remaining securities provide diversification and complement the
Bank's overall investment strategy.
54
<PAGE>
Investment Portfolio
The following table sets forth the carrying value of the Bank's
investment securities portfolio, and mortgage-backed securities portfolio at the
dates indicated. At June 30, 1998, the fair value of the Bank's investment
securities portfolio and mortgage-backed securities portfolio were $14.2 million
and $98.6 million, respectively.
<TABLE>
<CAPTION>
At June 30, At December 31,
----------- ---------------------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Investment Securities Held to Maturity:
U.S. Government Securities......................... $ 1,575 $ 1,771 $ 2,328 $ 761
U.S. Agency Securities............................. 920 7,895 10,393 23,081
------- ------ ------ ------
Total Investment Securities Held to Maturity..... 2,495 9,666 12,721 23,842
Investment Securities Available for Sale:
U.S. Government Securities........................ 499 498 493 496
U.S. Agency Securities............................ 6,501 23,193 40,103 16,909
Municipal Securities.............................. 4,704 3,241 2,599 --
Equity Securities(1).............................. 26 22 16 12
------- ------- ------ ------
Total Investment Securities Available For Sale.. 11,730 26,954 43,211 17,417
Mortgage-backed Securities Held to Maturity......... 12,794 14,356 16,611 19,179
Mortgage-backed Securities Available For Sale....... 85,679 50,099 19,359 13,041
------- ------- ------ ------
Total Investment and Mortgage-backed
Securities....................................... $112,698 $101,075 $91,902 $73,479
======= ======= ====== ======
</TABLE>
- ----------------
(1) Equity securities consist of 400 shares of Federal National Mortgage
Association common stock (requirement of being a Seller-Servicer).
55
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Bank's investment and mortgage-backed securities portfolio at
June 30, 1998.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ----------------- ------------------- -----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------ ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government
Securities............. $ 500 5.13% $ 167 9.38% $ 746 7.30% $ 662 5.11% $ 2,075 6.25% $ 2,075
U. S. Agency Securities.. 920 5.19 4,001 6.51 -- -- 2,500 7.07 7,421 6.54 7,421
Municipal Securities..... -- -- -- -- -- -- 4,704 5.25 4,704 5.25 4,704
Equity Securities(1)..... 26 4.56 -- -- -- -- -- -- 26 4.56 26
------- ---- ------- ---- ------- ----- ------- ----- -------- ---- -------
Total Investment
Securities........... 1,446 5.16 4,168 6.62 746 7.30 7,866 5.82 14,226 6.06 14,226
Mortgage-backed Securities. -- -- 10,206 6.82 25,581 7.72 62,686 8.39 98,473 8.06 98,632
------- ----- ------- ---- ------ ---- ------ ---- -------- ---- -------
Total Investments...... $ 1,446 5.16% $14,374 6.77% $26,327 7.71% $70,552 8.10% $112,699 7.81% $112,858
======= ==== ======= ==== ====== ==== ====== ==== ======== ==== =======
</TABLE>
- -------------------
(1) Equity securities consist of 400 shares of Federal National Mortgage
Association common stock (requirement of being a Seller-Servicer).
56
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources. In
addition to deposits and borrowings, the Bank derives funds from loan and
mortgage-backed securities principal repayments, and proceeds from the sale of
mortgage-backed securities and investment securities. Loan and mortgage-backed
securities payments are a relatively stable source of funds, while deposit
inflows are significantly influenced by general interest rates and money market
conditions. They also may be used on a longer-term basis for interest rate risk
management and general business purposes.
Deposits. The Bank offers a variety of deposit accounts, although a
majority of deposits are in fixed-term, market-rate certificate accounts.
Deposit account terms vary, primarily as to the required minimum balance amount,
the amount of time that the funds must remain on deposit and the applicable
interest rate.
The Bank's current deposit products include certificates of deposit
accounts ranging in terms from 91 days to five years as well as passbook,
statement, NOW, and money market accounts. Included in these are individual
retirement accounts (IRAs). The Bank does not negotiate its interest rates on
any of its certificates of deposit.
Deposits are obtained primarily from residents in northwestern Bergen
County, New Jersey. The Bank attracts deposit accounts by offering outstanding
service, competitive interest rates, and convenient locations and service hours.
The Bank uses traditional methods of advertising to attract new customers and
deposits, including radio, direct mail and print media advertising. The Bank
does not utilize the services of deposit brokers and management believes that an
insignificant number of deposit accounts are held by non-residents of New
Jersey.
The Bank pays interest on its deposits which are competitive in its
market. Interest rates on deposits are set weekly by senior management, based
upon a number of factors, including: (1) the previous week's deposit flow; (2) a
current survey of a selected group of competitors' rates for similar products;
(3) external data which may influence interest rates; (4) investment
opportunities and loan demand; and (5) scheduled maturities.
Because of the large percentage of certificates of deposit in the
deposit portfolio (75.8% at June 30, 1998), the Bank's liquidity could be
reduced if a significant amount of certificates of deposit, maturing within a
short period of time, were not renewed. Most certificates of deposit remain with
the Bank after they mature and the Bank believes that this will continue.
However, the need to retain these time deposits could result in an increase in
the Bank's cost of funds.
57
<PAGE>
Deposit Portfolio
Deposits in the Bank as of June 30, 1998, were represented by various
types of savings programs described below.
<TABLE>
<CAPTION>
Balances Percentage
Interest as of of Total
Category Term Rate(1) June 30, 1998 Deposits
- -------- ------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C>
Traditional(2) None 3.21% $ 29,126 14.67%
NOW Accounts(3) None 2.29 15,165 7.64
Money Market Accounts None 2.98 3,807 1.92
Certificates of Deposit:
Fixed Term, Fixed Rate 3 months 4.41 5,807 2.92
Fixed Term, Fixed Rate 6 months 5.07 18,412 9.27
Fixed Term, Fixed Rate 7 months 5.75 17 0.01
Fixed Term, Fixed Rate 8 months 5.56 220 0.11
Fixed Term, Fixed Rate 9 months 5.51 6,004 3.02
Fixed Term, Fixed Rate 12 months 5.28 21,506 10.83
Fixed Term, Fixed Rate 13 months 5.79 1,831 0.92
Fixed Term, Fixed Rate 18 months 5.81 32,914 16.57
Fixed Term, Fixed Rate 24 months 5.84 26,655 13.42
Fixed Term, Fixed Rate 30 months 5.89 13,365 6.73
Fixed Term, Fixed Rate 36 months 5.69 153 0.08
Fixed Term, Fixed Rate 60 months 5.67 6,320 3.18
Fixed Term, Fixed Rate 120 months 6.44 2,473 1.25
Jumbo Certificates(4) 14,827 7.46
------- -------
Total Certificates of Deposit 150,504 75.77
------- ------
Total $198,602 100.00%
======= ======
</TABLE>
- --------------
(1) Weighted average interest rates as of June 30, 1998.
(2) Consists of passbook accounts, statement savings accounts and childrens'
accounts (the Moola Moola program).
(3) Weighted average interest rate based upon interest bearing NOW accounts
only.
(4) Interest rate and term for jumbo certificates (certificates with a balance
of $100,000 or more) may vary depending on the term of certificate of
deposits offered.
58
<PAGE>
Time Deposits by Rate
The following table sets forth the time deposits in the Bank classified
by interest rate as of the dates indicated.
At June 30, At December 31,
----------- ------------------------------------------
1998 1997 1996 1995
----------- ----------- ----------- --------------
(In thousands)
Interest Rate
2.01-4.00%...... $ 1 $ 1 $ -- $ --
4.01-6.00%...... 125,575 126,204 122,799 83,651
6.01-8.00%...... 24,928 24,596 11,975 30,493
------- ------- ------- -------
Total........... $150,504 $150,801 $134,774 $114,144
======= ======= ======= =======
Time Deposits Maturity Schedule
The following table sets forth the amount and maturities of time
deposits at June 30, 1998.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------------
Six months ended Year ended Year ended After
December 31, December 31, December 31, December 31,
1998 1999 2000 2000 Total
--------------- ------------ ------------ ----------- ----------
Interest Rate
- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
2.01-4.00%..... $ - $ - $ 1 $ - $ 1
4.01-6.00%..... 47,218 70,108 6,483 1,766 125,575
6.01-8.00%..... 14 15,520 6,283 3,111 24,928
------ ------ ------ ----- -------
Total.......... $47,232 $85,628 $12,767 $4,877 $150,504
====== ====== ====== ===== =======
</TABLE>
59
<PAGE>
Jumbo Certificates of Deposit
The following table shows the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1998.
Certificates
Maturity Period of Deposit
- --------------- ----------
(In thousands)
Within three months................................... $ 3,018
Three through six months.............................. 2,039
Six through twelve months............................. 6,320
Over twelve months.................................... 3,450
------
$14,827
=======
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated:
Six Months Ended
June 30, Years Ended December 31,
------------------- ----------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Net increase (decrease)
before interest credited $ (61) $11,145 $14,402 $15,930 $20,306
Interest credited ........ 4,774 4,262 8,936 7,603 6,518
------- ------- ------- ------- -------
Net increase in savings
deposits ............... $ 4,713 $15,407 $23,338 $23,533 $26,824
======= ======= ======= ======= =======
Borrowings. Deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank, as the need arises, relies upon advances from the FHLB NY to supplement
its supply of lendable funds and to meet deposit withdrawal requirements.
Advances from the FHLB NY are typically secured by the Bank's stock in the FHLB
and a portion of the Bank's residential mortgage loans and may be secured by
other assets (principally securities which are obligations of or guaranteed by
the U.S. Government). The Bank funds loan demand and investment opportunities
out of current loan and mortgage-backed securities repayments, investment
maturities and new deposits. However, the Bank has utilized FHLB advances to
supplement these sources and as a match against certain assets in order to
better manage interest rate risk.
60
<PAGE>
The following table sets forth information concerning FHLB advances
during the periods indicated (includes both short- and long-term advances).
<TABLE>
<CAPTION>
At or For the
Six Months Ended At or For the Years
June 30, Ended December 31,
-------------------- ----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding....... $18,009 $25,995 $22,012 $32,210 $13,833
Maximum amount outstanding
at any month-end during
the period.................... 25,436 28,400 28,400 38,972 17,829
Balance outstanding at
end of period................... 25,432 19,181 16,282 28,400 16,012
Weighted average interest
rate during the period........ 5.77% 5.83% 5.93% 5.81% 6.37%
Weighted average
interest rate at
the end of the period......... 5.63% 5.89% 6.00% 5.86% 6.11%
</TABLE>
Subsidiary Activity
The Bank is permitted to invest its assets in the capital stock of, or
originate secured or unsecured loans to, subsidiary corporations. The Bank does
not have any subsidiaries.
Personnel
As of June 30, 1998, the Bank had 28 full-time employees and 13
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
satisfactory.
Competition
The Bank faces strong competition in its attraction of deposits, which
are its primary source of funds for lending, and in the origination of real
estate and consumer loans. The Bank's competition for deposits and loans
historically has come from other savings institutions and commercial banks
located in the Bank's market area. The Bank also competes with mortgage banking
companies for real estate loans, and commercial banks and savings institutions
for consumer loans; and faces competition for investor funds from short-term
money market securities and corporate and government securities. The Bank's
primary market area is northwestern Bergen County, New Jersey.
The Bank competes for loans by charging competitive interest rates and
loan fees, and emphasizing outstanding service for its customers. The Bank
offers consumer banking services such as passbook and NOW accounts, certificates
of deposit, retirement accounts, consumer and mortgage loans and provides
drive-up facilities, automated teller machines and overdraft protection. The
emphasis on outstanding service differentiates the Bank in its competition for
deposits. The Bank offers overall market rates on deposits. Although the bank is
ranked first in deposit share in its primary market area, many of the
competitors of the Bank offer a much broader array of services and products.
61
<PAGE>
Properties and Equipment
The Bank's executive offices are located at 531 North Maple Avenue in
Ridgewood, New Jersey. The Bank conducts its business through three offices,
which are located in Ridgewood and Mahwah, New Jersey. The following table sets
forth the location of each of the Bank's offices, the year the office was
acquired and the net book value of each office.
Net Book
Year Facility Value as of
Opened or Leased or June 30,
Office Location Acquired Owned 1998
- --------------- --------- -------- -----------
Broad Street Office
55 North Broad Street
Ridgewood, NJ 07450 1964 Leased $292,000
Mahwah Office
6 East Ramapo Avenue
Mahwah, NJ 07430 1995 Leased 246,000
Maple Avenue Office
531 North Maple Avenue
Ridgewood, NJ 07450 1995 Owned 1,101,000
---------
TOTAL $1,639,000
==========
The Broad Street office lease is dated April 6, 1975 with a term of
thirty years. The Mahwah office lease has a term of twelve years. Each lease has
a renewal option. The Bank has a limited service branch open several hours a
week that is located in a nursing home in Allendale, New Jersey.
As of June 30, 1998, the net book value of land, buildings, furniture,
and equipment owned by the Bank, less accumulated depreciation, totalled $2.2
million. Regardless of whether the offering is completed, the Bank is exploring
the purchase of a building to serve as an additional branch office and to house
administrative operations of the Bank. The Bank has estimated that the
acquisition and refurbishment costs for this purpose could total approximately
$6.0 million.
Legal Proceedings
The Bank, from time to time, is a party to routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. There were no lawsuits
pending or known to be contemplated against the Bank at June 30, 1998 that would
have a material effect on our operations or income.
62
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to
us. The description is not complete and is qualified in its entirety by
reference to applicable laws and regulations.
Bank
General. As a New Jersey chartered savings bank insured by the Savings
Association Insurance Fund (the "SAIF"), the Bank is subject to extensive
regulation and examination by the New Jersey Department of Banking and Insurance
(the "Department"), the FDIC, which insures its deposits to the maximum extent
permitted by law, and to a much lesser extent, by the Federal Reserve. The
federal and state laws and regulations which are applicable to banks regulate,
among other things, the scope of their business, their investments, the reserves
required to be kept against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
The laws and regulations governing the Bank generally have been promulgated to
protect depositors and not for the purpose of protecting stockholders. 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 regulation, whether by the Department, the FDIC or the United
States Congress could have a material adverse impact on the Company, the Bank
and their operations.
New Jersey Savings Bank Law. The New Jersey Banking Act of 1948
("Banking Code") contains detailed provisions governing the organization,
location of offices, rights and responsibilities of directors, officers, and
employees, as well as corporate powers, savings and investment operations and
other aspects of the Bank and its affairs. The Banking Code delegates extensive
rule-making power and administrative discretion to the Department so that the
supervision and regulation of state chartered savings banks may be flexible and
readily responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be fully competitive with each other and with other
financial institutions existing under other state, federal and foreign laws. To
this end, the Banking Code provides state-chartered savings banks with all of
the powers enjoyed by federal savings and loan associations, subject to
regulation by the Department. Federal law, however, prohibits state chartered
institutions from making new investments, loans, or becoming involved in
activities as principal and equity investments which are not permitted for
national banks unless (1) the FDIC determines the activity or investment does
not pose a significant risk of loss to the appropriate deposit insurance fund
and (2) the savings bank meets the fully phased-in capital requirements.
Accordingly, the ability of the Banking Code to provide additional operating
authority to the Bank is limited by federal law.
The Department generally examines the Bank not less frequently than
every two years. The Department may order any savings bank to discontinue any
violation of law or unsafe or unsound business practice and may direct any
director, officer, attorney or employee of a savings bank engaged in an
objectionable activity, after the Department has ordered the activity to be
terminated, to show cause at a hearing before the Department why such person
should not be removed.
63
<PAGE>
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). 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 institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
0.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the
deposit insurance assessment for most SAIF members was reduced to 0.064% of
deposits on an annual basis through the end of 1999. During this same period,
BIF members will be assessed approximately 0.013% of deposits. After 1999,
assessments for BIF and SAIF members should be the same. It is expected that
these continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank declined by approximately 70%.
Regulatory Capital Requirements. Under FDIC regulations, the Bank is
required to maintain minimum leverage capital (a ratio of Tier 1 capital to
total risk-weighted assets) of 4%. For institutions other than those most highly
rated by the FDIC, additional capital of at least 100 to 200 basis points is
required. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority investments in certain subsidiaries, less certain intangible assets,
deferred tax assets, certain identified losses and certain investments in
securities subsidiaries. As a SAIF-insured, state-chartered savings bank, the
Bank must currently also deduct from Tier 1 capital an amount equal to its
investments in, and extensions of credit to, subsidiaries engaged in certain
activities not permissible for national banks.
In addition to the leverage ratio, the Bank must maintain a ratio of
qualifying total capital to risk- weighted assets of at least 8.0%, of which at
least four percentage points must be Tier 1 capital. Qualifying total capital
consists of Tier 1 capital plus Tier 2 or supplementary capital items which
include allowances for loan losses in an amount of up to 1.25% of risk-weighted
assets, cumulative preferred stock and preferred stock with a maturity of over
20 years and certain other capital instruments. The includable amount of Tier 2
capital cannot exceed the institution's Tier 1 capital. Qualifying total capital
is further reduced by the amount of the bank's investments in banking and
finance subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross-holdings of capital securities issued by other banks and
certain other deductions. Under the FDIC's risk-weighted system, all of a bank's
balance sheet assets and the credit equivalent amounts of certain off-balance
sheet items are assigned to risk weight categories. The aggregate dollar amount
of each category is multiplied by the risk weight assigned to that category. The
sum of these weighted values equals the bank's risk-weighted assets.
Pursuant to New Jersey banking law the minimum leverage capital for a
depository institution is a ratio of Tier 1 capital to total risk-weighted
assets of four percent. However, the Department may require a higher ratio for a
particular depository institution.
64
<PAGE>
New Jersey banking law requires that a depository institution maintain
qualifying capital of at least eight percent of its risk weighted assets. At
least four percent of this qualifying capital shall be in the form of Tier 1
capital. For purposes of New Jersey banking law, risk weighted assets, Tier 1
capital, and total assets are defined in the same manner as in the FDIC
regulations.
The Bank was in compliance in both the FDIC and New Jersey capital
requirements at June 30, 1998. See "Historical and Pro Forma Capital
Compliance."
Regulatory Capital Distributions. Following the reorganization,
earnings of the Bank appropriated to bad debt reserves and deducted for federal
income tax purposes will not be available for payment of cash dividends or other
distributions to stockholders without payment of taxes at the then current tax
rate by the Bank on the amount of earnings removed from the reserves for such
distributions.
Dividends payable by the Bank to the Company and dividends payable by
the Company to stockholders will be subject to various additional limitations
imposed by federal and state laws, regulations and policies adopted by federal
and state regulatory agencies. The Bank will be required by federal law to
obtain FDIC approval for the payment of dividends if the total of all dividends
declared by the Bank in any year exceed the total of the Bank's net profits (as
defined) for that year and the retained net profits (as defined) for the
preceding two years, less any required transfers to surplus. Under New Jersey
law, the Bank may not pay dividends unless, following payment, the capital stock
of the Bank would be unimpaired and (a) the Bank will have a surplus of not less
than 50% of its capital stock, or, if not, (b) the payment of such dividends
will not reduce the surplus of the Bank.
Under applicable regulations, the Bank would be prohibited from making
any capital distributions if, after making the distribution, the Bank would
have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0%, unless a higher ratio is required by the Department.
The Bank was in compliance with both the FDIC and New Jersey capital
distribution requirements at June 30, 1998. See "Historical and Pro Forma
Capital Compliance."
