<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-65519
PROSPECTUS
South Jersey Financial Corporation, Inc.
Proposed Holding Company for
[LOGO] South Jersey Savings
and Loan Association
4651 ROUTE 42
TURNERSVILLE, NEW JERSEY 08012
(609) 629-6000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
South Jersey Savings and Loan Association is converting from the mutual to the
stock form of organization. This conversion must be approved by the Office of
Thrift Supervision, the New Jersey Department of Banking and Insurance and a
majority of the votes eligible to be cast by members of South Jersey Savings.
As part of this conversion, South Jersey Savings will become a wholly owned
subsidiary of South Jersey Financial Corporation, Inc. In addition, South
Jersey Savings intends to establish the South Jersey Savings Charitable
Foundation as part of the conversion and will fund the foundation with a
contribution of its common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TERMS OF THE OFFERING
South Jersey Financial is offering for sale shares of its common stock in a
subscription offering, and, to the extent shares are not subscribed, in a
community offering or other offering. IN ORDER TO PURCHASE SHARES PURSUANT TO A
SUBSCRIPTION RIGHT, YOU MUST SUBMIT A PROPERLY COMPLETED STOCK ORDER AND
CERTIFICATION FORM, TOGETHER WITH PAYMENT FOR THE SHARES, TO SOUTH JERSEY
SAVINGS BY 12:00 NOON, EASTERN TIME, ON JANUARY 19, 1999, UNLESS EXTENDED. No
shares will be sold if South Jersey Savings' conversion to stock form is not
approved as required or if at least the minimum number of shares are not sold.
All funds submitted to South Jersey Savings to purchase shares of stock will be
placed in a deposit account at South Jersey Savings until the shares are issued
or the funds are returned.
An independent appraiser has estimated the aggregate pro forma market value of
the common stock to be sold in South Jersey Savings' conversion to be between
$27,965,000 and $37,835,000. If the aggregate estimated pro forma market value
of the stock to be sold in this conversion is increased, then the maximum
number of shares to be sold also may be increased up to an adjusted maximum of
4,351,025 shares, a 15% increase.
. Price Per Share $10.00
. Number of Shares 2,796,500 to 3,290,000 to
Minimum/Midpoint/Maximum 3,783,500
. Underwriting Commissions and
Other Expenses $1,157,000 to $1,213,000 to
Minimum/Midpoint/Maximum $1,269,000
. Net Proceeds to South Jersey
Financial $26,808,000 to $31,687,000 to
Minimum/Midpoint/Maximum $36,566,000
. Net Proceeds per Share
Minimum/Midpoint/Maximum $9.59 to $9.63 to $9.66
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS DOCUMENT.
There is currently no public market for the common stock. The common stock is
expected to be quoted on the Nasdaq National Market, under the symbol "SJFC",
upon completion of the conversion.
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 Office of Thrift
Supervision, the New Jersey Department of Banking and Insurance, nor any other
state securities regulator has approved or disapproved these securities or
determined if this prospectus is accurate or complete. Any representations to
the contrary is a criminal offense.
--------------------
Sandler O'Neill & Partners, L.P.
--------------------
THE DATE OF THIS PROSPECTUS IS DECEMBER 16, 1998
<PAGE>
[MAP OF NEW JERSEY]
2
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS THE PURPOSE OF THE OFFERING?
A: The offering means that you will have the chance to become a stockholder of
our newly formed holding company, South Jersey Financial Corporation, Inc.,
which will allow you to share in our future as a stock savings institution.
The stock offering will increase our capital and funds for lending and
investment activities. As a stock savings institution operating through a
holding company structure, we will have greater flexibility for investments.
Q: HOW DO I PURCHASE THE STOCK?
A: You must complete and return the stock order form to us together with your
payment, so that we receive your order by 12:00 noon Eastern time on January
19, 1999.
Q: HOW MUCH STOCK MAY I PURCHASE?
A: The minimum purchase is 25 shares, which equals $250. The maximum purchase
for any individual person or persons ordering through a single account is
20,000 shares or $200,000. No person, related person or persons acting
together, may purchase more than 1% of the common stock sold, exclusive of
any increase above the maximum number of shares to be sold. We may decrease
or increase this purchase limitation without notifying you. In the event
that the offering is oversubscribed, shares will be allocated based upon a
formula.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: You might not receive any or all of the shares you want to purchase. If
there is an oversubscription in the subscription offering, the stock will be
allocated, in the following order of priority:
. Depositors who held at least $50 with us on June 30, 1997.
. The South Jersey Savings Employee Stock Ownership Plan.
. Depositors who held at least $50 with us on September 30, 1998.