Qualified Thrift Lender Test. The Bank must maintain an appropriate
level of certain investments ("Qualified Thrift Investments") and otherwise
qualify as a qualified thrift lender ("QTL"), in order to continue to enjoy full
borrowing privileges from the FHLB NY. The required percentage of Qualified
Thrift Investments is 65% of portfolio assets. In addition, savings banks may
include shares of stock of the Federal Home Loan Banks, FNMA and FHLMC as
qualifying QTL assets. Compliance with the QTL test is measured on a monthly
basis in nine out of every 12 months. As of June 30, 1998, the Bank was in
compliance with its QTL requirement.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between the Bank and its affiliates be
on terms as favorable to the Bank as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
Bank's capital. Collateral in specified amounts must usually be provided by
affiliates in order to receive loans from the Bank. Within certain limits,
affiliates are permitted to receive more favorable loan terms than
non-affiliates.
65
<PAGE>
Federal Home Loan Bank System. The Bank is a member of the FHLB NY,
which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from funds
deposited by its members and proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors of
the FHLB. The FHLB imposes various limitations on advances such as limiting the
amount of certain types of real estate related collateral to 30% of a member's
capital and limiting total advances to a member.
As a member, we are required to purchase and maintain stock in the FHLB
NY in an amount equal to at least 1% of its aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
in low and moderate income housing projects.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At June 30, 1998, the Bank
met its reserve requirements.
Company
General. As a bank holding company, we will be subject to regulation
and supervision by the Board of Governors of the Federal Reserve System and by
the Department. This regulation is generally intended to ensure that the Company
limits its activities to those allowed by law and that it operates in a safe and
sound manner without endangering the financial health of its subsidiary bank.
The mutual holding company will also be a bank holding company and will be
subject to the regulations summarized below.
Federal Law and Other Limitations. A bank holding company may not
acquire direct or indirect ownership or control of more than 5% of the voting
shares of any bank, or increase its ownership or control of any bank, without
prior approval of the Federal Reserve. In determining whether to authorize a
bank holding company (or a company that will become a bank holding company) to
acquire control of a bank, the Federal Reserve takes into consideration the
financial and managerial resources of the bank holding company, as well as those
of the bank to be acquired, and considers whether the acquisition is likely to
have anti-competitive effects or other adverse effects. A bank holding company
may not acquire any bank located outside of the state in which the operations of
the existing bank subsidiaries of the bank holding company are principally
conducted unless specifically authorized by applicable state law. No federal
approval is required, however, for a bank holding company already owning or
controlling 50% or more of the voting shares of a bank to acquire additional
shares of that bank.
Federal law also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. The Federal Reserve is authorized to approve the ownership
of shares by a bank holding company in any company, the activities of which the
Federal Reserve has determined to be so closely related to banking or to
managing or controlling banks as to be a proper incident thereto. In making such
determinations, the Federal Reserve is required to weigh
66
<PAGE>
expected benefits to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Federal Reserve has determined that certain activities are closely
related to banking. These activities include those of operating a mortgage
company, a finance company, a credit card company, a factoring company, a trust
company or a savings association; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; leasing personal property on a full-payout (and, to a limited
extent, less than full-payout), non-operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting of life insurance not related to credit
transactions, are not proper activities for banks.
Regulatory Capital Requirements. The Federal Reserve has adopted
capital adequacy guidelines pursuant to which it assesses the adequacy of
capital in examining and supervising a bank holding company and in analyzing
applications. The Federal Reserve capital adequacy guidelines are similar to
those imposed on the Bank by the FDIC. See "Regulation--Bank--Regulatory Capital
Requirements."
Commitments to Affiliated Depository Institutions. Under Federal
Reserve policy, the Company will be expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy. The enforceability and
precise scope of this policy is unclear. However, should the Bank require the
support of additional capital resources, it is expected that the Company will be
required to respond with any such resources available to it.
Restrictions Applicable to New Jersey-Chartered Mutual Holding
Companies. The Department is authorized to approve the reorganization of a state
chartered savings bank to a mutual savings bank holding company. The general
powers of a mutual savings bank holding company are similar to the authorized
powers of New Jersey corporations, subject to the interpretation of the
Department.
TAXATION
Federal
Savings institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), in the same general manner as
other corporations. Prior to certain changes to the Code in 1996, thrift
institutions enjoyed a tax advantage over banks with respect to determining
additions to its bad debt reserves. All thrift institutions, prior to 1996, were
generally allowed a deduction for additions to a reserve for bad debts. In
contrast, only small banks (the average adjusted bases of all assets of such
institution equals $500 million or less) were allowed a similar deduction for
additions to their bad debt reserves. In addition, while small banks were only
allowed to use the experience method in determining their annual addition to a
bad debt reserve, all thrift institutions generally enjoyed a choice between (i)
the percentage of taxable income method and, (ii) the experience method, for
determining the annual addition to their bad debt reserve. This choice of
methods provided a distinct advantage to thrift institutions that continually
experienced little or no losses from bad debts, over small banks in a similar
situation, because thrift institutions in comparison to small banks were
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<PAGE>
generally allowed a greater tax deduction by using the percentage of taxable
income method (rather than the experience method) to determine their deductible
addition to their bad debt reserves.
The Code was revised in August 1996 to equalize the taxation of thrift
institutions and banks, effective for taxable years beginning after 1995. All
thrift institutions are now subject to the same provisions as banks with respect
to deductions for bad debt. Now only thrift institutions that are treated as
small banks under the Code may continue to account for bad debts under the
reserve method; however such institutions may only use the experience method for
determining additions to their bad debt reserve. Thrift institutions that are
not treated as small banks may no longer use the reserve method to account for
their bad debts but must now use the specific charge-off method.
The revisions to the Code in 1996 also provided that all thrift
institutions must generally recapture any "applicable excess reserves" into
their taxable income, over a six year period beginning in 1996; however, such
recapture may be delayed up to two years if a thrift institution meets a
residential-lending test. Generally, a thrift institution's applicable excess
reserves equals the excess of (i) the balance of its bad debt reserves as of the
close of its taxable year beginning before January 1, 1996, over (ii) the
balance of such reserves as of the close of its last taxable year beginning
before January 1, 1988 ("pre- 1988 reserves"). The Bank will be required to
recapture $1.2 million of applicable excess reserve.
In addition, all thrift institutions must continue to keep track of
their pre-1988 reserves because this amount remains subject to recapture in the
future under the Code. A thrift institution such as the Bank, would generally be
required to recapture into its taxable income its pre-1988 reserves in the case
of certain excess distributions to, and redemptions of the Bank's shareholders.
For taxable years after 1995, the Bank will continue to account for its bad
debts under the reserve method. The balance of the Bank's pre-1988 reserves
equaled $3.1 million.
The Company may generally exclude from its income 100% of dividends
received from the Bank as a member of the same affiliated group of corporations.
A 70% dividends received deduction applies with respect to dividends received
from corporations that are not members of such affiliated group.
The Bank's federal income tax returns for the last five tax years have
not been audited by the IRS.
State
The Bank files New Jersey income tax returns. Generally, the income of
savings institutions in New Jersey, which is calculated based on federal taxable
income, subject to certain adjustments, is subject to New Jersey tax. The Bank
is not currently under audit with respect to its New Jersey income tax returns
and the Bank's state tax returns have not been audited for the past five years.
The Company will be required to file a New Jersey income tax return and
will generally be subject to a state income tax rate that is currently higher
than income tax rates for savings institutions in New Jersey. However, if the
Company meets certain requirements, it may be eligible to elect to be taxed as a
New Jersey Investment Company, which would allow the Company to be taxed at a
rate that is currently lower than income tax rates for savings institutions in
New Jersey.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
Our board of directors is composed of nine members each of whom serves
for a term of three years, with approximately one-third of the directors elected
each year. Our proposed certificate of incorporation and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Our officers are elected annually by our board and serve at the board's
discretion. These same provisions apply to the Bank and mutual holding company,
which will have the same directors and executive officers that we have.
The following table sets forth information with respect to our
directors and executive officers, all of whom will continue to serve in the same
capacities after the reorganization.
<TABLE>
<CAPTION>
Age at Current
December 31, Director Term
Directors 1997 Position Since Expires(1)
- ------------------------------- ------------------- -------------------------------- ------------- ----------
<S> <C> <C> <C> <C>
Susan E. Naruk 44 Director, President and 1991 2000
Chief Executive Officer
Nelson Fiordalisi 50 Director, Executive Vice 1987 1999
President and Chief
Operating Officer
Michael W. Azzara 50 Director 1989 2000
Jerome Goodman 61 Director 1989 2000
Bernard J. Hoogland 54 Director 1992 1999
John Kandravy 62 Director 1995 1999
Robert S. Monteith 73 Director 1981 2001
John J. Repetto 73 Director 1975 2001
Paul W. Thornwall 57 Director 1995 2001
John Scognamiglio 42 Senior Vice President and N/A N/A
Chief Financial Officer
Jean M. Miller 51 Senior Vice President and N/A N/A
Chief Lending Officer
</TABLE>
- -------------------
(1) The terms for directors of the Company and the MHC are the same as
those of Ridgewood Savings Bank of New Jersey.
The business experience for the past five years of each of the
directors and executive officers is as follows:
Michael W. Azzara has been a member of the Board since 1989. Mr. Azzara
is the President of The Valley Hospital and the Valley Health System, Inc., both
in Ridgewood, New Jersey. He is also a member of the board of directors of
Princeton Insurance Co. and Health Care Insurance Co.
69
<PAGE>
Nelson Fiordalisi has been a member of the Board since 1987 and
employed by the Bank since 1986. Mr. Fiordalisi is the Executive Vice President
and Chief Operating Officer of the Bank. He is a trustee, past president and
co-founder of the Ho-Ho-Kus Education Foundation, a member of the Ho- Ho-Kus
300th Anniversary Committee, the Ho-Ho-Kus Chamber of Commerce, and the
Financial Managers Society.
Jerome Goodman has been a member of the Board since 1989. Mr. Goodman
is a Certified Public Accountant and a Partner of Flackman, Goodman & Potter PA
in Ridgewood, New Jersey.
Bernard J. Hoogland has been a member of the Board since 1992. Mr.
Hoogland is the Vice President of Ridgewood Associates, a securities firm in
Paramus, New Jersey.
John Kandravy has been a member of the Board since 1995. Mr. Kandravy
is an attorney and a Partner of Shanley & Fisher, P.C. in Morristown, New
Jersey. He is a trustee and a Vice Chairman of The Valley Hospital, a trustee of
Valley Health System, Inc., and The Forum School, trustee and the President of
The Forum School Foundation, and a trustee of Children's Aid and Family
Services, Inc.
Robert S. Monteith has been a member of the Board of Directors since
1981. Mr. Monteith is the past President of the Bank and is now retired. He is a
member of the board of associates of Sacred Heart Hospital, Allentown,
Pennsylvania.
Susan E. Naruk has been a member of the Board of Directors since 1991.
Ms. Naruk has been the President and Chief Executive Officer of the Bank since
1991. Previously, she was a senior vice president with Warwick Savings Bank. Ms.
Naruk began her banking career as a lending officer in the national banking
group of Citibank, N.A. and served as a vice president and team leader in
corporate banking for Chase Manhattan Bank, N.A. She is a member of the board of
directors of the YWCA of Bergen County, a trustee and the First Vice President
of the Western Bergen Mental Health Care, a trustee of the Bankers Cooperative
Group and a member of the board of governors of the New Jersey League of
Community and Savings Bankers. She is a past President of the Northern New
Jersey Savings League.
John J. Repetto has been a member of the Board of Directors since 1975.
Mr. Repetto is the Real Estate Manager for Marron Enterprises in Ho-Ho-Kus, New
Jersey.
Paul W. Thornwall has been a member of the Board of Directors since
1995. Mr. Thornwall is an attorney and owner of the Thornwall Law Firm in Glen
Rock, New Jersey. He is the past president of the Ridgewood Rotary Club.
John Scognamiglio is a Senior Vice President and the Chief Financial
Officer of the Bank, where he has been employed since 1992. Mr. Scognamiglio is
a member of St. Mary's Parish Council and the Financial Managers Society.
Jean M. Miller is a Senior Vice President and the Chief Lending Officer
of the Bank, where she has been employed since 1992. Ms. Miller is a member of
the International Credit Council and the Ridgewood Chamber of Commerce.
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<PAGE>
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the
board and through activities of its committees. During the year ended December
31, 1997, the board of directors held 12 regular meetings. No director attended
fewer than 75% of the total meetings of the board of directors and committees on
which such director served during the year ended December 31, 1997. The Bank has
standing Nominating, Audit and Personnel (Compensation) Committees, as well as
other standing committees such as the Strategic Planning, Year 2000 Compliance,
Executive, and Asset Liability Committees.
The Nominating Committee of the Bank consists of Directors Monteith,
Naruk, Repetto and Thornwall. The Committee presents its recommendations of
nominees for Directors to the full Board for nomination. The Committee met once
during the year ended December 31, 1997.
The Audit Committee of the Bank consists of Directors Goodman, Monteith
and Thornwall. The Audit Committee meets at least semi-annually and meets with
the Bank's independent certified public accountants to review the results of the
annual audit and other related matters. The Audit Committee met four times
during the year ended December 31, 1997
The Personnel (Compensation) Committee of the Bank consists of
Directors Azzara, Hoogland, Naruk and Thornwall. The Committee meets at least
annually to review the performance and remuneration of the officers and
employees of the Bank. The Committee met three times during the year ended
December 31, 1997.
Director Compensation
During 1997 each non-management director was paid a fee of $1,250 for
each Board meeting attended and each Director Emeritus was paid $500 per Board
meeting attended. At the discretion of the Board of Directors, the position of
Director Emeritus is filled by former directors who have retired and no longer
serve as a director because they are no longer willing or able to attend
meetings on the basis expected by the members of the Board of Directors of the
Bank. A Director Emeritus is not engaged to work on specific projects but, more
generally, to provide advice due to their extensive experience. In 1998, the
non-management director fees were increased to $1,350 for each Board meeting
attended. The fees for a Director Emeritus were not increased. Each
non-management director member of the Loan Review Committee and the Property
Inspection Committee was paid $50 per respective Committee meeting attended.
Directors are not paid a fee for attending any other committee meetings nor will
they be paid a fee for attending the Company Board meetings. The total fees paid
to the directors for the year ended December 31, 1997 were approximately
$182,000 consisting of $141,000 in Board fees, $33,000 in Life/Health Insurance
(including $6,000 for former President Schletzer) and $8,000 to the Loan
Committee.
Directors Consultant and Retirement Plan ("DRP"). The DRP provides
retirement benefits to directors following retirement after age 60 and
completion of at least 10 years of service. If a director agrees to become a
consulting director to our board upon retirement, he or she will receive a
monthly payment equal to between 50% and 80% of the Board fee in effect at the
date of retirement for a period of 120 months; such level of benefits is based
upon years of prior service as of the retirement date (i.e., 50% with 10-15
years, 60% with up to 20 years, 70% with up to 25 years and 80% with more than
25
71
<PAGE>
years of service). Benefits under our DRP will begin upon a director's
retirement. In the event there is a change in control, all directors will be
presumed to have not less than 10 years of service and each director will
receive a lump sum payment equal to the present value of future benefits
payable.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer, chief
operating officer and chief financial officer for the three years ended December
31, 1997.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------
Other Annual All other
Compensation Compensation
Name and Principal Position Year Salary Bonus (1) (2)
- --------------------------- ---- ------ ----- ----- ----
<S> <C> <C> <C> <C> <C>
Susan E. Naruk, President 1997 $155,000 $25,000 $ -- $3,661
and Chief Executive Officer 1996 125,000 20,000 -- 2,946
1995 115,000 16,000 -- 2,626
Nelson Fiordalisi, Executive 1997 108,450 15,000 -- 2,501
Vice President and Chief 1996 93,000 12,000 -- 2,116
Operating Officer 1995 90,000 11,000 -- 2,028
John Scognamiglio, Senior 1997 88,000 13,000 -- 2,029
Vice President and Chief 1996 82,700 11,000 -- 1,883
Financial Officer 1995 80,000 9,100 -- 1,784
</TABLE>
- --------------------
(1) The Bank provides an automobile and group term life for certain
officers. The value of these benefits do not exceed the lesser of
$50,000 or 10% of total salary and bonus.
(2) Consists of company contributions and matching contributions under the
401(k) plan. Additionally, the individual participates in a defined
benefit pension plan whereby a benefit of up to 33-1/3% of final
average earnings is payable at age 65 with 10 or more years of service.
Also, each individual participates in the SERP Plan. See
"--Supplemental Executive Retirement Plan".
Employment Agreements. We have entered into an employment agreement
with our President, Ms. Susan E. Naruk. Ms. Naruk's base salary under the
employment agreement is $157,500. The employment agreement has a term of three
years. The agreement is terminable by us for "just cause" as defined in the
agreement. If we terminate Ms. Naruk without just cause, Ms. Naruk will be
entitled to a continuation of her salary from the date of termination through
the remaining term of the agreement. The employment agreement contains a
provision stating that in the event of the termination of employment in
connection with any change in control of us, Ms. Naruk will be paid a lump sum
amount equal to 2.999 times her five year average annual taxable cash
compensation. If a payment had been made under the agreement as of December 31,
1997, the payment would have equaled approximately $418,000. The aggregate
payment that would have been made to Ms. Naruk would be an expense to us,
thereby reducing our net income and our capital by that amount. The agreement
may be renewed annually by our board of directors upon a determination of
satisfactory performance within the board's
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<PAGE>
sole discretion. If Ms. Naruk shall become disabled during the term of the
agreement, she shall continue to receive payment of 100% of the base salary for
a period of 6 months and 50% of such base salary for an additional six months.
Such payments shall be reduced by any other benefit payments made under other
disability programs in effect for our employees. Similar agreements have been
implemented for our other senior officers including Mr. Nelson Fiordalisi,
Executive Vice President and Mr. John Scognamiglio, Senior Vice President.
Payment to each such individual upon a change in control is limited to 200% of
the average annual compensation over the prior 36 month taxable compensation
period. As of December 31, 1997, payment to Mr. Fiordalisi and to Mr.
Scognamiglio would have been $221,000 and $188,000, respectively, had there been
a change in control as of that date.
Supplemental Executive Retirement Plan. We have implemented a
supplemental executive retirement plan ("SERP") for the benefit of our senior
officers, including Susan E. Naruk, Nelson Fiordalisi and John Scognamiglio. The
SERP provides that the participant may receive additional retirement income in
addition to benefits payable under the Bank's defined benefit pension plan.
Benefits under the SERP are calculated as 60% of final average earnings upon
retirement at age 65, reduced by benefits payable under the Bank's defined
benefit pension plan and Social Security benefits. Benefits payable prior to age
65 will be reduced by 1% per month of early retirement. Upon a termination of
employment following a change in control, the participant will be presumed to
have attained not less than the minimum retirement age under the SERP. Payments
under the SERP will be accrued for financial reporting purposes during the
period of employment of the participant. At June 30, 1998, approximately $12,000
has been accrued and recognized as an expense. The SERP shall be unfunded. All
benefits payable under the SERP will be paid from our current assets. There are
no tax consequences to either the participant or us related to the SERP prior to
payment of benefits. Upon receipt of payment of benefits, the participant will
recognize taxable ordinary income in the amount of such payments received and we
will be entitled to recognize a tax-deductible compensation expense at that
time.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employees
of ours, to be implemented upon the completion of the reorganization.
Participating employees are employees who have completed one year of service
with us or our subsidiary and have attained the age of 21. An application for a
letter of determination as to the tax-qualified status of the ESOP will be
submitted to the IRS. Although no assurances can be given, we expect that the
ESOP will receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash. In
accordance with the plan, the ESOP may borrow funds with which to acquire up to
8% of the common stock to be issued in the offering. The ESOP intends to borrow
funds from the Company. The loan is expected to be for a term of ten years at an
annual interest rate equal to the prime rate as published in The Wall Street
Journal. Presently it is anticipated that the ESOP will purchase up to 8% of the
common stock to be issued in the offering (i.e., 112,800 shares, based on the
midpoint of the offering range). The loan will be secured by the shares
purchased and earnings of ESOP assets. Shares purchased with such loan proceeds
will be held in a suspense account for allocation among participants as the loan
is repaid. It is anticipated that all such contributions will be tax-deductible.
This loan is expected to be fully repaid in approximately 10 years.
The ESOP may purchase some or all of the shares covered by its
subscription after the offering in the open market.
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<PAGE>
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year, or have
terminated employment following death, disability or retirement, in order to
receive an allocation. Participant benefits become vested in plan allocations
following five years of service. Employment prior to the adoption of the ESOP
shall be credited for the purposes of vesting. Our contributions to the ESOP are
discretionary and may cause a reduction in other forms of compensation.
Therefore, benefits payable under the ESOP cannot be estimated.
The board of directors has appointed the non-employee directors to the
ESOP Committee to administer the ESOP and to serve as the initial ESOP
Directors. The ESOP Directors must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Unallocated
shares and allocated shares for which no timely direction is received will be
voted by the ESOP Directors as directed by the board of directors or the ESOP
Committee, subject to the Directors' fiduciary duties.
401(k) Savings Plan. The Bank sponsors a tax-qualified defined
contribution savings plan ("401(k) Plan") for the benefit of its employees.
Employees become eligible to participate under the 401(k) Plan after reaching
age 21 and completing one year of service. Under the 401(k) Plan, employees may
voluntarily elect to defer between 1% and 18% of compensation, not to exceed
applicable limits under the Code (i.e., $9,500 in calendar 1997). The Bank
matches 50% of the first 4% of employee contributions. Employee and matching
contributions immediately vest. The Bank intends to amend the 401(k) Plan to
permit voluntary investments of plan assets by participants in the common stock
in, and following, the offering.
Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Normal retirement age under the 401(k) Plan is
65. Additionally, funds under the 401(k) Plan may be distributed upon
application to the plan administrator upon severe financial hardship in
accordance with uniform guidelines which comply with those specified by the
Code. It is intended that the 401(k) Plan operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code.
Costs associated with the 401(k) Plan were approximately $9,000 and
$20,000, respectively, for the six months ended June 30, 1998 and the year ended
December 31, 1997. Contributions to the 401(k) Plan by the Bank for employees
may be reduced in the future or eliminated as a result of contributions made to
the Employee Stock Ownership Plan. See "--Employee Stock Ownership Plan."
Potential Stock Benefit Plans
Stock Option Plans. Following the offering, we intend to adopt a stock
option plan for directors and key employees. No plan will be adopted within one
year after the reorganization. Any plan adopted will be subject to stockholder
approval and applicable laws. Any plan adopted after the reorganization will
require the approval of a majority of our stockholders, other than the mutual
holding company. Up to 10% of the shares of common stock sold in the offering
will be reserved for issuance under the stock option plan. No determinations
have been made as to the specific terms of, or awards under, the stock option
plan.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers, key employees and
directors with a proprietary interest in the Company as
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<PAGE>
an incentive to contribute to our success and reward officers and key employees
for outstanding performance. Although the terms of the stock option plan have
not yet been determined, it is expected that the stock option plan will provide
for the grant of: (i) options to purchase the common stock intended to qualify
as incentive stock options under the Code (incentive stock options); and (ii)
options that do not so qualify (non-statutory stock options). Incentive stock
options differ from non-statutory stock options in that incentive stock options
can only be granted to employees and may provide more favorable long-term
capital gains tax treatment to the employee. The exercise of an incentive stock
option does not result in a taxable event to the employee. Non-statutory stock
options are available for others, such as non-employee-directors, and result in
taxable ordinary income to the director upon exercise of the option. For options
we grant, we receive a tax deduction equal to the taxable income recognized upon
exercise of a non-statutory stock option but we receive no tax deduction upon
the exercise of an incentive stock option if the option holder meets the
requirements to treat what would otherwise be taxable income as capital gain.
Any stock option plans would be in effect for up to ten years from the earlier
of adoption by the board of directors or approval by the stockholders.
Stock Programs. Following the offering, we also intend to establish
stock programs to provide our officers and outside directors with a proprietary
interest in the Company. The stock programs are expected to provide for the
award (at no cost to the recipient) of common stock, subject to vesting
restrictions, to eligible officers, employees and directors. The adoption of a
stock program will not be adopted within one year after the reorganization and
will be subject to appropriate stockholder approval and applicable laws. Any
plan adopted after the reorganization would require the approval of a majority
of our stockholders other than the mutual holding company.
We expect to contribute funds to stock programs to acquire, in the
aggregate, up to 4% of the shares of common stock sold in the offering. Shares
used to fund the stock programs may be acquired through open market purchases or
from authorized but unissued shares. No determinations have been made as to the
specific terms of stock programs.
Once the offering is completed, the ownership interest of existing
stockholders will be diluted if shares are issued out of authorized but unissued
shares for either the stock programs or stock option plans. In this event, of
the amount owned by minority stockholders, the dilution resulting from a 4%
stock program would be 3.8% and the dilution resulting from a 10% stock option
plan would be 9.1%.
Transactions with Management and Others
No directors, executive officers or immediate family members of such
individuals were engaged in transactions with the Bank or any subsidiary
involving more than $60,000 (other than through a loan) during the year ended
December 31, 1997. Furthermore, the Bank had no "interlocking" relationships in
which (i) any executive officer is a member of the board of directors or of
another entity, one of whose executive officers are a member of the Bank's board
of directors, or where (ii) any executive officer is a member of the
compensation committee of another entity, one of whose executive officers is a
member of the Bank's board of directors.
The Bank has followed the policy of offering residential mortgage loans
for the financing of personal residences, share loans, and consumer loans to its
officers, directors and employees. Loans are made in the ordinary course of
business and also made on substantially the same terms and conditions, including
interest rate and collateral, as those of comparable transactions prevailing at
the time with other persons, and do not include more than the normal risk of
collectibility or present other unfavorable features.
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<PAGE>
As of June 30, 1998, the aggregate principal balance of loans
outstanding to all directors, executive officers and immediate family members of
such individuals was $180,000.
Proposed Stock Purchases by Management
The following table sets forth for each of the directors and executive
officers of the Bank and for all such directors and executive officers as a
group (including in each case all associates of such persons) the number of
shares of common stock which such person or group intends to purchase, assuming
the sale of 1,410,000 shares of common stock at $7.00 per share. The table
includes purchases to be made through the Bank's 401(k) Savings Plan. The table
does not include purchases by the ESOP (8% of the common stock sold in the
offering or 112,800 shares), and does not take into account any stock benefit
plans adopted no sooner than one year following the reorganization. See
"--Executive Compensation-- Potential Stock Benefit Plans."
<TABLE>
<CAPTION>
Percentage of
Total Number Total Dollar 1,410,000 Total
of Shares Amount of Shares Shares Sold in
to be Purchased to be Purchased the Offering(1)
--------------- --------------- ---------------
<S> <C> <C> <C>
Susan E. Naruk 28,571 $ 200,000 2.0
Nelson Fiordalisi 28,571 200,000 2.0
Michael W. Azzara 9,285 65,000 *
Jerome Goodman 28,571 200,000 2.0
Bernard J. Hoogland 18,000 126,000 1.3
John Kandravy 3,571 25,000 *
Robert S. Monteith 1,000 7,000 *
John J. Repetto 1,428 10,000 *
Paul W. Thornwall 14,285 100,000 1.0
John Scognamiglio 28,571 200,000 2.0
Jean M. Miller 7,142 50,000 *
-------- ---------- ----
Total 168,995 $1,183,000 12.0
</TABLE>
- ----------------
* Less than 1.0%
(1) In the event the stockholders of the Company approve the stock benefit
plans as discussed in this prospectus (stock programs (4% of the common
stock sold in the offering) and the stock option plans (10% of the common
stock sold in the offering)), and all of the common stock is awarded
pursuant to the stock benefit plans and all options are exercised
(increasing the number of outstanding shares), directors and executive
officers would own 366,395 or 23.6% of the shares of common stock owned by
persons other than the mutual holding company (11.7% of the total shares
outstanding, including those held by the mutual holding company). If fewer
than 1,410,000 shares were publicly sold, these percentage ownership
estimates would increase. See "--Executive Compensation--Potential Stock
Benefit Plans."
THE REORGANIZATION
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED THE PLAN AUTHORIZING THE
REORGANIZATION, SUBJECT TO THE APPROVAL OF THE DEPARTMENT, THE NON-OBJECTION OF
THE FDIC AND RATIFICATION OF THE
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<PAGE>
DEPOSITORS OF THE BANK AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS.
DEPARTMENT APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY THE DEPARTMENT.
General
On June 22, 1998, the Board of Directors of the Bank adopted the plan
of reorganization and stock issuance which was subsequently amended, pursuant to
which the Bank proposes to reorganize from a New Jersey chartered, mutual
savings bank to a New Jersey chartered stock savings bank. The Bank will be a
wholly owned subsidiary of the Company, the majority of whose shares are to be
owned by the MHC. Concurrently with the reorganization, the Company will sell a
minority percentage of its common stock in the offering to the Bank's depositors
and members of the general public. The Board of Directors unanimously adopted
the plan after consideration of the advantages and the disadvantages of the
reorganization and offering and alternative transactions, including a full
conversion from the mutual to stock form of organization. Following the receipt
of all required regulatory approvals, the approval of the plan by the Bank's and
the satisfaction of all other conditions precedent to the reorganization, the
Bank will effect the reorganization (i) by exchanging its New Jersey mutual
savings bank charter for a New Jersey stock savings bank charter and becoming a
wholly owned subsidiary of the Company and the Company then becoming a
majority-owned subsidiary of the MHC, and having the depositors of the Bank
receive such liquidation interests in the MHC as they have in the Bank before
the reorganization; or (ii) in any other manner consistent with the plan or
reorganization and applicable regulations. See "-- Description of the
Reorganization." On the effective date, the Company will commence business as
Ridgewood Financial, Inc., a bank holding company, and the Bank will commence
business as Ridgewood Savings Bank of New Jersey, a New Jersey-chartered stock
savings bank, and the MHC will commence business as Ridgewood Financial, MHC,
majority owner of the common stock of the Company. The reorganization will be
accomplished in accordance with the procedures set forth in the plan, the
requirements of applicable laws and regulations, and the policies of the
Department.
For additional information concerning the offering, see "The Offering."
Purposes of the Reorganization
The Board of Directors of the Bank has determined that the
reorganization is in the best interest of the Bank and has several business
purposes for the reorganization.
The reorganization will structure the Bank in the stock form, which is
the form used by commercial banks, most major business corporations and an
increasing number of savings institutions. Formation of the Bank as a capital
stock savings bank subsidiary of the Company will permit the Company to issue
common stock, which is a source of capital not available to mutual savings banks
or savings and loan associations. At the same time, the Bank's mutual form of
ownership will be preserved in the MHC, and the MHC, as a mutual corporation,
will control at least a majority of the common stock of the Company so long as
the MHC remains in existence as a mutual institution. The reorganization will
enable the Bank to achieve certain benefits of a stock company without a loss of
control that sometimes follows standard conversions from mutual to stock form.
Sales of locally based, independent savings institutions to larger, regional
financial institutions following such mutual to stock conversions can result in
closed branches, fewer choices for consumers, employee layoffs and the loss of
community support and involvement by a financial institution. The Bank is
committed to being an independent, community-oriented institution, and the Board
of Directors believes that the mutual holding company structure is best suited
for this purpose. The mutual holding company structure also will give the
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Company flexibility to issue its common stock at various times and in varying
amounts as market conditions permit, rather than in a single stock offering. The
MHC may convert from mutual to stock form of organization in the future. The
holding company form of organization is expected to provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with other
financial institutions, as well as other companies. Although the Bank has no
current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the reorganization and
offering, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise.
The Company is offering for sale up to 47% of the common stock in an
offering at an aggregate price based upon an independent appraisal. The proceeds
from the sale of common stock of the Company will provide the Bank with new
equity capital, which will support future deposit growth and expanded
operations. The ability of the Company to sell common stock also will enable the
Company and the Bank to increase capital in response to any future regulatory
capital requirement levels. While the Bank currently meets or exceeds all
regulatory capital requirements, the sale of common stock in connection with the
reorganization, coupled with the accumulation of any earnings (net of dividends)
from year to year, represents a means for the orderly preservation and expansion
of the Bank's capital base, and allows flexibility to respond to sudden and
unanticipated capital needs. After the reorganization, the Company may
repurchase common stock. The investment of the net proceeds of the offering also
will provide additional income to enhance further the Bank's future capital
position.
The ability of the Company to issue common stock also will enable it in
the future to establish stock benefit plans for management and employees of the
Company and the Bank, including incentive stock option plans, stock award plans,
and employee stock ownership plans.
The formation of the Company also will allow the Company to borrow
funds, on a secured and unsecured basis, and to issue debt to the public or in a
private placement. The proceeds of any such borrowings or debt issuance may be
contributed to the Bank as core capital for regulatory capital purposes. The
Company has not made a determination to borrow funds or issue debt at the
present time.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure, which include:
the inability of the Company to sell stock representing more than 49.99% of its
estimated pro forma market value so long as the MHC remains in existence; the
more limited liquidity of the common stock, as compared to a full conversion;
and the inability of stockholders other than the MHC to obtain a majority
ownership of the Company which may result in the perpetuation of the existing
management and Board of Directors of the Company and the Bank. The MHC will be
able to elect all members of the Board of Directors of the Company, and will be
able to control the outcome of all matters presented to the stockholders of the
Company for resolution by vote, except for matters which by regulation must be
approved by a majority of the shares owned by persons other than the MHC (the
"minority stockholders"), including certain matters relating to stock
compensation plans and certain votes regarding a conversion to stock form by the
MHC. No assurance can be given that the Company will not take action adverse to
the interests of the minority stockholders. For example, the Company can revise
the dividend policy, prevent the sale of control of the Company or defeat a
candidate for the Board of Directors of the Company or other proposal put forth
by the minority stockholders.
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Description of the Reorganization
Following receipt of all required regulatory approvals and ratification
of the plan of reorganization by the voting depositors, the reorganization will
be effected by a series of mergers or in any manner approved by the Department
that is consistent with the purposes of the plan of reorganization and
applicable laws and regulations. The Bank's intention is to complete the
reorganization using a series of mergers, although it may elect to use any
method consistent with applicable regulations, subject to Department approval.
For a detailed description of the merger structure, see "--Federal and
State Tax Consequences of the Reorganization." Upon consummation of the
reorganization, the legal existence of the Bank will not terminate, the
converted stock bank will be a continuation of the Bank and all property of the
Bank, including its right, title, and interest in and to all property of any
kind and nature, interest and asset of every conceivable value or benefit then
existing or pertaining to the Bank, or which would inure to the Bank immediately
by operation of law and without the necessity of any conveyance or transfer and
without any further act or deed, will continue to be owned by the Bank as the
survivor of the merger. The Bank will possess, hold and enjoy the same in its
right and fully and to the same extent as the same was possessed, held and
enjoyed by the Bank. The Bank will continue to have, succeed to, and be
responsible for all the rights, liabilities, and obligations of the Bank and
will maintain its headquarters operations at the Bank's present location.
The foregoing description of the reorganization is qualified in its
entirety by reference to the plan and the charter and bylaws of the Bank, the
MHC and the Company to be effective upon consummation of the reorganization.
Effects of the Reorganization
General. The reorganization will not have any effect on the Bank's
present business of accepting deposits and investing its funds in loans and
other investments permitted by law. The reorganization will not result in any
change in the existing services provided to depositors and borrowers, or in
existing offices, management, and staff. Upon completion of the reorganization,
the Bank will continue to be subject to regulation, supervision, and examination
by the Department and the FDIC.
Deposits and Loans. Each holder of a deposit account in the Bank at the
time of the reorganization will continue as an account holder in the Bank after
the reorganization, and the reorganization will not affect the deposit balance,
interest rate, and other terms of such accounts. Each such account will be
insured by the FDIC to the same extent as before the reorganization. Depositors
will continue to hold their existing certificates, passbooks, checkbooks, and
other evidence of their accounts. The reorganization will not affect the loans
of any borrower from the Bank. The amount, interest rate, maturity, security
for, and obligations under each loan will remain contractually fixed as they
existed prior to the reorganization. See "-- --Voting Rights" and "--
- --Liquidation Rights" below for a discussion of the effects of the
reorganization on the voting and liquidation rights of the depositors and
borrowers of the Bank.
Voting Rights. As a New Jersey-chartered mutual savings bank, the Bank
has no authority to issue capital stock and thus, no stockholders. Control of
the Bank in its mutual form is vested in the Board of Directors of the Bank.
Although they have no statutory right, certain qualifying holders of the Bank's
savings, demand, or other authorized accounts will be given an opportunity to
vote on the
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reorganization. In the consideration of the reorganization, each holder of
qualifying account is permitted to cast one vote for each $100, or fraction
thereof, of the withdrawal value of the voting depositor's account.
After the reorganization, the affairs of the Bank will be under the
direction of the Board of Directors of the Company and the Bank and all voting
rights as to the Bank will be vested exclusively in the holders of the
outstanding voting capital stock of the Company, which initially will consist
exclusively of common stock. By virtue of its ownership of a majority of the
outstanding shares of common stock, the MHC will be able to elect all members of
the Board of Directors of the Company and generally will be able to control the
outcome of most matters presented to the stockholders of the Company for
resolution by vote, excluding certain matters where shares held by the MHC are
not counted.
The MHC will be controlled by its Board of Directors, which will
initially consist of the current directors of the Bank. Under the mutual form of
ownership, existing directors elect new directors, which can perpetuate existing
management and control of the MHC, the Company and the Bank. All depositors of
the Bank at the time of the reorganization will become members of the MHC as
long as they hold deposit accounts at the Bank.
Liquidation Rights. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, existing holders of deposit accounts of the
Bank would be entitled to share in a liquidating distribution after the payment
of claims of all creditors (including the claims of all account holders to the
withdrawal value of their accounts). Each account holder's pro rata share of
such liquidating distribution would be in the same proportion as the value of
his or her deposit accounts was to the total value of all deposit accounts in
the Bank at the time of liquidation.
Upon a complete liquidation of the Bank after the reorganization, the
Company, as holder of the Bank's common stock, would be entitled to any assets
remaining upon a liquidation or dissolution of the Bank. Each depositor would
not have a claim in the assets of the Bank. However, upon a complete liquidation
of the MHC after the reorganization, each depositor would have a claim up to the
pro rata value of his or her accounts, in the assets of the MHC remaining after
the claims of the creditors of the MHC are satisfied. Depositors who have
liquidation rights in the Bank immediately prior to the reorganization will
continue to have such rights in the MHC after the reorganization for so long as
they maintain deposit accounts in the Bank after the reorganization. These
liquidation rights are evidenced through a liquidation account that will be
established as a memorandum account, rather than as a formal reserve.