. Depositors who held less than $50 with us or were a borrower on June 30,
1997.
If the above persons do not subscribe for all of the shares, the remaining
shares may be offered in a community offering or through Sandler O'Neill &
Partners, L.P. in a public offering. We have the right to reject any stock
order in the community offering or public offering.
3
<PAGE>
SUMMARY
. This summary highlights selected information in this prospectus but does not
contain all of the information that you need to know before making an
informed investment decision. You should read carefully this entire
prospectus, including the financial statements and the notes to the financial
statements of South Jersey Savings.
THE COMPANIES
SOUTH JERSEY FINANCIAL CORPORATION, INC.
4651 Route 42
Turnersville, New Jersey 08012
(609) 629-6000
South Jersey Financial is not an operating company and has not engaged in any
significant business to date. It was formed to be the holding company for South
Jersey Savings. The holding company structure will provide greater flexibility
in terms of operations, expansion and diversification. See page 19.
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
4651 Route 42
Turnersville, New Jersey 08012
(609) 629-6000
South Jersey Savings is a New Jersey mutual savings and loan association. At
July 31, 1998, South Jersey Savings had assets of $259.7 million, deposits of
$231.2 million and equity of $26.0 million.
South Jersey Savings operates three banking offices in Gloucester and Camden
Counties in Southwest New Jersey. South Jersey Savings historically has
operated as a community-oriented banking institution primarily offering
residential mortgage loans and consumer loans and a variety of retail deposit
products.
THE STOCK OFFERING
South Jersey Financial is offering for sale between 2,796,500 and 3,783,500
shares of its common stock at $10 per share. As a result of changes in market
and financial conditions prior to completion of the conversion or to fill the
order of our employee stock ownership plan and subject to the Office of Thrift
Supervision's approval, the offering may be increased to 4,351,025 shares
without further notice to you. In that event, you will not have the opportunity
to change or cancel any stock order previously delivered to us.
STOCK PURCHASES
The shares of common stock are offered on the basis of priorities. As a
depositor or borrower member, you will receive 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, public offering or
syndicated public offering. See pages 89 to 113.
SUBSCRIPTION RIGHTS
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law.
THE OFFERING RANGE AND DETERMINATION OF THE PRICE PER SHARE
The offering range is based on an independent appraisal by FinPro, Inc. dated
as of October 7, 1998. This appraisal was based upon our financial condition
and operations and the effect of the additional capital to be raised in this
offering. The $10.00 price per share was determined by our board of directors
and is the price most commonly used in stock offerings involving conversions of
mutual savings institutions. The independent appraisal will be updated prior to
the consummation of the conversion.
4
<PAGE>
TERMINATION OF THE OFFERING
The subscription offering will terminate on January 19, 1999. If all of the
shares are not subscribed for in the subscription offering and we are unable to
obtain orders for the remaining shares by March 5, 1999, we will:
. promptly return any payment you made to us, with interest, or cancel any
withdrawal authorization you gave us; or
. give you notice of an extension of the offering and of your rights to
cancel or change your subscription.
NO BOARD RECOMMENDATION
Our boards of directors make no recommendation to you regarding whether you
should purchase the common stock. You should make an evaluation of your best
interests and financial capabilities in deciding whether or not to purchase
stock.
CONVERSION CENTER
If you have any questions regarding the conversion, please call the Conversion
Center at (609) 858-6088.
BENEFITS TO MANAGEMENT FROM THE OFFERING
We intend to establish the South Jersey Savings Employee Stock Ownership Plan
which will purchase shares as part of the offering. After we complete the
offering, we will be able to calculate the number of shares we will give to the
charitable foundation. The employee stock ownership plan will submit an order
to buy stock in the offering in an amount equal to 8% of the total of the
shares to be sold in connection with the conversion and the shares to be given
to the foundation. The South Jersey Savings Employee Stock Ownership Plan will
be a tax qualified retirement benefit for all eligible employees. We also
intend to adopt a stock-based incentive plan for the benefit of directors,
officers and employees.