Upon a complete liquidation of the Company, each holder of shares of
the common stock would be entitled to receive a pro rata share of the Company's
assets, following payment of all debts, liabilities and claims of greater
priority of or against the Company.
Federal and State Tax Consequences of the Reorganization
The reorganization may be effected in any manner approved by the
Department that is consistent with the purposes of the plan and applicable law
regulations and policies. However, the Bank intends to consummate the
reorganization using a series of mergers as described below. This structure
enables the Bank to retain all of its historical tax attributes and produces
significant savings to the Bank because it simplifies regulatory approvals and
conditions associated with the completion of the reorganization.
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The merger structure will be accomplished as follows: (i) the Bank will
organize the MHC initially as an interim New Jersey stock savings bank as its
wholly owned subsidiary; (ii) the MHC will organize a capital stock corporation
under New Jersey law (i.e., the Company) as its wholly owned subsidiary that
will subsequently hold 100% of the Bank's common stock; (iii) the MHC will also
organize an interim New Jersey stock savings bank as its wholly owned subsidiary
("Interim"). The following transactions will then occur simultaneously: (iv) the
Bank will exchange its charter for a New Jersey stock savings bank charter (the
"Reorganization"); (v) the MHC (while in its stock form) will cancel its
outstanding stock and exchange its charter for a New Jersey mutual savings bank
holding company charter and thereby become the MHC; (vi) Interim will merge with
and into the Bank with the Bank being the surviving institution and (vii) the
initially issued stock of the Bank (which will be constructively received by
former Bank depositors when the Bank becomes the Bank pursuant to step (iv))
will be issued to the MHC in exchange for liquidation interests in the MHC which
will be held by the Bank's depositors. The MHC will then contribute 100% of the
stock of the Bank to the Company, its wholly owned subsidiary. The Company will
subsequently offer for sale up to 49.9% of its common stock pursuant to the
plan. As a result of these transactions, (a) the Bank will be a wholly owned
subsidiary of the Company; (b) the Company will be a majority-owned subsidiary
of the MHC; and (c) the former depositors of the Bank will hold liquidation
interests in the MHC.
Under this structure: (i) the reorganization is intended to be a
tax-free reorganization under Code section 368(a)(1)(F); and (ii) the exchange
of the shares of the Bank's initial common stock deemed constructively received
by the Bank's depositors for liquidation interests in the MHC (the "Exchange")
is intended to be a tax-free exchange under Code section 351.
Under the plan, consummation of the reorganization is conditioned upon,
among other things, the prior receipt by the Bank of either a private letter
ruling from the IRS and from the New Jersey taxing authorities or an opinion of
the Bank's counsel as to the federal and New Jersey income tax consequences of
the reorganization to the Bank (in both its mutual and stock form), the Company
and the Eligible Account Holders and Supplemental Account Holders. In Revenue
Procedure 96-3, 1996-1 I.R.B. 82, the IRS announced that it will not rule on
whether a transaction qualifies as a tax-free reorganization under Code section
368(a)(1)(F) or as a tax-free exchange of stock for stock in the formation of a
holding company under Code section 351, but that it will rule on significant
sub-issues that must be resolved to determine whether the transaction qualifies
under either of these Code sections.
The Bank has requested a private letter ruling from the IRS regarding
certain significant sub- issues associated with the reorganization. Based in
part upon this private letter ruling, Malizia, Spidi, Sloane & Fisch, P.C. will
issue its opinion regarding certain federal income tax consequences of the
reorganization. There is no assurance that a private letter ruling will be
obtained.
In the following discussion, "Mutual Bank" refers to the Bank before
the reorganization and "Stock Bank" refers to the Bank after the reorganization.
With regard to the reorganization, Malizia, Spidi, Sloane & Fisch, P.C.
intends to issue an opinion that: (1) the reorganization will constitute a
reorganization under Code section 368(a)(1)(F), and the Bank (in either its
status as Mutual Bank or Stock Bank) will recognize no gain or loss as a result
of the reorganization; (2) the basis of each asset of Mutual Bank received by
Stock Bank in the reorganization will be the same as Mutual Bank's basis for
such asset immediately prior to the reorganization; (3) the holding period of
each asset of Mutual Bank received by Stock Bank in the reorganization will
include the period during which such asset was held by Mutual Bank prior to the
reorganization; (4) for purposes of Code section 381(b), Stock Bank will be
treated as if there had been
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no reorganization and, accordingly, the taxable year of the Mutual Bank will not
end on the effective date of the reorganization and the tax attributes of Mutual
Bank (subject to application of Code sections 381, 382, and 384), including
Mutual Bank's bad debt reserves and earnings and profits, will be taken into
account by Stock Bank as if the reorganization had not occurred; (5) Mutual
Bank's qualifying depositors will recognize no gain or loss upon their
constructive receipt of shares of Stock Bank common stock solely in exchange for
their interest (i.e., liquidation rights) in Mutual Bank; and (6) no gain or
loss will be recognized by depositors of Mutual Bank upon the issuance to them
of deposits in Stock Bank in the same dollar amount as their deposits in the
Mutual Bank.
Unlike private rulings of the IRS, 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.
Malizia, Spidi, Sloane & Fisch, P.C. intends to opine, subject to the
limitations and qualifications in its opinion, that, for purposes of the New
Jersey corporate income tax, the reorganization will not become a taxable
transaction to the Bank (in either its status as Mutual Bank or Stock Bank), the
MHC, the Company, the stockholders of the Stock Bank or the depositors of the
Bank.
Accounting Consequences
The reorganization will be accounted for in a manner similar to a
pooling-of-interests under generally accepted accounting principles.
Accordingly, the carrying value of the Bank's assets, liabilities, and capital
will be unaffected by the reorganization and will be reflected in the Company's
and Bank's consolidated financial statements based on their historical amounts.
Conditions to the Reorganization
Consummation of the reorganization is subject to the receipt of all
requisite regulatory approvals, including various approvals or non-objections,
as the case may be, of the Department, FDIC and the Federal Reserve. The receipt
of such approvals or non-objections from the Department, FDIC and the Federal
Reserve does not constitute a recommendation or endorsement of the plan or
reorganization by the Department, the FDIC or the Federal Reserve. Consummation
of the reorganization also is subject to ratification of the plan by a majority
of the total votes of depositors at a special meeting called for the purpose of
approving the plan and to be held on December 21, 1998, as well as the receipt
of satisfactory rulings or opinions with respect to the tax consequences of the
reorganization, as discussed under "The Reorganization--Federal and State Tax
Consequences of the Reorganization".
Capital and Financial Resources of the MHC
The Company intends to capitalize the MHC with up to $200,000 in the
reorganization. Subsequent to the reorganization, the MHC's capital and
financial resources will initially be dependent primarily on earnings from the
investment of its initial capitalization and dividends from the Company. The
payment of dividends by the Company will be subject to declaration by the
Company's Board of Directors, which will take into account the Company's
financial condition, results of operations, tax considerations, industry
standards, economic conditions, regulatory restrictions which affect the payment
of dividends by the Company to the MHC and other factors.
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Additional financial resources also may be available to the MHC (and,
through contribution by the MHC, to the Company) through borrowings from an
unaffiliated lender or lenders. In connection with any such borrowings, the MHC
could grant a security interest in the assets of the MHC, including the common
stock held by the MHC. However, a mutual holding company generally may not
pledge the stock of a subsidiary savings association and may not be able to
pledge the Stock of the Company unless the proceeds of the loan secured by the
pledge are infused into the institution whose stock is pledged and the
Department is notified of such pledge within 10 days thereafter. Any borrowings
of the MHC would be serviced with available resources, which initially will
consist of dividends from the Company, subject to applicable regulatory and tax
considerations. The MHC does not have any plans to incur any indebtedness
following consummation of the reorganization.
Amendment or Termination of the Plan of Reorganization
If deemed necessary or desirable by the Board of Directors of the Bank,
the plan may be amended by a two-thirds vote of the Bank's Board of Directors,
with the concurrence of the Department and the FDIC, at any time prior to or
after submission of the plan to voting depositors of the Bank for ratification.
The plan may be terminated by the Board of Directors of the Bank at any time
prior to or after ratification by the voting depositors, by a two-thirds vote
with the concurrence of the Department.
Management of the MHC
After the reorganization, the MHC will operate under essentially the
same mutual organization structure as was previously applicable to the Bank.
Directors of the MHC will be classified into three classes as equal in size as
is possible, with one of such classes being elected on an annual basis for
three-year terms by the Board of Directors of the MHC. All current members of
the Board of Directors of the Bank will be the initial members of the Board of
Directors of the MHC. For information about these persons, whose terms as
directors of the MHC will be the same as their terms as directors of the Bank,
see "Management." The initial executive officers of the Company will be persons
who are executive officers of the Bank.
It is not anticipated that the directors and executive officers of the
MHC will receive separate compensation in their capacities as such until such
time as such persons devote significant time to the separate management of the
MHC's affairs, which is not expected to occur unless the MHC becomes actively
involved in other investments. The MHC, however, may determine that such
compensation is appropriate in the future.
THE OFFERING
General
Concurrently with the reorganization, we, the Company, are offering
shares of common stock to persons other than the MHC. We are offering between a
minimum of 1,198,500 shares and an anticipated maximum of 1,621,500 shares of
common stock in the offering (subject to adjustment to up to 1,864,725 shares in
the event our estimated pro forma market value has increased at the conclusion
of the offering), which will expire at 12:00 noon, New Jersey time, on December
18, 1998 unless extended. The shares of common stock that will be sold in the
offering will constitute 47% of the shares that will be outstanding after the
offering. The minimum purchase is 50 shares of common stock
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(minimum investment of $350). Our common stock is being offered at a fixed price
of $7.00 per share in the offering.
Subscription funds may be held by the Bank for up to 45 days after the
last day of the subscription offering in order to consummate the reorganization
and offering and thus, unless waived by the Bank, all orders will be irrevocable
until February 1, 1999. In addition, the reorganization and offering may not be
consummated until the Bank receives approval from the Department and notice of
non-objection from the FDIC. Approval by the Department and notice of
non-objection from the FDIC are not recommendations of the reorganization or
offering. Consummation of the reorganization and offering will be delayed, and
resolicitation will be required, in the event the Department does not issue a
letter of approval within 45 days after the last day of the subscription
offering, or in the event the Department requires a material change to the
offering prior to the issuance of its approval. In the event the reorganization
and offering are not consummated by February 1, 1999, subscribers will have the
right to modify or rescind their subscriptions and to have their subscription
funds returned with interest at the Bank's passbook rate and all withdrawal
authorizations will be canceled.
Because we are required to sell shares of common stock within a range,
a resolicitation could occur if we do not receive orders by the expiration date
of the offering for at least 1,198,500 shares or if more than 1,864,725 shares
of common stock must be sold in order to complete the offering. In either event,
we must receive federal and state authorization to proceed and all subscribers
will be provided with updated information concerning the offering. To the extent
we extend the expiration date of the offering (to the extent allowed by federal
and state regulators) subscribers will not have access to the funds they have
provided to us until the offering is completed, terminated or the expiration
date passes.
We may cancel the offering at any time, and orders for common stock
which have been submitted are subject to cancellation under such circumstances.
Conduct of the Offering
Subject to the limitations of the plan, shares of common stock are
being offered in descending order of priority in the subscription offering to:
(i) persons with a deposit account with the Bank of at least $50.00 on May 31,
1997 ("Eligible Account Holders"); (ii) the employee stock ownership plan (the
"ESOP"); (iii) persons with a deposit account with the Bank of at least $50.00
on September 30, 1998 ("Supplemental Eligible Account Holders"); and (iv)
depositors who are entitled to vote at the meeting to ratify the reorganization
(the "Voting Depositors"). To the extent that shares remain available and
subject to market conditions at or near the completion of the subscription
offering, we will conduct one or more of a community, public and syndicated
public offering.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." All such
determinations are in our sole discretion and may be based on whatever evidence
we choose to use in making any such determination.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of
reorganization to the following persons:
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Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase up to $200,000 of common stock
offered in the subscription offering; subject to the overall limitations
described under "--Limitations on Purchases of Common Stock." If there are
insufficient shares available to satisfy all subscriptions of Eligible Account
Holders, shares will be allocated to Eligible Account Holders 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 for which he subscribed. Thereafter, unallocated shares will be
allocated to remaining subscribing Eligible Account Holders (whose subscriptions
remain unfilled in the same proportion that each such subscriber's qualifying
deposit bears to the total amount of qualifying deposits of all subscribing
Eligible Account Holders, whose subscriptions remain unfilled. Subscription
rights received by executive officers and directors, based on their increased
deposits in the Bank in the one year preceding the eligibility record date will
be subordinated to the subscription rights of other eligible account holders. To
ensure proper allocation of stock, each Eligible Account Holder must list on his
order form all qualifying accounts in which he had an ownership interest as of
May 31, 1997 (the "Eligibility Record Date"). If there is an oversubscription,
fewer shares could be allocated if one or more accounts are omitted from the
order form; we and our agents are not responsible for a reduced allocation
because a depositor did not fully disclose all qualifying accounts.
Priority 2: The ESOP. The tax-qualified employee stock benefit plans
will be given the opportunity to purchase in the aggregate up to 10% of the
common stock issued in the subscription offering. It is expected that the ESOP
will purchase up to 8% of the common stock issued in the offering. In the event
of an oversubscription in the offering by Eligible Account Holders, the ESOP
may, in whole or in part, fill its order through open market purchases
subsequent to the closing of the offering.
See also "Risk Factors--Possible Negative Effect of ESOP."
Priority 3: Supplemental Eligible Account Holders. To the extent there
are shares remaining after satisfaction of subscriptions by Eligible Account
Holders and the ESOP, each Supplemental Eligible Account Holder shall have the
opportunity to purchase up to $200,000 of common stock offered in the
Subscription Offering, subject to the overall limitations described under
"--Limitations on Purchases of Common Stock." In the event Supplemental Eligible
Account Holders subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders and the ESOP, is in excess of the
total number of shares offered in the offering, the shares of common stock will
be allocated among subscribing Supplemental Eligible Account Holders first so as
to permit each subscribing Supplemental 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 for which he subscribed. Thereafter,
unallocated shares will be allocated to each subscribing Supplemental Eligible
account Holder whose subscription remains unfilled in the same proportion that
such subscriber's qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders, in each case
on September 30, 1998, whose subscriptions remain unfilled. To ensure proper
allocation of stock each Supplemental Eligible Account Holder must list on his
order form all deposit accounts in which he had an ownership interest as of
September 30, 1998 (the "Supplemental Eligibility Record Date"). If there is an
oversubscription, fewer shares could be allocated if one or more accounts are
omitted from the order form; we and our agents are not responsible for a reduced
allocation because a depositor did not fully disclose all qualifying accounts.
Priority 4: Voting Depositors. To the extent that there are shares
remaining after satisfaction of all subscriptions by the Eligible Account
Holders, the ESOP, and Supplemental Eligible Account Holders, each Voting
Depositor shall have the opportunity to purchase up to $200,000 of common stock
offered in the subscription offering, subject to the overall limitations
described under "--Limitations on Purchases of Common Stock." In the event
Voting Depositors subscribe for a number of shares which,
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when added to the shares subscribed for by Eligible Account Holders, the ESOP
and Supplemental Eligible Account Holders, is in excess of the total number of
shares offered in the offering, the subscriptions of Voting Depositors will be
allocated so as to permit each subscribing Voting Depositor, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
of common stock equal to the lesser of 100 shares or the number of shares for
which he has subscribed. for by Voting Depositors. Any shares remaining will be
allocated among the subscribing Voting Depositors whose subscriptions remain
unsatisfied on a 100 shares (or whatever lesser amount is available or have been
subscribed for) per order basis until all orders have been filled or the
remaining shares have been allocated.
State Securities Laws. We in our sole discretion, may make reasonable
efforts to comply with the securities laws of any state in the United States in
which Bank depositors reside, and will only offer and sell the common stock in
states in which the offers and sales comply with state securities laws. However,
no person will be offered or allowed to purchase any common stock under the plan
if he resides in a foreign country or in a state of the United States with
respect to which: (i) a small number of persons otherwise eligible to purchase
shares under the plan reside in such state or foreign country; or (ii) the offer
or sale of shares of common stock to such persons would require us or the Bank
or our employees to register, under the securities laws of such state or foreign
country, as a broker or dealer or to register or otherwise qualify its
securities for sale in such state or foreign country and such registration or
qualification would be impracticable for reasons of cost or otherwise.
Restrictions on Transfer of Subscription Rights and Shares. The plan
prohibits any person with subscription rights, including Eligible Account
Holders, Supplemental Eligible Account Holders, and Voting Depositors, 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 common 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 or her
account. Each person subscribing for shares will be required to certify that
such person is purchasing shares solely for his or her own account and that such
person has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of common stock prior to the completion of the
offering.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders we
know to involve the transfer of such rights.
Expiration Date. The subscription offering will expire at 12:00 noon,
New Jersey time, on December 18, 1998, unless it is extended, up to an
additional 45 days with the approval of the Department, if necessary, but
without additional notice to subscribers (the "expiration date"). Subscription
rights will become void if not exercised prior to the expiration date.
Community Offering
If less than the total number of shares of common stock to be offered
in the offering are subscribed for in the subscription offering, shares
remaining unsubscribed may be made available for purchase in the community
offering to certain members of the general public, which may subscribe together
with any associate or group of persons acting in concert for up to $200,000 of
common stock. In the community offering, if any, shares will be available for
purchase by the general public with
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preference given first to natural persons residing in Bergen County, New Jersey
and second, to natural persons residing in the State of New Jersey. We will
attempt to issue common stock in such a manner as to promote a wide distribution
of common stock.
If purchasers in the community offering (if any), whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among persons
submitting orders in the community offering in an equitable manner.
The community offering, if any, may commence simultaneously with,
during or subsequent to the completion of the subscription offering and if
commenced simultaneously with or during the subscription offering the community
offering may be limited to residents of Bergen County and/or New Jersey. The
community offering, if any, must be completed within 45 days after the
completion of the subscription offering unless otherwise extended by the
Department.
We, in our absolute discretion, reserve the right to reject any or all
orders in whole or in part which are received in the community offering, at the
time of receipt or as soon as practicable following the completion of the
community offering.
Public Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the subscription offering, we may offer
shares, to selected persons in a public offering on a best-efforts basis through
Ryan, Beck in such a manner as to promote a wide distribution of the common
stock. Any orders received in connection with the public offering, if any, will
receive a lower priority than orders received in the subscription offering.
Common stock sold in the public offering will be sold at the same price as all
other shares in the subscription offering. We have the right to reject orders,
in whole or in part, in our sole discretion in the public offering. No person,
together with any associate or group of persons acting in concert, will be
permitted to purchase more than 28,571 shares or $200,000 of common stock in the
public offering.
Syndicated Public Offering
To the extent that shares remain available and subject to market
conditions, we may offer shares of common stock not purchased in the
subscription, community and public offerings in a syndicated public offering
through a syndicate of selected broker/dealers to be formed and managed by Ryan,
Beck. The syndicated public offering, if held, will be conducted to achieve the
widest distribution of shares, subject to our right to reject orders in whole or
in part in our sole discretion. Neither Ryan, Beck nor any registered
broker/dealer will have any obligation to take or purchase any shares in the
syndicated public offering. Shares sold in the syndicated public offering will
be sold at $7.00 per share.
The purchase limitations that apply in the subscription, community and
public offerings also apply in the syndicated public offering. In the event of a
syndicated public offering, Ryan, Beck will form a selling group of selected
NASD member firms (which may include Ryan, Beck) under a selected dealers'
agreement. We will pay a fee equal to 5.5% of the aggregate amount of stock sold
pursuant to such selected dealer agreements. Ryan, Beck will not commence a
syndicated public offering through such a selling group without our prior
approval. See "The Offering--Plan of Distribution/Marketing Arrangements."
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The syndicated public offering will terminate not more than 45 days
following the Expiration Date, unless we further extend the offering with
regulatory approval and we resolicit subscribers.
The opportunity to order shares of common stock in the syndicated
public offering, if held, is subject to our right, in our sole discretion, to
accept or reject any such orders in whole or in part.
Limitations on Purchases of Common Stock
The following additional limitations have been imposed upon purchases
of shares of common stock:
1. The aggregate amount of our outstanding common stock owned or
controlled by persons other than the mutual holding company at
the close of the offering will be less than 50% of the Company's
total outstanding common stock.
2. The maximum number of shares of common stock which may be
purchased in the subscription offering by any person (or persons
through a single account) in the first priority, third priority
and fourth priority shall not exceed 28,571 shares or $200,000.
3. The maximum number of shares of common stock which may be
subscribed for or purchased in all categories in the offering by
any person (or persons through a single account) together with
any associate or group of persons acting in concert shall not
exceed 28,571 shares or $200,000, except for our employee plans,
which in the aggregate may subscribe for up to 10% of the common
stock issued in the offering.
4. The maximum number of shares of common stock which may be
purchased in all categories in the offering by officers and
directors of the Bank and their associates in the aggregate shall
not exceed 31% of the total number of shares of common stock
issued in the offering to persons other than the mutual holding
company.
5. A minimum of 50 shares of common stock must be purchased by each
person purchasing shares in the offering to the extent those
shares are available.
6. If the number of shares of common stock otherwise allocable to
any person or that person's associates would be in excess of the
maximum number of shares permitted as set forth above, the number
of shares of common stock allocated to each such person shall be
reduced to the lowest limitation applicable to that person, and
then the number of shares allocated to each group consisting of a
person and that person's associates shall be reduced so that the
aggregate allocation to that person and his associates complies
with the above maximums, and such maximum number of shares shall
be reallocated among that person and his associates in proportion
to the shares subscribed by each (after first applying the
maximums applicable to each person, separately).
7. Depending upon market or financial conditions, the Board of
Directors of the Company, without further approval of the
depositors, may decrease or increase the purchase limitations in
the plan, provided that the maximum purchase limitations may not
be increased to a percentage in excess of 5% of the offering. If
the Company increases the maximum purchase limitations, the
Company is only required to resolicit Persons who
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subscribed for the maximum purchase amount and may, in the sole
discretion of the Company, resolicit certain other large
subscribers.
8. In the event of an increase in the total number of shares offered
in the offering due to an increase in the maximum of the
estimated valuation range of up to 15% (the adjusted maximum")
the additional shares will be used in the following order of
priority: (i) in the event that there is an oversubscription at
the Eligible Account Holder level, to fill unfilled subscriptions
of Eligible Account Holders; (ii) in the event that there is an
oversubscription at the ESOP level, fill the ESOP's subscription
up to 10% of the adjusted maximum; (iii) in the event that there
is an oversubscription at the Supplemental Eligible Account
Holder level, to fill unfilled subscriptions of Supplemental
Eligible Account Holders; (iv) in the event that there is an
oversubscription at the Voting Depositor level, to fill unfilled
subscriptions of depositors; and (v) to fill unfilled
Subscriptions in the community offering, with preference given to
persons residing in the local community.
9. No person shall be entitled to purchase any common stock to the
extent such purchase would be illegal under any federal law or
state law or regulation or would violate regulations or policies
of the NASD, particularly those regarding free riding and
withholding. The Bank and/or its agents may ask for an acceptable
legal opinion from any purchaser as to the legality of such
purchase and may refuse to honor any purchase order if such
opinion is not timely furnished.
10. The Board of Directors has the right to reject any order
submitted by a person whose representations the Board of
Directors believes to be false or who it otherwise believes,
either alone or acting in concert with others, is violating,
circumventing, or intends to violate, evade, or circumvent the
terms and conditions of the plan.
11. The foregoing restrictions on purchases by any person also apply
to purchases by persons acting in concert under applicable
regulations of the Department. Under regulations of the
Department, directors of the Bank are not deemed to be affiliates
or a group acting in concert with other directors solely as a
result of membership on the Board of Directors of the Bank.
The term "associate" of a person is defined in the plan to mean (i) any
corporation or organization (other than the Bank or a majority-owned subsidiary
of the Bank) of which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities, (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, (excluding tax-qualified employee stock benefit
plans or tax-qualified employee stock benefit plans in which a person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity and except that, for purposes of aggregating total shares that may be
held by officers and directors, the term "Associate" does not include any
tax-qualified employee stock benefit plan), and (iii) any relative or spouse of
such person or any relative of such spouse, who has the same home as such person
or who is a director or officer of the Bank, or any of its parents or
subsidiaries. For example, a corporation of which a person serves as an officer
would be an associate of such person, and therefore, all shares purchased by
such corporation would be included with the number of shares which such person
individually could purchase under the above limitations.
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Each person purchasing shares of the common stock in the offering will
be deemed to confirm that such purchase does not conflict with the maximum
purchase limitation. In the event that such purchase limitation is violated by
any person (including any associate or group of persons affiliated or otherwise
acting in concert with such persons), we will have the right to purchase from
such person at the purchase price per share all shares acquired by such person
in excess of such purchase limitation or, if such excess shares have been sold
by such person, to receive the difference between the purchase price per share
paid for such excess shares and the price at which such excess shares were sold
by such person.
Our right to purchase such excess shares will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by directors and officers of the Bank.
For certain restrictions on the common stock purchased by directors and
officers, see "--Restrictions on Transferability by Directors and Officers." In
addition, under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe in the subscription and
community offering may only be exercised by completion of an order form. Any
person receiving an order form who desires to subscribe for shares of common
stock must do so prior to the applicable expiration date by delivering (by mail
or in person ) to the Bank a properly executed and completed order form,
together with full payment of the purchase price for all shares for which
subscription is made; provided, however, that if the ESOP subscribes for shares
during the subscription offering, the ESOP will not be required to pay for the
shares at the time it subscribes but rather may pay for the shares upon
consummation of the reorganization. All subscription rights under the plan will
expire on the expiration date, whether or not we have been able to locate each
person entitled to such subscription rights. We have the right to permit
institutional investors to submit contractually irrevocable orders in the public
offering at any time prior to the completion of the offering. Once tendered,
subscription orders cannot be modified or revoked without the consent of the
Bank unless the reorganization is not completed within 45 days of the Expiration
Date.
In the event an order form (i) is not delivered and is returned to the
Bank by the United States Postal Service or the Bank is unable to locate the
addressee; (ii) is not received or is received after the applicable expiration
date, (iii) is defectively completed or executed; (iv) is not accompanied by the
full required payment for the shares subscribed for (including instances where a
savings account or certificate balance from which withdrawal is authorized is
insufficient to fund the amount of such required payment, but excluding
subscriptions by the ESOP) or, in the case of an institutional investor in the
public offering, by delivering irrevocable orders together with a legally
binding commitment to pay the full purchase price prior to 48 hours before the
completion of the reorganization; or (v) is not mailed pursuant to a "no mail"
order placed in effect by the account holder, the subscription rights for the
person to whom such rights have been granted will lapse as though such person
failed to return the completed order form within the time period specified.
However, we may, but will not be required to, waive any irregularity on any
order form or require the submission of corrected order forms or the remittance
of full payment for subscribed shares by such date as we may otherwise specify.
The waiver of an irregularity on an order form in no way obligates us to waive
any other irregularity on any other order form. Waivers will be considered on a
case by case basis. We reserve the right in our sole discretion to accept or
reject orders received on photocopies or facsimile order forms, or whose payment
is to be made by wire transfer or payment from private third parties. Our
interpretation of the terms and conditions of the plan and of the
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acceptability of the order forms will be final, subject to the authority of the
Department. We are not required to deliver a prospectus or order form by any
means other than the mails.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, 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 order form will confirm receipt or delivery in
accordance with Rule 15c2- 8. Order forms will only be distributed with a
prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Payment for shares of common stock may be made (i) in cash, if
delivered in person, (ii) by check or money order, or (iii) for shares of common
stock subscribed for in the subscription offering, by authorization of
withdrawal from savings accounts (including certificates of deposit) maintained
with the Bank. Appropriate means by which such withdrawals may be authorized are
provided in the order form. Once such a withdrawal has been authorized, none of
the designated withdrawal amount may be used by a subscriber for any purpose
other than to purchase the common stock for which a subscription has been made
until the offering has been completed or terminated. In the case of payments
authorized to be made through withdrawal from savings accounts, all sums
authorized for withdrawal will continue to earn interest at the contract rate
until the offering has been completed or terminated. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares, however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal, without penalty, and the remaining balance will earn
interest at its passbook savings account rate subsequent to the withdrawal. In
the case of payments made in cash or by check or money order, such funds will be
placed in a segregated account and interest will be paid by the Bank at its
passbook savings account rate from the date payment is received until the
offering is completed or terminated. An executed order form, once we receive it,
may not be modified, amended, or rescinded without our consent, unless the
offering is not completed within 45 days after the conclusion of the
subscription offering, in which event subscribers may be given the opportunity
to increase, decrease, or rescind their subscription for a specified period of
time. In the event that the offering is not consummated for any reason, all
funds submitted pursuant to the offerings will be promptly refunded with
interest and authorized withdrawals from deposit accounts will be canceled.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the offerings. Persons with IRAs maintained
at the Bank must have their accounts transferred to an unaffiliated institution
or broker to purchase shares of common stock in the offerings. There is no early
withdrawal or IRS interest penalties for such transfers. Instructions on how to
transfer IRAs maintained at the Bank can be obtained from the stock information
center. Depositors interested in using funds in an IRA to purchase common stock
should contact the stock information center as soon as possible so that the
necessary forms may be forwarded, executed and returned prior to the expiration
date.
Regulations prohibit the Bank from lending funds or extending credit to
any person to purchase the common stock in the reorganization.
Stock Information Center. The stock information center is located at 8
Franklin Avenue, Ridgewood, New Jersey. Its phone number is (201) 445-2109.
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Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed to the persons entitled thereto at the
address noted on the order form, as soon as practicable following consummation
of the offering. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the common stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of stock for which they subscribed.
Restriction on Sales Activities
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock in jurisdictions where such
participation is not prohibited. Other employees of the Bank may participate in
the offering in ministerial capacities. Such other employees have been
instructed not to solicit offers to purchase common stock or provide advice
regarding the purchase of common stock. Questions of prospective purchasers will
be directed to executive officers of the Bank or registered representatives of
Ryan, Beck. No officer, director or employee of the Bank will be compensated in
connection with such person's solicitations or other participation in the
offering by the payment of commissions or other remuneration based either
directly or indirectly on transactions in the common stock.
Stock Pricing and the Number of Shares to be Offered
FinPro, which is experienced in the valuation and appraisal of business
entities, including savings institutions, has been retained to prepare an
appraisal of the estimated pro forma market value of the common stock (an
independent valuation). This independent valuation will express our pro forma
market value in terms of an aggregate dollar amount. FinPro will receive fees of
$24,000 for its appraisal services, including the independent valuation and
subsequent updates, and for assistance in preparation of other material, plus
its reasonable out-of-pocket expenses incurred in connection with the
independent valuation and for assistance in the preparation of other material.
The Bank has agreed to indemnify FinPro under certain circumstances against
liabilities and expenses (including certain legal fees) arising out of or based
on any misstatement or untrue statement of a material fact contained in the
information supplied by the Bank to FinPro, except where FinPro is determined to
have been negligent or failed to exercise due diligence in the preparation of
the independent valuation.
Pursuant to the plan, the number of shares of common stock to be
offered in the offering will be based upon the estimated pro forma market value
of the common stock and the purchase price of $7.00 per share. The final
minority ownership percentage will be determined as follows: (i) the numerator
will be the product of (x) the number of shares of common stock sold in the
offering and (y) the purchase price ($7.00 per share); and (ii) the denominator
will be the updated valuation of our pro forma market value immediately upon
conclusion of the offering as determined by FinPro.
FinPro has determined that as of October 7, 1998, our estimated
aggregate pro forma market value was $21.0 million. Pursuant to regulations,
this estimate must be included within a range with a minimum of $17.8 million
and a maximum of $24.2 million, which maximum may be adjusted upwards pursuant
to regulation, to $27.8 million (maximum, as adjusted). Of our estimated market
value, shares representing 53% of that value will be issued to the mutual
holding company and shares representing 47% of that value will be sold to
minority stockholders in the offering. We have determined to offer shares of
common stock in the offering at a price of $7.00 per share. As a result, we are
offering 1,410,000 shares within a range of a minimum of 1,198,500 shares and a
maximum of 1,621,500 shares, subject to a maximum, as adjusted, of up to
1,864,725 shares. In determining the offering range, the Board of
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Directors reviewed FinPro's appraisal and in particular, considered (i) the
Bank's financial condition and results of operations for the year ended December
31, 1997 and six months ended June 30, 1998, (ii) financial comparisons of the
Bank in relation to financial institutions of similar size and asset quality and
(iii) stock market conditions generally and in particular for financial
institutions, all of which are set forth in the appraisal. The Board also
reviewed the methodology and the assumptions used by FinPro in preparing its
appraisal. The number of shares, and the minority ownership interest, are
subject to change if the independent valuation changes at the conclusion of the
offering.
The number of shares and price per share of common stock was determined
by the Board of Directors based upon the independent valuation. The actual
number of shares to be issued to the mutual holding company and sold in the
offering may be increased or decreased prior to the completion of the offering,
subject to approval and conditions that may be imposed by the Department and
FDIC, to reflect any change in our estimated pro forma market value. The total
number of shares of common stock that may be sold to persons other than the
mutual holding company in the offering may not exceed 49.9% of our issued and
outstanding voting stock.
Depending on market and financial conditions at the time of the
completion of the offering, we may increase or decrease the number of shares to
be issued in the reorganization and offering. No resolicitation of prospective
purchasers will be made and prospective purchasers will not be permitted to
modify or cancel their purchase orders unless the change in the number of shares
to be issued in the offering results in fewer than 1,198,500 shares or more than
1,864,725 shares being sold at the purchase price of $7.00, in which event we
may also elect to terminate the offering. In the event that we elect to
terminate the offering, subscribers will receive a prompt refund of their
purchase orders (including cancellation of withdrawal authorizations), together
with interest earned thereon from the date of receipt to the date of termination
of the offering. In the event we receive orders for less than 1,198,500 shares,
at our discretion and subject to approval of the Department and FDIC, we may
obtain a new independent valuation, establish a new offering range and resolicit
prospective purchasers. In the event of such a resolicitation, prospective
purchasers will be permitted to modify or cancel their purchase orders. Any
adjustments in our pro forma market value as a result of market and financial
conditions or a resolicitation of prospective purchasers would be subject to
Department and FDIC approval. A resolicitation, if any, following conclusion of
the offering would not extend beyond the expiration date, without prior approval
of the Department and FDIC.
The independent valuation will be updated at the time of the completion
of the offering, and the minority ownership interest may increase or decrease to
reflect the changes in market conditions, the estimated pro forma market value
of the Bank, or both. If the updated estimate of the pro forma market value of
the Bank immediately upon conclusion of the offering changes, there will be a
corresponding change to the 3,000,000 shares issued, in the aggregate, to the
mutual holding company in the reorganization and sold to subscribers in the
offering. For example, if the independent valuation at the conclusion of the
offering increases to $24,150,000, or decreases to $17,850,000, then the total
number of shares outstanding after the reorganization and offering will be
3,450,000 or 2,550,000, respectively. If the updated independent valuation
increases, the Company may increase the number of shares sold in the offering
(to up to 1,864,725 shares), and will increase the number of shares issued to
the mutual holding company. Subscribers will not be given the opportunity to
change or withdraw their orders unless more than 1,864,725 shares or fewer than
1,198,500 shares are sold in the offering. Any adjustment of shares of common
stock sold will have a corresponding effect on the estimated net proceeds of the
offering and the pro forma capitalization and per share data of the Bank.
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The independent valuation is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing the common
stock. In preparing the independent valuation, FinPro has relied upon and
assumed the accuracy and completeness of financial and statistical information
provided by the Bank. FinPro did not independently verify the financial
statements and other information provided by the Bank, nor did FinPro value
independently the assets and liabilities of the Bank. The independent valuation
considers the Bank only as a going concern and should not be considered as a
indication of the liquidation value of the Bank. Moreover, because such
independent valuation is based upon estimates and projections on a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing the common stock will be able to sell such
shares at a price equal to or greater than the purchase price.
No sale of shares of common stock may be consummated unless, FinPro
confirms that, to the best of its knowledge, nothing of a material nature has
occurred that, taking into account all relevant factors, would cause FinPro to
conclude that the independent valuation is incompatible with its estimate of our
pro forma market value at the conclusion of the offering. Any change that would
result in an aggregate value that is below $17,850,000 or above $27,772,500
would be subject to Department approval. If confirmation from FinPro is not
received, the Bank may extend the offering, reopen or commence a new offering,
request a new Independent Valuation, establish a new offering range and commence
a resolicitation of all prospective purchasers with the approval of the
Department, or take such other action as permitted by the Department in order to
complete the offering.
Plan of Distribution/Marketing Arrangements
The common stock will be offered in the offering principally by the
distribution of this prospectus and through activities conducted at the stock
information center. It is expected that a registered representative employed by
Ryan, Beck will be working at, and supervising the operation of, the stock
information center. Ryan, Beck will be responsible for overseeing the mailing of
material relating to the offering, responding to questions regarding the
reorganization and the offering and processing order forms.
The Bank and Company have entered into an agency agreement with Ryan,
Beck under which Ryan, Beck will provide advisory assistance and assist, on a
best efforts basis, in the distribution of the common stock in the offering.
Ryan, Beck is a broker-dealer registered with the National Association of
Securities Dealers, Inc. Specifically, Ryan, Beck will assist in the offering in
the following manner: (i) training and educating the Bank's employees regarding
the mechanics and regulatory requirements of the stock conversion process; (ii)
conducting informational meetings for potential subscribers, if necessary; (iii)
managing the sales efforts in the offering; and (iv) keeping records of all
stock subscriptions.
Ryan, Beck will receive, as compensation, an advisory and marketing fee
of $150,000. In the event common stock is sold through licensed brokers under a
selected dealers agreement, we will pay a fee of 5.5% of the value of the common
stock sold to such brokers (which may include Ryan, Beck). Ryan, Beck will also
be reimbursed for its legal fees and out-of-pocket expenses, which are not to
exceed $45,000. The Bank has agreed to indemnify Ryan, Beck, to the extent
allowed by law, for reasonable costs and expenses in connection with certain
claims or liabilities, including certain liabilities under the Securities Act of
1933, as amended.
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Restrictions on Repurchase of Stock
Current FDIC regulations prohibit the Company from repurchasing common
stock for one year following the reorganization. In addition, securities rules
restrict the method, time, price, and number of shares of common stock that may
be repurchased by the Company.