The following table presents information regarding the total shares of common
stock, at the maximum of the shares proposed to be sold, which would be
acquired by the South Jersey Savings Employee Stock Ownership Plan and
allocated over an anticipated 15 year period to all eligible employees and the
total of all shares available for award and issuance upon the exercise of
options granted under the stock-based incentive plan. The value of shares given
in the table assumes that their value is the same as the sales price of the
shares in the offering. No value is given for options because their exercise
price will be equal to the fair market value of the common stock on the day the
options are granted. As a result, value can be received under an option only if
the market price of common stock increases.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
SHARES SOLD
IN CONNECTION WITH
THE CONVERSION AND
ISSUED TO THE
ESTIMATED SOUTH JERSEY SAVINGS
VALUE OF SHARES CHARITABLE FOUNDATION
--------------- ---------------------
<S> <C> <C>
Employee Stock Ownership Plan............. $3,268,940 8.0%
Stock-Based Incentive Plan:
Stock Awards............................ 1,634,470 4.0
Stock Options........................... -- 10.0
---------- ----
Total................................. $4,903,410 22.0%
========== ====
</TABLE>
Additionally, some of our employees will receive employment agreements or
change in control agreements which could provide those employees with cash
payments upon their termination of employment following a change in control of
South Jersey Financial or South Jersey Savings. The stock-based incentive plan
may also provide participants with benefits upon a change in control.
5
<PAGE>
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
South Jersey Financial will use a portion of the net proceeds from the sale of
its stock to purchase all the common stock to be issued by South Jersey Savings
in the conversion and possibly to make a loan to our employee stock ownership
plan to fund its purchase of stock in the conversion. The balance of the funds
will be retained as South Jersey Financial's initial capitalization. See page
22.
DIVIDENDS
South Jersey Financial has not made any decision concerning the payment of
dividends.
SOUTH JERSEY SAVINGS CHARITABLE FOUNDATION
In furtherance of our long-standing commitment to our local community, we
intend to establish a charitable foundation, the South Jersey Savings
Charitable Foundation, and to contribute to it shares of our common stock equal
to 8% of the shares sold. See pages 90 to 96.
6
<PAGE>
RISK FACTORS
The following risk factors, in addition to the other information discussed
elsewhere in this prospectus, should be considered by you in deciding whether
to purchase our common stock.
INCREASING INTEREST RATES MAY HURT OUR PROFITS
To be profitable, we have to earn more money in interest and fees than we pay
to our depositors in interest. More than two-thirds of our interest-earning
assets, such as our loans, are long-term investments with fixed interest rates.
In contrast, the interest we owe to our depositors generally is for short-term
deposits and may be changed more frequently. When interest rates rise, we must
pay more in interest while our interest income remains more fixed. This causes
profits to decrease. For a further discussion of how changes in interest rates
could impact South Jersey Financial see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Management of Interest Rate
Risk and Market Risk Analysis."
AFTER THIS OFFERING, SOUTH JERSEY FINANCIAL'S NET INCOME-TO-EQUITY RATIO WILL
BE LOW, COMPARED TO OTHER COMPANIES. THIS COULD NEGATIVELY INFLUENCE THE MARKET
PRICE AND LIQUIDITY OF OUR COMMON STOCK.
The proceeds we will receive from the sale of our stock will significantly
increase our capital and it will take us time to fully use it in our business
operations through prudent longer-term investments. Therefore, we expect our
return on equity initially to be below our historical level and below that of
peer group institutions. We cannot give you any assurance as to when or if we
will achieve returns on equity that are comparable to industry peers or our
historical levels.
In addition, the proposed stock-based benefit plans will increase our future
costs for the compensation of our employees, which will reduce our income.
These factors mean that our stock price likely will be less than it otherwise
would be if we were able to more rapidly invest our new capital in higher
interest-earning assets and if we did not incur those compensation expenses.
For further information regarding the risks involved with the implementation of
stock-based benefit plans, see "--The Implementation of Stock-Based Benefits to
Management and Directors Will Increase Our Future Compensation Expense" and "--
Our Agreement to Make Payments After A Change in Control In Various Employee
Contracts and Plans May Discourage Takeover Attempts."
THE LOW DEMAND FOR MORTGAGE LOANS IN OUR PRIMARY MARKET AREA HAS LOWERED OUR
PROFITABILITY
We have experienced a generally low demand for residential real estate mortgage
loans in our primary market area. This has occurred even though the generally
low level of interest rates in recent periods has promoted significant demand
for mortgage loans to refinance existing, higher interest rate loans. Since our
business primarily is investing in mortgage loans, and our alternative
investments generally earn less revenue for us, the decreased amount of
mortgage loans means our profit has been less than we would have earned had we
been able to invest in a larger number of mortgage loans. In addition, the
refinancings of our existing loans by borrowers in order to obtain lower
interest rates reduces the future payments we will receive on loans and forces
us to reinvest those loan prepayments in lower interest rate investments. For
further information, see "Business of the Association--Lending Activities."