Restrictions on Transferability by Directors and Officers
Shares of the common stock purchased by directors or officers of the
Bank cannot be sold for a period of one year following completion of the
reorganization, except for a disposition of shares in the event of the death of
the stockholder. Accordingly, shares of the common stock issued to directors and
officers will bear a legend restricting their sale. Any shares issued to
directors and officers as a stock dividend, stock split, or otherwise with
respect to restricted stock will be subject to the same restriction.
For a period of three years following the reorganization, no director
or officer of the Bank or their associates may, without the prior approval of
the Department, purchase our common stock except from a broker or dealer
registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made for
tax qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual officers or directors.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Prior to the completion of the reorganization and offering, no
depositor may transfer, or enter into an agreement or understanding to transfer,
any subscription rights or the legal or beneficial ownership of the shares of
common stock to be purchased by such person in the offering. Depositors who
submit an order form will be required to certify that their purchase of common
stock is solely for their own account and there is no agreement or understanding
regarding the sale or transfer of their shares. We intend to pursue any and all
legal and equitable remedies in the event we become aware of any such agreement
or understanding, and will not honor orders we reasonably believe to involve
such an agreement or understanding.
Conditions to the Offering
Consummation of the offering is subject to (i) consummation of the
reorganization, which requires the receipt of various approvals from the
Department, the ratification of the Bank's voting depositors, and the receipt of
rulings and/or opinions of counsel as to the tax consequences of the
reorganization, (ii) the receipt of all required federal and state approvals for
the issuance of common stock in the offering, including without limitation the
non-objection of the FDIC, and (iii) the sale of a minimum of 1,198,500 shares
of common stock. In the event that these conditions are not satisfied prior to
completion of the offering, all funds received will be promptly returned with
interest at the Bank's passbook rate and all withdrawal authorizations will be
canceled.
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CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
General
The following discussion is a summary of statutory and regulatory
restrictions on the acquisition of our common stock. In addition, the following
discussion summarizes the mutual holding company structure, certain provisions
of certificates of incorporation and bylaws and certain regulatory provisions
that have an anti-takeover effect.
Mutual Holding Company Structure
The mutual holding company structure will restrict the ability of our
stockholders of the Company to effect a change of control of management because
mutual holding company, as long as it remains in existence as a mutual entity,
will control a majority of our voting stock. In addition, voting rights in the
mutual holding company are vested in the Board of Directors, as such, management
of the Bank (which is also management of the Company and the mutual holding
company) will be able to exert voting control over the mutual holding company.
Change in Bank Control Act and Bank Holding Company Provisions of the BHCA
Federal law provides that no person, acting directly or indirectly or
through or in concert with one or more other persons, may acquire control of a
bank unless the FDIC has been given 60 days prior written notice. Federal law
provides that no company may acquire control of a bank holding company without
the prior approval of the Federal Reserve. Any company that acquires control
becomes a "bank holding company" subject to registration, examination and
regulation by the Federal Reserve. Pursuant to federal regulations, control is
conclusively deemed to have occurred when an entity, among other things, has
acquired more than 25 percent of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have occurred, subject to
rebuttal, upon the acquisition of more than 10 percent of any class of voting
stock, or of more than 25 percent of any class of stock, of a savings
institution, where certain enumerated control factors are also present in the
acquisition. The Federal Reserve may prohibit an acquisition of control if: (i)
it would result in a monopoly or substantially lessen competition; (ii) the
financial condition of the acquiring person might jeopardize the financial
stability of the institution; or (iii) the competence, experience or integrity
of the acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of stock by one or
more tax-qualified employee stock benefit plans, provided that the plan or plans
do not have beneficial ownership in the aggregate of more than 25 percent of any
class of our equity security.
The Company's Certificate and Bylaws
General. Our certificate and bylaws are available at our administrative
office or by writing or calling us, 531 North Maple Avenue, Ridgewood, New
Jersey 07450-1612 (our telephone number is (201) 445-4000).
Classified Board of Directors and Related Provisions. Our board of
directors is divided into three classes which are as nearly equal in number as
possible. Directors serve for terms of three years. As a result, each year, only
one-third of the directors are eligible to be elected and it would take at least
96
<PAGE>
two years to elect a majority of our directors. A director may be removed only
by the affirmative vote of the holders of at least 80% of the shares then
entitled to vote.
Restrictions on Voting of Securities. The certificate provides that any
shares of common stock beneficially owned directly or indirectly in excess of
10% by any person, other than the mutual holding company will not be counted as
shares entitled to vote, shall not be voted by any person or counted as voting
shares in connection with any matter submitted to stockholders for a vote, and
shall not be counted as outstanding for purposes of determining a quorum or the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote. It is possible for such a person to have voting authority for less
than 10% of our shares, depending on how the shares are registered. The purpose
of this provision is to reduce the chance that minority stockholders could
challenge our management.
Prohibition Against Cumulative Voting. Our certificate prohibits
cumulative voting by stockholders in the election of directors. The absence of
cumulative voting rights effectively means that the holders of a majority of the
shares voted at a meeting of stockholders may, if they so choose, elect all
directors elected at the meeting, thus precluding a minority stockholder from
obtaining representation on the Board of Directors unless the minority
stockholder is able to obtain the support of a majority. In accordance with the
law governing mutual holding companies, the mutual holding company must remain
the majority holder of our voting stock.
Supermajority Provision. Any sale or merger, which has not been
approved by at least two-thirds of the Board of Directors, requires the approval
of at least 80% of the outstanding vote.
Additional Anti-Takeover Provisions. The provisions described above are
not the only provisions of our certificate and bylaws having an anti-takeover
effect. For example, the certificate authorizes the issuance of up to five
million shares of preferred stock, which conceivably would represent an
additional class of stock required to approve any proposed acquisition. This
preferred stock, none of which has been issued, together with authorized but
unissued shares of the common stock (the Certificates authorizes the issuance of
up to 10 million shares of the common stock), also could represent additional
capital required to be purchased by the acquiror.
In addition to discouraging a takeover attempt which a majority of our
stockholders might determine to be in their best interest or in which our
stockholders might receive a premium over the current market prices for their
shares, the effect of these provisions may render the removal of our management
more difficult. It is possible that incumbent officers and directors might be
able to retain their positions (at least until their term of office expires)
even though a majority of our stockholders, other than the mutual holding
company, desire a change.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 10,000,000 shares of common stock, par value
$0.10 per share and 5,000,000 shares of preferred stock, no par value. We will
issue between 2,550,000 and 3,967,500 shares of common stock in the
reorganization (between 1,198,500 and 1,864,725 shares to persons other than the
mutual holding company). See "Capitalization." Upon payment of the purchase
price shares of common stock issued in the offering will be fully paid and
non-assessable. The common stock will represent nonwithdrawable capital, will
not be an account of insurable type and will not be insured by the FDIC or any
other governmental agency. See also "Dividends" and "Waiver of Dividends by the
MHC."
97
<PAGE>
Voting Rights
The holders of common stock will possess exclusive voting rights in the
Company. The holder of shares of common stock will be entitled to one vote for
each share held on all matters subject to stockholder vote. See also "The
Reorganization--Effect of the Reorganization--Voting Rights."
Liquidation Rights
In the event of any liquidation, dissolution, or winding-up of the
Company, the holders of the common stock generally would be entitled to receive,
after payment of all debts and liabilities of the Company (including all debts
and liabilities of the Bank), all assets of the Company available for
distribution. See also "The Reorganization--Effect of the
Reorganization--Liquidation Rights."
Preemptive Rights; Redemption
The holders of the common stock do not have any preemptive rights with
respect to any shares we may issue. The common stock will not be subject to any
redemption provisions.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of preferred stock
and to fix and state voting powers, designations, preferences, or other special
rights of such shares and the qualifications, limitations and restrictions of
those shares as the Board of Directors may determine in its discretion.
Preferred stock may be issued in distinctly designated series, may be
convertible into common stock and may rank prior to the common stock as to
dividend rights, liquidation preferences, or both, and may have full or limited
voting rights. Accordingly, the issuance of preferred stock could adversely
affect the voting and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares. Depending on the circumstances, however, stockholder approval may be
required pursuant to requirements for eligibility for quotation of the common
stock on The Nasdaq Stock Market or by any exchange on which the common stock
may then be listed.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the reorganization and federal and state taxation
will be passed upon for us by Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C. Certain legal matters will be passed upon for Ryan, Beck & Co. by Jamieson,
Moore, Peskin & Spicer, Morristown, New Jersey.
EXPERTS
The financial statements of Ridgewood Savings Bank of New Jersey as of
December 31, 1997 and 1996 and for the years then ended have been included in
this prospectus in reliance upon the report
98
<PAGE>
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Ridgewood Savings Bank of New Jersey as of
December 31, 1995 and for the year then ended have been included in this
prospectus in reliance upon the report of Dorfman, Abrams, Music & Co.,
independent certified public accountants, appearing elsewhere in this
prospectus, and upon the authority of that firm as experts in accounting and
auditing.
FinPro has consented to the publication in this document of a summary
of its letter to Ridgewood Savings Bank of New Jersey setting forth its opinion
as to the estimated pro forma market value of us in the converted form and its
opinion setting forth the value of subscription rights and to the use of its
name and statements with respect to it appearing in this document.
CHANGE IN AUDITOR
On July 22, 1996, the board of directors of the Bank engaged KPMG Peat
Marwick LLP as its independent auditor for the fiscal year ended December 31,
1996. By letter dated July 23, 1996, the Bank notified Dorfman, Abrams, Music &
Co., its independent auditor for the fiscal years ended December 31, 1995 and
1994, of this determination and that Dorfman, Abrams, Music & Co. would not
continue to be engaged for the fiscal year ending December 31, 1996. On July 12,
1996, the audit committee of the Bank had recommended this change in auditor to
the board of directors. The determination to replace Dorfman, Abrams, Music &
Co. was approved by the full board of directors of the Bank. The report of KPMG
Peat Marwick LLP for the fiscal year ended December 31, 1996 and the report of
Dorfman, Abrams, Music & Co. for the fiscal years ended December 31, 1995 and
1994 contained no adverse opinion or disclaimer of opinion and were not modified
as to uncertainty, audit scope or accounting principles. During the fiscal years
ended December 31, 1995 and 1994 and during the period from January 1, 1996 to
July 23, 1996, there were no disagreements between the Bank and Dorfman, Abrams,
Music & Co. concerning accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
REGISTRATION REQUIREMENTS
Our common stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We will be
subject to the information, proxy solicitation, insider trading restrictions,
tender offer rules, periodic reporting and other requirements of the SEC under
the Exchange Act. We may not deregister the common stock under the Exchange Act
for a period of at least three years following the reorganization.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act
and must file reports and other information with the SEC.
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. Such information 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
99
<PAGE>
from the SEC at prescribed rates. The SEC also maintains an internet address
("Web site") that contains reports, proxy and information statements and other
information regarding registrants, including the Company, that file
electronically with the SEC. The address for this Web site is
"http://www.sec.gov." The statements contained in this document as to the
contents of any contract or other document filed as an exhibit to the Form SB-2
are, of necessity, brief descriptions and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
A copy of our certificate of incorporation and bylaws, as well as those
of the Bank and the mutual holding company, are available without charge from
Ridgewood Savings Bank of New Jersey. Copies of the plan of reorganization are
also available without charge.
The Bank has filed notice of mutual holding company reorganization with
the Department of Banking and Insurance of New Jersey. In addition, the Bank has
filed copies of this application with the FDIC. This prospectus omits certain
information contained in that application.
INDEX TO FINANCIAL STATEMENTS
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Reports F-1
Statements of Financial Condition at June 30, 1998 (unaudited)
and December 31, 1997 and 1996 F-3
Statements of Income for the six months ended
June 30, 1998 (unaudited) and for each of the
three years in the period ended December 31, 1997 20
Statements of Equity for the six months ended
June 30, 1998 (unaudited) and for each of the
three years in the period ended December 31, 1997 F-4
Statements of Cash Flows for the six months ended June 30, 1998 and 1997
(unaudited) and for each of the three years in the period ended
December 31, 1997 F-5
Notes to Financial Statements F-7
</TABLE>
Other schedules are omitted as they are not required or are not applicable or
the required information is shown in the financial statements or related notes.
Financial statements of Ridgewood Financial, MHC and Ridgewood Financial, Inc.
have not been provided because they have conducted no operations. Ridgewood
Financial, MHC has not yet been organized and Ridgewood Financial, Inc. has no
assets and no liabilities.
<PAGE>
Independent Auditors' Report
The Board of Directors
Ridgewood Savings Bank of New Jersey:
We have audited the statements of financial condition of Ridgewood Savings Bank
of New Jersey as of December 31, 1997 and 1996 and the related statements of
income, equity, and cash flows for the years then ended as listed in the
accompanying index. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of Ridgewood
Savings Bank of New Jersey for the year ended December 31, 1995 were audited by
other auditors whose report thereon dated February 29, 1996 expressed an
unqualified opinion on those statements.
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 1997 and 1996 financial statements referred to above present
fairly, in all material respects, the financial position of Ridgewood Savings
Bank of New Jersey as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
February 27, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS'REPORT
Board of Directors
Ridgewood Savings Bank of New Jersey
Ridgewood, New Jersey
We have audited the accompanying statement of financial condition of Ridgewood
Savings Bank of New Jersey as of December 31, 1995, and the related statements
of income, equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 presentabon.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ridgewood Savings Bank of New
Jersey as of December 31, 1995, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/Dorfman, Abrams, Music & Co.
Glen Rock, New Jersey
February 29, 1996
F-2
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Statements of Financial Condition
(Dollars in thousands)
<TABLE>
<CAPTION>
June, 30 December, 31
------------- ----------------------
Assets 1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 3,128 2,198 2,564
Federal funds sold 16,400 13,200 3,800
--------- --------- ---------
Cash and cash equivalents 19,528 15,398 6,364
Investment securities:
Held to maturity (fair value of $2,496, $9,724
and $12,599 at June 30, 1998, December 31,
1997 and December 31,1996) 2,495 9,666 12,721
Available for sale 11,730 26,954 43,211
Mortgage-backed securities:
Held to maturity (fair value of $12,953, $14,522
and $16,678 at June 30, 1998, December 31,
1997 and December 31, 1996) 12,794 14,356 16,611
Available for sale 85,679 50,099 19,359
Loans held for sale -- 750 3,756
Loans receivable, net 104,627 105,715 107,959
Accrued interest receivable 1,386 1,609 1,818
Premises and equipment, net 2,188 2,253 2,310
Federal Home Loan Bank stock, at cost 1,949 1,949 1,949
Other assets 286 316 717
--------- --------- ---------
Total assets $ 242,662 229,065 216,775
========= ========= =========
Liabilities and Equity
Deposits 198,602 193,889 170,551
Borrowed funds 25,432 16,282 28,400
Advances from borrowers for taxes and insurance 896 902 907
Accounts payable and other liabilities 381 798 1,548
--------- --------- ---------
Total liabilities 225,311 211,871 201,406
--------- --------- ---------
Equity:
Retained earnings 17,453 16,966 15,716
Accumulated other comprehensive income (102) 228 (347)
--------- --------- ---------
Total equity 17,351 17,194 15,369
Commitments and contingencies
Total liabilities and equity $ 242,662 229,065 216,775
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Statements of Equity
(In thousands)
<TABLE>
<CAPTION>
Accu-
mulated
other
Compre- compre-
hensive Retained hensive Total
income earnings income equity
------ -------- ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 13,849 (259) 13,590
Comprehensive income:
Net income 1,127 1,127 - 1,127
Other comprehensive income, net of tax - unrealized gain
on securities, net of reclassification adjustment 571
------
Total comprehensive income $ 1,698 - 571 571
===== --------- ----- ---------
Balance at December 31, 1995 14,976 312 15,288
Comprehensive income:
Net income 740 740 - 740
Other comprehensive income, net of tax - unrealized gain
on securities, net of reclassification adjustment (659)
------
Total comprehensive income $ 81 - (659) (659)
====== --------- ----- ---------
Balance at December 31, 1996 15,716 (347) 15,369
Comprehensive income:
Net income 1,250 1,250 - 1,250
Other comprehensive income, net of tax - unrealized gain
on securities, net of reclassification adjustment 575
------
Total comprehensive income $ 1,825 - 575 575
====== --------- ----- ---------
Balance at December 31, 1997 16,966 228 17,194
Comprehensive income:
Net income 487 487 - 487
Other comprehensive income, net of tax - unrealized gain
on securities, net of reclassification adjustment (330)
------
Total comprehensive income $ 157 - (330) (330)
====== --------- ----- ---------
Balance at June 30, 1998 $ 17,453 (102) 17,351
========= ===== =========
</TABLE>
<TABLE>
<CAPTION>
Six-months Years ended
ended December 31,
June 30, ------------
1998 1997 1996 1995
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Disclosure of reclassification amount:
Unrealized holding (losses) gains arising during period $ (306) 594 (614) 542
Less: reclassification adjustment for (losses) gains in
net income (24) (19) (45) 29
---------- ----- ----- -----
Net unrealized (losses) gains $ (330) 575 (659) 571
========== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
------------------------ --------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 487 662 1,250 740 1,127
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 100 99 199 148 75
Amortization of loan fees (60) (58) (131) (174) (203)
Premiums and discounts on mortgage-
backed and investment securities 416 (11) 376 194 418
Proceeds from loan sales 771 24 3,637 750 4,375
Gain on sale of loans (21) (3) (45) (14) (38)
Loans originated for resale -- -- (585) (4,293) (3,962)
(Gain) loss on sale of securities available
for sale (24) -- (19) (45) 29
Provision for loans losses 132 6 12 12 60
Deferred income tax (benefit) expense (118) 181 265 84 (29)
Decrease (increase) in accrued interest
receivable 223 (85) 209 (347) (710)
Decrease (increase) in other assets, net 215 (76) (298) (57) (48)
(Decrease) increase in other liabilities (299) (994) (605) 1,236 (194)
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities 1,822 (255) 4,265 (1,766) 900
-------- -------- -------- -------- --------
Cash flows from investing activities:
Net decrease (increase) in first mortgage loans 1,803 2,615 4,660 (9,257) (9,367)
Net increase in consumer loans (787) (2,037) (2,316) (2,390) (451)
Purchase of mortgage-backed securities available
for sale (46,600) (9,332) (40,931) (15,763) (3,971)
Principal collected on mortgage-backed securities 11,669 3,413 7,421 5,930 5,456
Proceeds from sales of mortgage-backed securities
available for sale -- -- 6,320 4,967 --
Purchase of investment securities available
for sale (1,470) (500) (1,503) (41,447) (21,936)
Proceeds from sales of securities available for sale 7,022 2,000 17,525 15,689 10,221
Purchase of investment securities held to maturity -- -- -- -- (16,192)
Maturities of investment securities held to maturity 6,976 2,500 2,500 11,021 2,500
Maturities of investment securities available for sale 9,700 -- -- -- --
Principal collected on investment securities 175 233 -- -- 274
Purchase of premises and equipment (35) (99) (142) (729) (1,268)
Purchase of Federal Home Loan Bank stock -- -- -- (768) (43)
Proceeds from collection of loan fees -- 6 20 56 92
-------- -------- -------- -------- --------
Net cash used in investing activities (11,549) (1,201) (6,446) (32,691) (34,685)
-------- -------- -------- -------- --------
</TABLE>
F-5
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Statements of Cash Flows, Continued
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
-------------------- ----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in passbook, NOW
and money market accounts $ 5,010 6,096 7,311 2,904 (566)
Net (decrease) increase in certificates of deposit (297) 9,311 16,027 20,629 27,390
Proceeds from borrowed funds 18,190 20,181 13,407 25,175 16,487
Repayment of borrowed funds (9,040) (29,400) (25,525) (12,786) (9,326)
Net (decrease) increase in advances from
borrowers for taxes and insurance (6) 13 (5) 77 17
-------- -------- -------- -------- --------
Net cash provided by financing
activities 13,857 6,201 11,215 35,999 34,002
-------- -------- -------- -------- --------
Net increase in cash and cash
equivalents 4,130 4,745 9,034 1,542 217
Cash and cash equivalents at beginning of year 15,398 6,364 6,364 4,822 4,605
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year 19,528 11,109 15,398 6,364 4,822
======== ======== ======== ======== ========
Supplemental disclosures of cash flow information cash payments for:
Interest on deposits and borrowed funds $ 5,344 5,140 10,386 11,185 6,562
======== ======== ======== ======== ========
Income taxes $ 370 163 233 548 779
======== ======== ======== ======== ========
Transfers to available for sale from mortgage-
backed securities held to maturity $ -- -- -- -- 9,317
======== ======== ======== ======== ========
Transfers to held to maturity from investment
securities available for sale $ -- -- -- -- 420
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
Business Activities
Ridgewood Savings Bank of New Jersey (the Bank) grants residential,
commercial and consumer loans to, and accepts deposits from, customers
from three branches located in northeastern New Jersey. The Bank is
subject to the regulations of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the 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
statement of financial condition and revenues and expenses for the
period. Actual results could differ significantly from these 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 settlement of loans. In connection with the
determination of the allowance for loans losses and valuation of real
estate owned, management generally obtains independent appraisals for
significant properties.