IF OUR COMPUTER SYSTEMS DO NOT WORK PROPERLY WITH YEAR 2000 DATA, OUR BUSINESS
OPERATIONS WILL BE SIGNIFICANTLY DISRUPTED
We could experience a significant disruption to our business operations and, as
a result, a significant adverse impact on our financial condition and results
of operations if our computer systems and the computer systems operated by
third party vendors on which we rely are not able to properly handle problems
created by the year 2000. We are actively working to make sure as best we can
that this does not happen or, at least, that the effects are lessened as much
as possible; but we cannot give any assurances that our efforts will be
successful.
7
<PAGE>
In addition, if our progress towards becoming Year 2000 compliant is deemed
inadequate, then we may be subjected to adverse regulatory action. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
THE ESTABLISHMENT OF THE SOUTH JERSEY SAVINGS CHARITABLE FOUNDATION WILL HAVE A
NEGATIVE IMPACT ON EARNINGS
South Jersey Financial intends to contribute to the South Jersey Savings
Charitable Foundation shares of common stock equal to 8% of the shares to be
sold, assuming the foundation is approved by members. This contribution will
have an adverse impact on our operating results for the year ending December
31, 1999, possibly resulting in an operating loss for that year. For further
discussion regarding the effect of the contribution to the charitable
foundation, see "The Conversion--Establishment of the Charitable Foundation."
THE CONTRIBUTION TO THE SOUTH JERSEY SAVINGS CHARITABLE FOUNDATION MEANS THAT
YOUR TOTAL OWNERSHIP WILL BE 7.4% LESS THAN IF WE MADE NO CONTRIBUTION
If you purchase shares, then your ownership and voting interest in South Jersey
Financial will be diluted by 7.4% compared to what they would have been if we
made no contribution to the South Jersey Savings Charitable Foundation. For
further discussion regarding the effects of the contribution to the charitable
foundation, see "The Conversion--Establishment of the Charitable Foundation."
THERE IS A RISK THAT THE CONTRIBUTION TO THE CHARITABLE FOUNDATION WILL NOT BE
TAX DEDUCTIBLE AND THUS ITS NEGATIVE EFFECT ON OUR EARNINGS COULD BE
SIGNIFICANTLY GREATER THAN WE EXPECT
We believe that our contribution to the South Jersey Savings Charitable
Foundation will be deductible by us for federal income tax purposes.
Nevertheless, we do not have any assurance that the Internal Revenue Service
will agree with us. In the event our contribution is not deductible for federal
income tax purposes, we would not receive any tax benefit from that
contribution. In addition, even if our contribution is tax deductible, we may
not have sufficient earnings to be able to use the deduction in full. For a
further discussion of the contribution to the charitable foundation, please see
"The Conversion--Establishment of the Charitable Foundation."
THE IMPLEMENTATION OF STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS WILL
INCREASE OUR FUTURE COMPENSATION EXPENSE
We intend to adopt a stock-based incentive plan which will provide for the
granting of options to purchase common stock and awards of common stock to our
eligible officers, employees and directors and to have an employee stock
ownership plan which will purchase shares in the conversion. These plans will
increase our future costs of compensating our employees.
Since stock options will be granted with an exercise price equal to the fair
market value of the common stock on the day of grant, recipients will realize
value only in the event of an increase in the price of common stock following
the date of grant of the stock options. Accordingly, under current accounting
standards, for financial statement purposes, we will not recognize compensation
expense with respect to stock options.
OUR AGREEMENT TO MAKE PAYMENTS AFTER A CHANGE IN CONTROL IN VARIOUS EMPLOYEE
CONTRACTS AND PLANS MAY DISCOURAGE TAKEOVER ATTEMPTS
The proposed stock benefit plan may contain provisions calling for the
acceleration of benefits or payments in the event of a change in control. We
also intend to enter into employment and change in control agreements with
certain employees and adopt an employee severance compensation plan. These
agreements and plan are expected to provide benefits and cash payments to
employees if there is a change in control and a subsequent termination of their
employment. These benefits that would come into effect upon a change in control
would increase the cost of acquiring us. This additional cost could discourage
future attempts to take us over which
8
<PAGE>
you might like to have happen. For a further discussion of current and proposed
benefits for our directors, management and employees, see "Restrictions on
Acquisition of the Company and the Association--Restrictions in the Company's
Certificate of Incorporation and Bylaws," "Management of the Association--
Employment Agreements," "--Change in Control Agreements," "--Employee Severance
Compensation Plan" and "--Other Benefit Plans."