The accompanying unaudited financial statements as of June 30, 1998, and
for the six-month periods ended June 30, 1998 and 1997, have been
prepared in accordance with generally accepted accounting principles. All
information in the notes to the financial statements as of June 30, 1998
and for the six-month periods ended June 30, 1998 and 1997 are unaudited.
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 six months
ended June 30, 1998 are not necessarily indicative of results that may be
expected for the year ending December 31, 1998.
Effective January 1, 1998, the Bank adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (Statement No. 130). Statement No. 130 establishes standards for
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Under Statement No.
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. Comparative financial statements
provided for earlier periods have been reclassified to reflect the
application of the provisions of Statement No. 130.
F-7
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(1), Continued
Statement No. 130 requires total comprehensive income and its components
to be displayed on the face of a financial statement for annual financial
statements. For the Bank, comprehensive income is determined by adding
unrealized investment holding gains or losses during the period to net
income.
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132 "Employers
Disclosures about Pensions and Other Postretirement Benefits" (Statement
No. 132). Statement 132 revises employers' disclosures about pension and
other postretirement benefits plans. It does not change the measurement
or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information in changes in the benefit
obligations and fair value of plan assets that will facilitate financial
analysis and eliminates certain required disclosure of previous
accounting pronouncements.
Statement No. 132 is effective for fiscal years beginning after December
15, 1997. Earlier application is encouraged. Restatement of disclosures
for earlier periods provided for comparative purposes is required unless
the information is not readily available. As Statement No. 132 affects
disclosure requirements, it is not expected to have an impact on the
financial statements of the Bank.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(Statement No. 133). Statement No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. Statement No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal quarter. On
that date, hedging relationships must be designated as new and documented
pursuant to the provisions of this Statement. Earlier application of all
of the provisions of Statement No. 133 is encouraged, but it is permitted
only as of the beginning of any fiscal quarter that begins after issuance
of this Statement. This Statement should not be applied retroactively to
financial statements of prior periods. The Bank has not determined the
impact, if any, Statement No. 133 will have on the Bank's financial
statement presentation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold.
F-8
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(1), Continued
Investment Securities
Management determines the appropriate classification of securities as
either held to maturity or available for sale at the purchase date. Debt
securities that management has the ability and intent to hold to maturity
are classified as held to maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts. Other securities are
classified as available for sale and are carried at fair value.
Unrealized gains and losses on securities available for sale are
recognized as direct increases or decreases to equity, net of income
taxes. Premiums and discounts are amortized using the level yield method.
The cost of securities sold is recognized using the specific
identification method.
Mortgage-backed Securities
Management determines the appropriate classification of mortgage-backed
securities as either held to maturity or available for sale at the
purchase date. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and
serviced by third parties. Mortgage-backed securities that management has
the intent and ability to hold to maturity are classified as held to
maturity and carried at unpaid principal balances, adjusted for
unamortized premiums and unearned discounts. All other mortgage-backed
securities are classified as available for sale and are carried at fair
value. Unrealized gains and losses on mortgage-backed securities
available for sale are recognized as direct increases or decrease to
equity, net of income taxes. Premiums and discount are amortized using
the level yield method. The cost of securities sold is determined using
the specific identification method.
Loans Held for Sale
Loans originated and held for sale are carried at the lower of cost or
fair value determined on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance through charges to income. Gains and
losses on the sale of loans held for sale are determined using the
specific identification method. At December 31, 1997 and 1996, the cost
of loans held for sale approximates fair value.
Effective January 1, 1997, the Bank adopted Statement of Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (Statement No. 125). The
statement provides standards for distinguishing transfers of financial
assets that are sales from those that are secured borrowings, and
provides guidance on the recognition and measurement of asset servicing
contracts and on debt extinguishments. As issued, Statement No. 125 is
effective for transactions occurring after December 31, 1996. However, as
a result of an amendment to Statement No. 125
F-9
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(1), Continued
issued by the FASB in December 1996, certain provisions of Statement No.
125 were deferred for an additional year. Statement No. 125 requires the
recognition of separate assets for the rights to service for others
mortgage loans that have been acquired through purchase or origination.
These rights are amortized over the estimated net servicing life of the
loans and are evaluated for impairment based on their fair value on a
quarterly basis. The fair value of the rights is estimated using the
present value of future cash flows and assumptions regarding prepayment
estimates, cost of servicing, discount rates and loan terms. Any
impairments to the value of the rights are recognized as a direct effect
to amortization. The impact of adopting the new accounting standard was
not material to the Bank.
Loans Receivable
Loans receivable are stated at unpaid principal balances less the
allowance for loans losses and net deferred loan origination fees.
Interest income on loans is accrued and credited to interest income as
earned. Loan origination and commitment fees are deferred and amortized
as a yield adjustment over the lives of the related loans using the
interest method.
The allowance for loan losses is increased by charges to income through a
provision for loan losses and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and
current economic conditions.
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 routine 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.
Loans are placed on nonaccrual status when a loan is specifically
determined to be impaired based on management's periodic evaluation. Any
unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific
nonaccrual loans unless the likelihood of further loss is remote and only
to the extent of interest payments received.
F-10
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(1), Continued
The Bank has defined the population of impaired loans to be all
nonaccrual and restructured commercial loans, and certain other
performing loans considered to be impaired as to principal and interest.
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 excluded
from the impaired loan portfolio. At June 30, 1998, December 31, 1997 and
1996, the Bank has no impaired loans.
Premises and Equipment
Premises and equipment, including leasehold improvements, are recorded at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets.
Foreclosed Real Estate
Real estate properties acquired through foreclosure are initially
recorded at the lower of amortized cost or estimated fair value, less
estimated costs to sell at the date of foreclosure. Costs relating to
development and improvements of property are capitalized, whereas costs
relating to the holding of property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of
a property exceeds its estimated fair value, less estimated costs to
sell.
Income Taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Reclassifications
Certain reclassifications have been made to the 1995, 1996 and 1997
financial statements to conform to the 1998 presentation.
F-11
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(2) Investment Securities
At June 30, 1998, December 31, 1997 and 1996, securities held to maturity
consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------
(Unaudited) December 31, 1997 December 31, 1996
---------------------------------- -----------------------------------
Gross Gross Gross Gross Gross Gross
Amor- unre- unre- Amor- unre- unre- Amor- unre- unre-
tized alized alized Fair tized alized alized Fair tized alized alized Fair
cost gains losses value cost gains losses value cost gains losses value
---- ----- ------ ----- ---- ----- ------ ----- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 2,495 9 (8) 2,496 9,666 62 (4) 9,724 12,721 15 (137) 12,599
======= ==== ===== ===== ======= === == ====== ====== ==== ===== ======
</TABLE>
At June 30, 1998 and December 31, 1997, securities of $1.6 million and
1.8 million, respectively, were pledged as collateral.
At June 30, 1998 and December 31, 1997 and 1996, securities available for
sale consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------
(Unaudited) December 31, 1997 December 31, 1996
---------------------------------- ----------------------------------
Gross Gross Gross Gross Gross Gross
Amor- unre- unre- Amor- unre- unre- Amor- unre- unre-
tized alized alized Fair tized alized alized Fair tized alized alized Fair
cost gains losses value cost gains losses value cost gains losses value
---- ----- ------ ----- ---- ----- ------ ----- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and federal
agencies $ 7,000 2 (2) 7,000 23,697 28 (34) 23,691 41,204 12 (620) 40,596
Municipal securities 4,561 146 (3) 4,704 3,091 150 - 3,241 2,589 10 - 2,599
Equity securities 8 18 - 26 8 14 - 22 9 7 - 16
------ ----- ----- ------ ------ ----- ---- ------ ------ ---- ----- ------
$11,569 166 (5) 11,730 26,796 192 (34) 26,954 43,802 29 (620) 43,211
====== ===== ===== ====== ====== === ==== ====== ====== ==== ===== ======
</TABLE>
F-12
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(In thousands)
(2), Continued
The following is a summary of maturities of debt securities as of June
30, 1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------- December 31, 1997
(Unaudited) ----------------------------------------
Securities Securities
held to Securities held to Securities
maturity available for sale maturity available for sale
------------------- ------------------ ----------------- ---------------------
Amor- Amor- Amor- Amor-
tized Fair tized Fair tized Fair tized Fair
cost value cost value cost value cost value
---- ----- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ 920 920 500 500 920 916 500 498
After one year through
five years 167 167 4,000 4,000 1,219 1,238 - -
After five years through
ten years 746 755 - - 3,807 3,842 23,197 23,193
After ten years 662 654 7,061 7,204 3,720 3,728 3,091 3,241
------ ------ ------- -------- ------ ------ ------- -------
$ 2,495 2,496 11,561 11,704 9,666 9,724 26,788 26,932
====== ====== ======= ======== ====== ====== ======= =======
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investment securities available for sale and the
realized gross gains and losses from those sales are as follows (in
thousands):
<TABLE>
<CAPTION>
Six months
ended Years ended
June 30, December 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Proceeds from sales $ 7,022 2,000 17,525 15,689 10,221
====== ====== ======= ======= =======
Gross realized gains 24 - 11 20 3
Gross realized losses - - - - (32)
------ ------ ------- ------- -------
$ 24 - 11 20 (29)
====== ====== ======= ======= =======
</TABLE>
In 1995, debt securities of $420,000 were transferred to held to maturity
from available for sale as a one time reallocation between categories, as
allowed by the "Special Report - A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities"
which was issued in November 1995.
F-13
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(In thousands)
(3) Mortgage-backed Securities
At June 30, 1998, December 31, 1997 and 1996, mortgage-backed securities
held to maturity consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------
(Unaudited) December 31, 1997 December 31, 1996
---------------------------------- ----------------------------------
Gross Gross Gross Gross Gross Gross
Amor- unre- unre- Amor- unre- unre- Amor- unre- unre-
tized alized alized Fair tized alized alized Fair tized alized alized Fair
cost gains losses value cost gains losses value cost gains losses value
---- ----- ------ ----- ---- ----- ------ ----- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA $ 2,747 47 (5) 2,789 3,138 64 (8) 3,194 3,658 56 (21) 3,693
FHLMC 2,610 28 (7) 2,631 2,902 34 (5) 2,931 3,530 26 (20) 3,536
FNMA 7,437 100 (4) 7,533 8,316 97 (16) 8,397 9,423 71 (45) 9,449
------- ----- ---- ------- ------ ----- --- ------ ------ ----- ---- ------
$ 12,794 175 (16) 12,953 14,356 195 (29) 14,522 16,611 153 (86) 16,678
======= ===== ==== ======= ====== === === ====== ====== === ==== ======
</TABLE>
At June 30, 1998, December 31, 1997 and 1996, mortgage-backed securities
available for sale consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------
(Unaudited) December 31, 1997 December 31, 1996
---------------------------------- ----------------------------------
Gross Gross Gross Gross Gross Gross
Amor- unre- unre- Amor- unre- unre- Amor- unre- unre-
tized alized alized Fair tized alized alized Fair tized alized alized Fair
cost gains losses value cost gains losses value cost gains losses value
---- ----- ------ ----- ---- ----- ------ ----- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA $ 2,158 9 (7) 2,160 1,348 10 - 1,358 474 9 - 483
FHLMC 39,242 165 (338) 39,069 25,567 165 (70) 25,662 7,645 73 (24) 7,694
FNMA 44,598 172 (320) 44,450 22,987 142 (50) 23,079 11,192 27 (37) 11,182
------- ----- ---- ------ ------ ----- ---- ------ ------ ----- ---- ------
$ 85,998 346 (665) 85,679 49,902 317 (120) 50,099 19,311 109 (61) 19,359
======= ===== ==== ====== ====== === ==== ====== ====== === ==== ======
</TABLE>
F-14
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(3), Continued
The following is a summary of maturities of mortgage-backed securities as
of June 30, 1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------------------------------------- --------------------------------------
(Unaudited)
Securities Securities Securities Securities
held to available held to available
maturity for sale maturity for sale
---------------------- ----------------- ----------------- ----------------
Amor- Amor- Amor- Amor-
tized Fair tized Fair tized Fair tized Fair
cost value cost value cost value cost value
---- ----- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts maturing in:
After one year through
five years $ 957 962 9,223 9,249 - - 7,549 7,593
After five years through
ten years 703 701 24,855 24,878 963 955 10,546 10,598
After ten years 11,134 11,290 51,920 51,552 13,393 13,567 31,807 31,908
------- ------- ------- ------- ------ ---------- ---------- --------
$ 12,794 12,953 85,998 85,679 14,356 14,522 49,902 50,099
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations without call
or prepayment penalties.
Proceeds from sales of mortgage-backed securities available for sale and
the realized gross gains and losses from those sales are as follows (in
thousands):
<TABLE>
<CAPTION>
Six months
ended Years ended
June 30, December 31,
--------------------- -------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Proceeds from sales $ - - 6,320 4,967 -
===== ===== ===== ====== =====
Gross realized gains - - 8 31 -
Gross realized losses - - - (6) -
----- ----- ----- ------ -----
$ - - 8 25 -
===== ===== ===== ====== =====
</TABLE>
At June 30, 1998, mortgage-backed securities of $17.1 million were pledge
as collateral.
In 1995, mortgage-backed securities with an amortized cost of
approximately $9.3 million were transferred from held to maturity to
available for sale as one time reallocation between categories, as
allowed by the "Special Report - A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities"
which was issued in November 1995.
F-15
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(4) Loans
The following is a summary of loans as of June 30, 1998, December 31,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
First mortgage loans:
Secured by one- to four-family
residence $ 83,990 86,140 90,500
Secured by other property 10,661 10,313 10,613
---------- ---------- ----------
Total first mortgage loans 94,651 96,453 101,113
Consumer loans:
Loans to depositors, secured by savings 208 350 256
Education 186 160 120
Equity 10,583 9,645 7,519
Lines of credit 98 134 78
---------- ---------- ----------
Total consumer loans 11,075 10,289 7,973
---------- ---------- ----------
Less:
Net deferred loan fees 349 409 521
Allowance for loan losses 750 618 606
---------- ---------- ----------
$ 104,627 105,715 107,959
========== ========== ==========
Loans held for sale $ - 750 3,756
========== ========== ==========
</TABLE>
Activity in the allowance for loan losses for the six months ended June
30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
--------------------- ---------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 618 606 606 593 528
Provision charged to income 132 6 12 12 60
Charge-offs - - - 2 -
Recoveries - - - 3 5
------ ---- ---- ---- ----
Balance at end of period $ 750 612 618 606 593
====== ==== ==== ==== ====
</TABLE>
F-16
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(4), Continued
The balance of nonaccrual loans for which interest income has been
reduced totals approximately $6,000, $0 and $313,000 at June 30, 1998,
December 31, 1997 and 1996, respectively. Interest income that would have
been recorded under the original terms of such loans approximated $0 and
$59,000 for the six months ended June 30, 1998 and 1997, respectively,
and $0, $13,000 and $22,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
(5) Premises and Equipment
Premises and equipment at June 30, 1998, December 31, 1997 and 1996
consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
-------- -------------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Land $ 527 527 527
Building and improvements 607 607 607
Leasehold improvements 787 787 767
Furniture, fixtures and equipment 1,125 1,090 968
-------- ------- -------
3,046 3,011 2,869
Less accumulated depreciation 858 758 559
-------- ------- -------
$ 2,188 2,253 2,310
======== ======= =======
</TABLE>
(6) Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank System, is required
to maintain an investment in capital stock of the Federal Home Loan Bank
of New York (FHLB). The FHLB of New York paid dividends at an effective
rate of 7.4% and 6.3% for the six months ended June 30, 1998 and 1997,
respectively, and 6.6%, 7.6% and 7.6% for the years ended December 31,
1997, 1996 and 1995, respectively.
F-17
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(7) Deposits
Deposits at June 30, 1998, December 31, 1997 and 1996 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, December 31,
------------- 1997 1996
(Unaudited) ------------------------- -------------------------
Weighted Weighted Weighted
average average average
Amount rate Amount rate Amount rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Passbook $ 29,126 3.21% $ 27,136 3.01% $ 23,377 3.01%
NOW accounts 15,165 2.29 12,320 1.84 8,622 1.94
Money market 3,807 2.98 3,632 2.98 3,778 2.98
Certificates of deposit 150,504 5.61 150,801 5.66 134,774 5.54
------- ------- -------
$ 198,602 $ 193,889 $ 170,551
======== ========= ========
</TABLE>
The aggregate amount of certificate of deposit accounts with a minimum
denomination of $100,000 was approximately $14.8 million, $15.6 million,
and $17.1 million at June 30, 1998, December 31, 1997 and 1996,
respectively.
At June 30, 1998, December 31, 1997 and 1996, scheduled maturities of
certificates of deposit are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
One year or less $ 108,575 95,800 109,525
One year to three years 37,294 50,878 19,694
Three years or more 4,635 4,123 5,555
--------- --------- ----------
$ 150,504 150,801 134,774
========= ========= ==========
</TABLE>
Interest expense on deposits for the six months ended June 30, 1998 and
1997 and for the years ended December 31, 1997, 1996 and 1995 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
----------------- -------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Passbook $ 443 369 785 663 634
NOW accounts 121 88 195 139 103
Money market 57 63 121 122 133
Certificates of deposit 4,171 3,769 7,881 6,726 5,683
------ ------- -------- ------- -------
$ 4,792 4,289 8,982 7,650 6,553
====== ======= ======== ======= =======
</TABLE>
F-18
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(8) Borrowed Funds
Borrowed funds at June 30, 1998, December 31, 1997 and 1996 are
summarized as follows (in thousands):
December 31,
June 30, -------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Advances from the FHLB $ 25,432 16,282 28,400
======== ======== =========
Pursuant to collateral agreements with the FHLB, advances are secured by
all stock in the FHLB and qualifying first mortgage loans. Advances at
June 30, 1998 and December 31, 1997 have maturity dates as follows (in
thousands):
June 30, December 31,
1998 1997
---- ----
(Unaudited)
1998 $ 6,700 15,525
2000 2,150 150
2006 582 607
2008 16,000 -
------- ------
$ 25,432 16,282
======= =======
The interest rates on advances ranged from 5.30% to 6.76%, 5.30% to 6.85%
and from 5.30% to 6.85% at June 30, 1998, December 31, 1997 and 1996,
respectively.
(9) Employee Retirement Plans
Pension Plan
The Bank has a defined benefit pension plan covering substantially all
employees. The benefits are computed using an average of the employee's
compensation for the highest five years during the last ten years of
employment. The Bank funds an amount equal to the
F-19
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(9), Continued
maximum allowable deduction for tax purposes as reported by the Bank's
actuary. Listed below are the components of pension expense for the six
months ended June 30, 1998 and 1997 and for the years ended December 31,
1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
----------------- -------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Service cost $ 42 34 67 66 79
Interest cost 22 21 42 37 26
Return on plan assets (27) (24) (47) (47) (7)
Other components 3 3 6 3 6
---- ---- ---- ----- ------
Net periodic pension
cost $ 40 34 68 59 104
==== ==== ==== ===== ======
</TABLE>
The following table shows the funded status of the plan and the amount
reported in the statements of financial condition at June 30, 1998,
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
June 30, ----------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $ 425 430 269
Nonvested 95 79 47
----- ------- -------
Total accumulated benefit
obligation 520 509 316
----- ------ ------
Projected benefit obligation (698) (707) (501)
Fair value of plan assets, primarily
certificates of deposit 716 730 549
----- ------ ------
Excess of fair value of
plan assets over pro-
jected benefit 18 23 48
Other (23) 12 (35)
------ ------ ------
(Accrued pension liability)
net pension asset $ (5) 35 13
====== ====== ======
</TABLE>
F-20
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(9), Continued
Assumptions used to develop the net periodic pension costs are as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
---------------- -----------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Discount rate 6.8% 7.5% 7.5% 7.5% 7.0%
Expected long-term rate of
return on assets 8.0 8.0 8.0 8.0 7.0
Rate of increase in compen-
sation levels 4.5 5.5 5.5 5.5 5.0
==== ==== ==== ==== ====
</TABLE>
Profit-sharing Plan
The Bank has established a 401(k) profit-sharing plan covering
substantially all employees. The plan provides for the Bank to match 50%
of an employee's contribution up to 4% of individual's salary.
Contributions to the plan for the six months ended June 30, 1998 and 1997
were approximately $9,000 and $9,000, respectively and for the years
ended December 31, 1997, 1996 and 1995 were approximately $20,000,
$19,000 and $17,000, respectively.
(10) 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 experience method
was used in preparing the income tax return for 1995. Legislation was
enacted in August 1996 which repealed for tax purposes the percentage of
taxable income bad debt reserve method. As a result, the Bank will use a
specific experience formula to compute its bad debt deduction for 1996
and 1997. The legislation also requires the Bank to recapture its
post-1987 net additions to its tax bad debt reserves for which the Bank
has accrued a deferred liability.
F-21
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(10), Continued
Income tax expense for the six months ended June 30, 1998 and 1997 and
for the years ended December 31, 1997, 1996 and 1995 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
------------------ -----------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 334 220 532 500 631
State 29 24 44 44 55
------ ------ ------ ------ ------
$ 363 244 576 544 686
====== ====== ====== ====== ======
Deferred:
Federal (111) 172 243 77 (27)
State (7) 9 22 7 (2)
------- ------ ------ ------ ------
$ (118) 181 265 84 (29)
====== ====== ====== ====== ======
Total:
Federal 223 392 775 577 604
State 22 33 66 51 53
------ ------ ------ ------ ------
$ 245 425 841 628 657
====== ====== ====== ====== ======
</TABLE>
Total income tax expense differed from the amounts computed by applying
the U.S. federal income tax rates of 34% to income before income taxes as
a result of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
-------------------- ----------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected income tax expense
at federal tax rate $ 249 370 711 465 607
Increase (decrease) in taxes
resulting from:
State income tax, net of
federal income tax effect 14 22 44 33 35
Tax-exempt interest (25) (22) (48) - -
Tax bad debt reserve - - - 136 -
Other, net 7 55 134 (6) 15
----- ----- ---- ---- ----
$ 245 425 841 628 657
===== ===== ==== ==== ====
</TABLE>
F-22
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(10), Continued
Total income tax expense for the six months ended June 30, 1998 and 1997
and for the years ended December 31, 1997, 1996 and 1995 was allocated as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
----------------- --------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income tax expense from operations $ 245 425 841 628 657
Shareholders' equity - unrealized gain (loss)
on securities available for sale (185) (31) 323 (372) 322
----- ----- ------- ------ ----
$ 60 394 1,164 256 979
===== ===== ======= ====== ====
</TABLE>
The following are the significant components of the net deferred tax
(liability) asset at June 30. 1998, December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
-------- --------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Components of deferred tax asset:
Provision for loan losses - book $ 270 222 218
Loan fees 86 85 135
Interest reserves -- -- 16
Amortization of premiums and discounts
on investment securities and mortgage-
backed securities 213 185 355
Unrealized losses on available-for-sale securities 57 -- 196
----- ----- -----
Total deferred tax asset 626 492 920
----- ----- -----
Components of deferred tax liability:
Depreciation (40) (36) (34)
Provision for loan losses - tax (396) (432) (433)
Other (28) (37) (5)
Unrealized gains on available-for-sale securities -- (128) --
----- ----- -----
Total deferred tax liability (464) (633) (472)
----- ----- -----
Net deferred tax asset (liability) $ 162 (141) 448
===== ===== =====
Net state deferred tax asset (liability) 9 (12) 37
Net federal deferred tax asset (liability) 153 (129) 411
----- ----- -----
$ 162 (141) 448
===== ===== =====
</TABLE>
F-23
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(10), Continued
Management has determined that it is more likely than not that it will
realize the deferred tax asset 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
pretax 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.
Retained earnings at both June 30, 1998 and December 31, 1997 includes
approximately $3.1 million for which no provision for income taxes 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. Management is not aware of the
occurrence of any such events. At both June 30, 1998 and December 31,
1997, the Bank has an unrecognized tax liability of $1.1 million with
respect to this reserve.
(11) Related-party Transactions
At June 30, 1998, December 31, 1997 and 1996, the executive officers and
directors have approximately ^$181,000, $121,000 and $233,000,
respectively, in outstanding residential first mortgage and consumer
loans. Lending transactions with related parties are on the same terms as
those prevailing at the time for comparable transactions with outside
customers. ^Activity in the related party loan balances for the six
months ended June 30, 1998 and the year ended December 31, 1997 is as
follows (in thousands):
June 30, 1998 December 31, 1997
------------- -----------------
Beginning Balance $ 121 233
Additional borrowings 60 73
Repayments -- (185)
--- ----
Ending Balance $ 181 121
=== ===
(12) Commitments, Contingencies and Concentrations of Credit Risk
In the ordinary course of business, the Bank has various outstanding
commitments that are not reflected in the accompanying financial
statements. The principal commitments of the Bank are outlined in the
following section.
F-24
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(12), Continued
Lease Commitments
At June 30, 1998 and December 31, 1997, the Bank is obligated under a
noncancelable operating lease expiring in February 2005 for its office
and drive-in facilities in Ridgewood, New Jersey. The lease contains
escalation clauses providing for increased rentals based upon
increases in the consumer price index and an option to renew for an
additional ten years. In addition, the Bank leases a facility in
Mahwah, New Jersey, under a noncancelable operating lease expiring in
November 2007. The lease contains an option to renew for an additional
eight years. Net rent expense exclusive of real estate taxes under the
operating leases, included in occupancy and equipment expense, was
approximately $79,000 and $80,000 for the six months ended June 30,
1998 and 1997, respectively, and approximately $161,000, $154,000 and
$123,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The projected minimum rental payments under the terms of the leases,
exclusive of the renewal options, are as follows (in thousands):
June, 30 December 31,
1998 1997
---- ----
(Unaudited)
1998 $ 77 100
1999 155 100
2000 155 100
2001 155 100
2002 155 100
2003 and thereafter 936 539
------- -------
$ 1,633 1,039
======= =======
Real estate taxes, insurance and maintenance expenses are generally
obligations of the Bank and, accordingly, are not included as part of
rental payments.
Financial Instruments with Off-balance-sheet Risk
The Bank maintains its cash and cash equivalents in bank deposit
accounts, the balances of which, at times, may exceed federally
insured limits. Additionally, the Bank is a party to financial
instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments primarily consist of commitments to extend credit. These
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
statements of financial condition.
F-25
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(12), Continued
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require
payment of a fee. The Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount and type of collateral obtained by
the Bank upon extension of credit varies and is based on management's
credit evaluation of the counterparty/customer.
Loan Commitments
At June 30, 1998 and December 31, 1997, the Bank has outstanding firm
commitments to originate loans as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 198
------------------------------- December 31, 1997
(Unaudited) ----------------------------
Vari- Vari-
Fixed able Fixed able
rate rate Total rate rate Total
---- ---- ----- ---- ---- -----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans $ 2,534 3,287 5,821 420 1,575 1,995
Consumer and other
loans 219 195 414 145 100 245
------- ------- ------- ----- ------- -------
$ 2,753 3,482 6,235 565 1,675 2,240
======= ======= ======= ===== ======= =======
</TABLE>
Litigation
In the normal course of business, the Bank may be a party to various
outstanding legal proceedings and claims. In the opinion of
management, the financial position of the Bank will not be materially
affected by the outcome of such legal proceedings and claims.
Concentrations of Credit Risk
A substantial portion of the Bank's loans are one- to four-family
residential first mortgage loans secured by real estate located in New
Jersey. Accordingly, the collectibility of a substantial portion of
the Bank's loan portfolio is susceptible to changes in real estate
market conditions.
F-26
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(13) Recapitalization of Savings Institution Insurance Fund (SAIF)
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF and spread the obligations for
payment of Financing Corporation (FICO) bonds across all SAIF and Bank
Insurance Fund (BIF) members. The Federal Deposit Insurance Corporation
(FDIC) special assessment levied amounted to 65.7 basis points on SAIF
assessable deposits held as of March 31, 1995. The special assessment was
recognized in 1996 and was tax deductible. The Bank took a charge of
$830,000, before tax-effect, as a result of the FDIC special assessment.
This legislation will eliminated the substantial disparity between the
amount that BIF and SAIF member institutions had been paying for deposit
insurance premiums.
Beginning on January 1, 1997, BIF members paid a portion of the FICO
payment equal to 1.3 basis points on BIF-insured deposits compared to 6.4
basis points on SAIF-insured deposits, and will pay a pro rata share of the
FICO payment on the earlier of January 1, 2000 or the date upon which the
last savings association ceases to exist. The legislation also requires BIF
and SAIF to be merged by January 1, 1999, provided that subsequent
legislation is adopted to eliminate the savings association charter and no
savings associations remain as of that time.
The FDIC has recently lowered SAIF assessments to a range comparable to
that of BIF members, although SAIF members must also make the FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an ongoing basis or whether the BIF and SAIF will eventually
be merged.
(14) Regulatory Matters
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at June 30, 1998 and December 31,
1997, the Bank is required to maintain (a) a minimum leverage ratio of Tier
1 capital to total adjusted assets of 4.0%, and (b) minimum ratios of Tier
1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC 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 leverage (Tier 1) 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%.
F-27
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(14), Continued
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 quantitative judgments by the FDIC
about capital components, risk weightings and other factors.
Management believes that, as of June 30, 1998, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent
FDIC notification categorized the Bank as a well-capitalized institution
under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes
have changed the Bank's capital classification.
The following is a summary of the Bank's actual capital amounts and
ratios as of June 30, 1998, December 31, 1997 and 1996, compared to the
FDIC minimum capital adequacy requirements and the FDIC requirements for
classification as a well-capitalized institution (in thousands).
<TABLE>
<CAPTION>
To be well
For capital capitalized
adequacy under prompt
Actual purpose correction action
-------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998 (unaudited):
Total capital (to risk-
weighted assets) $ 18,199 20.24% $ 7,195 8.00% $ 8,993 10.00%
Tier 1 (capital to risk-
weighted assets) 17,449 19.40 3,597 4.00 5,396 6.00
Tier 1 capital (to average
assets) 17,449 7.49 9,317 4.00 11,647 5.00
As of December 31, 1997:
Total capital (to risk-
weighted assets) 17,579 20.42 6,888 8.00 8,610 10.00
Tier 1 (capital to risk-
weighted assets) 16,962 19.70 3,444 4.00 5,166 6.00
Tier 1 capital (to average
assets) 16,962 7.59 8,942 4.00 11,178 5.00
As of December 31, 1996:
Total capital (to risk-
weighted assets) 16,322 20.89 6,252 8.00 7,814 10.00
Tier 1 (capital to risk-
weighted assets) 15,716 20.11 3,126 4.00 4,688 6.00
Tier 1 capital (to average
assets) 15,716 7.33 8,573 4.00 10,717 5.00
======= ===== ===== ==== ====== ======
</TABLE>
F-28
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(15) Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in estimating
its fair value disclosure for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the statements of financial condition for
these assets approximate their fair value.
Investment Securities (Including Mortgage-backed Securities)
Fair values for investment securities are based on quoted market prices.
Loans
Fair values are estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk
characteristics.
Deposits
The fair values disclosed for demand deposits are, by definition, equal to
the amount payable on demand at the reporting date. The fair value for
certificates of deposit is estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates of deposit to a schedule of aggregate contractual maturities
on such time deposits.
Borrowed Funds
The fair value of borrowed funds is estimated using a discounted cash flow
calculation that applies interest rates currently being offered.
FHLB Stock
The fair value of FHLB stock approximates carrying value.
Off-Balance-Sheet Commitments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar arrangements and is not included in
the table since it is not significant.
F-29
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(15), Continued
The estimated fair values of the Bank's financial instruments at June 30,
1998, December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,1998
---------------------- December 31, 1997 December 31, 1996
(Unaudited) --------------------- ------------------------
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 19,528 19,528 15,398 15,398 6,364 6,364
Investment securities - HTM 2,495 2,496 9,666 9,724 12,721 12,599
Investment securities - AFS 11,730 11,730 26,954 26,954 43,211 43,211
Mortgage-backed securities -
HTM 12,794 12,953 14,356 14,522 16,611 16,678
Mortgage-backed securities -
AFS 85,679 85,679 50,099 50,099 19,359 19,359
Loans held for sale - - 750 750 3,756 3,756
Loans receivable, net 104,627 108,741 105,715 108,227 107,959 111,112
FHLB stock 1,949 1,949 1,949 1,949 1,949 1,949
Liabilities:
Deposits 198,602 198,201 193,889 192,776 170,551 170,393
Borrowed funds 25,432 25,548 16,282 16,300 28,400 28,407
========= ========= ========= ========= ========= ========
</TABLE>
The carrying amounts in the preceding table are included in the statements
of financial condition under the applicable captions.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on existing on-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. The tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
F-30
<PAGE>
RIDGEWOOD SAVINGS BANK OF NEW JERSEY
Notes to Financial Statements, Continued
(16) Plan of Conversion (unaudited)
On June 22, 1998, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a New Jersey chartered mutual savings bank to
a New Jersey chartered stock savings bank. The bank will be a
wholly-owned subsidiary of Ridgewood Financial, Inc. (the Company), a
holding company formed by the Bank, subject to approval by regulatory
authorities. The conversion is expected to be accomplished through the
sale of a minority of the Company's common stock in an amount equal to
the pro forma market value of the Company and the Bank after giving
effect to the conversion. The majority of the shares will be owned by
Ridgewood Financial, MHC (the MHC). A subscription right to subscribe for
the purchase of common stock will be made initially to each depositor of
the Bank who had a deposit account balance of at least $50 as of May
31,1997 ( the "Eligible Account Holders"), the employee stock ownership
plan of the Bank, ^each depositor of the Bank, other than Eligible
Account Holders, who had a deposit account balance of at least $50 as of
September 30,1998 (the "supplemental eligible account holders"), and
other depositors of the Bank, as of the voting record date.
Any shares of common stock not sold in the subscription offering are
expected to be made available for sale at the same price per share to the
general public in a community offering which may be commenced
simultaneously with the subscription offering; thereafter, remaining
shares, if any, are expected to be sold in a public offering.
Upon a complete liquidation of the Bank after the conversion, the
Company, as holder of the Bank's common stock would be entitled to any
assets remaining upon a liquidation of the Bank. Each depositor would not
have a claim in the assets of the Bank. However, upon a complete
liquidation of the MHC after the conversion, each depositor would have a
claim up to the pro rata value of his or her accounts, in the assets of
the MHC remaining after the claims of the creditors of the MHC are
satisfied. Depositors who have liquidation rights in the Bank immediately
prior to the conversion will continue to have such rights in the MHC
after the conversion for so long as they maintain deposit accounts in the
Bank after the conversion.
Upon a complete liquidation of the Company, each holder of shares of
common stock would be entitled to receive a pro rata share of the
Company's assets, following payment of all debts, liabilities and claims
of greater priority of or against the Company.
Costs to be incurred that are directly associated with the conversion are
to be deferred and are to be deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs
would be charged to expense at the conclusion of the offering process.
F-31
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
================================================================================ ==================================================
You should rely only on the information contained in this document or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of Ridgewood Savings Bank of New Jersey or
Ridgewood Financial, Inc. may change after the date of this prospectus. Delivery
of this document and the sales of shares made hereunder does not mean otherwise.
TABLE OF CONTENTS
Page
----
Questions and Answers...................................................... (i) Up to 1,864,725 Shares
Summary ........................................ (iii) Common Shares
Selected Financial and Other Data............................................(x)
Recent Developments.......................................................(xiii)
Management's Discussion and Analysis
of Recent Developments.....................................................(xv)
Risk Factors...................................................................1
Ridgewood Savings Bank of New Jersey...........................................5
Ridgewood Financial, Inc.......................................................5
Ridgewood Financial, MHC.......................................................6 RIDGEWOOD FINANCIAL, INC.
Use of Proceeds................................................................6
Dividend Policy................................................................7
Wavier of Dividends by the MHC.................................................7
MHC Conversion to Stock Form...................................................8
Market for Common Stock........................................................9
Capitalization................................................................11
Pro Forma Data................................................................12
Historical and Pro Forma Capital Compliance...................................18
Statements of Income..........................................................20
Management's Discussion and Analysis of
Financial Condition and Results of Operations................................21
Business of the Company.......................................................39 ------------------
Business of the Bank..........................................................39
Regulation ...................................................................63 PROSPECTUS
Taxation......................................................................67
Management ...................................................................69 ------------------
The Reorganization............................................................76
The Offering..................................................................83
Certain Restrictions on Acquisition of
the Company..................................................................96
Description of Capital Stock..................................................97
Legal and Tax Opinions........................................................98 Ryan, Beck & Co.
Experts.......................................................................98
Change in Auditor.............................................................99
Registration Requirements.....................................................99
Where You Can Find Additional Information.....................................99
Index to Financial Statements................................................100 November 12, 1998
Until the later of February 18, 1999 or 90 days after commencement of the
offering, all dealers effecting transactions in these securities, whether or not THESE SECURITIES ARE NOT DEPOSITS OR
participating in this offering, may be required to deliver a prospectus. This is ACCOUNTS AND ARE NOT FEDERALLY INSURED
in addition to the dealers' obligation to deliver a prospectus when acting as OR GUARANTEED.
underwriters and with respect to their unsold allotments or subscriptions.
================================================================================ ==================================================
</TABLE>