ANTI-TAKEOVER PROVISIONS IN OUR GOVERNING INSTRUMENTS AND VOTING CONTROL OF
MANAGEMENT MAY DISCOURAGE TAKEOVER ATTEMPTS
PROVISIONS IN SOUTH JERSEY FINANCIAL'S AND SOUTH JERSEY SAVINGS' GOVERNING
INSTRUMENTS. Provisions in our governing instruments may discourage potential
proxy contests and other potential takeover attempts, particularly those which
have not been negotiated with our board of directors. As a result, these
provisions generally may serve to perpetuate existing management. Examples of
these provisions include, a limitation on the voting of shares held by a single
beneficial owner in excess of 10% of our outstanding shares and the election of
directors for three-year terms so that only approximately one-third of our
directors are elected annually. For a more detailed discussion of these
provisions, see "Restrictions on Acquisitions of the Company and the
Association."
VOTING CONTROL OF OFFICERS AND DIRECTORS. The prospective possible total
ownership or voting influence over our shares which our employees and directors
might obtain over time through the shares they purchase in the conversion,
their interests in the South Jersey Savings Employee Stock Ownership Plan, and
their possible acquisition of shares upon the vesting of awards or the exercise
of options that they might receive if we adopt the proposed stock-based benefit
plan would give our employees and directors a significant vote on matters
important to you. Further, this possible ownership level could discourage
takeover attempts which you might like to see happen. In addition, the total
ownership or voting level by employees and directors from these sources could
reach in excess of 20% of our outstanding stock. That level would enable our
employees and directors as a group to defeat any stockholder matter that
required an 80% vote. For a detailed discussion of these provisions, see
"Restrictions on Acquisition of the Company and the Association--Restrictions
in the Company's Certificate of Incorporation and Bylaws."
IF THE NUMBER OF SHARES OF COMMON STOCK TO BE SOLD IN THIS OFFERING IS
INCREASED, THE FUTURE NET INCOME ATTRIBUTABLE TO EACH SHARE OF COMMON STOCK
WOULD BE DECREASED
An increase in the number of shares sold will mean that each share will own a
smaller part of whatever earnings and equity we have in the future. For further
information regarding pro forma information, see "Pro Forma Data."
YOUR SUBSCRIPTION RIGHTS MAY BE TAXABLE
We have received an opinion of FinPro, Inc. that, under FinPro's valuation, the
subscription rights granted to depositors to purchase our common stock have no
value. However, FinPro's valuation is not binding on the Internal Revenue
Service. If the Internal Revenue Service determines that those subscription
rights have value, then receipt of those rights could result in a taxable gain
to you. Whether subscription rights have value is an inherently factual
determination. For further discussion regarding tax aspects, see "The
Conversion--Tax Aspects."
9
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The selected financial and other data of South Jersey Savings set forth below
is derived in part from, and should be read in conjunction with, the Financial
Statements of South Jersey Savings and Notes thereto presented elsewhere in
this Prospectus. The data presented for the seven month periods ended July 31,
1998 and 1997 were derived from unaudited financial statements and reflect, in
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such interim
periods. Interim results at and for the seven month period ended July 31, 1998,
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998. In order to present ratios and other data
for the seven month periods ended July 31, 1998 and 1997, which can be compared
to the ratios and data for the annual periods, the ratios and other data for
the seven month periods ended July 31, 1998 and 1997 have been presented as if
they related to an annual period.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JULY 31, --------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.................. $259,709 $249,805 $241,212 $234,374 $222,775 $220,744
Cash and cash equivalents..... 17,210 19,200 10,894 17,842 9,097 11,136
Loans, net.................... 99,563 98,966 104,263 105,352 110,618 108,213
Securities held-to-maturity:
Mortgage-backed securities,
net........................ 48,352 45,231 41,398 31,672 29,923 29,340
Investment securities, net.. 87,056 79,034 77,110 72,180 65,904 64,648
FHLB stock.................... 1,249 1,233 1,150 1,182 1,150 1,239
Deposits...................... 231,156 223,206 216,834 211,120 201,509 201,838
FHLB advances................. 176 176 176 176 176 176
Total equity.................. 26,026 24,689 22,424 21,267 19,244 17,055
Real estate owned............. 50 -- -- 23 -- 143
Nonperforming assets and
troubled debt
restructurings............... 465 631 999 665 3,795 4,757
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FOR THE SEVEN
MONTHS ENDED
JULY 31, FOR THE YEAR ENDED DECEMBER 31,
-------------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest
income............... $ 10,593 $ 10,175 $17,606 $16,956 $16,172 $15,367 $15,615
Interest expense...... 5,672 5,375 9,330 9,130 8,591 7,425 7,576
--------- --------- ------- ------- ------- ------- -------
Net interest
income............. 4,921 4,800 8,276 7,826 7,581 7,942 8,039
Provision for loan
losses............... 175 233 400 180 180 300 400
--------- --------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses........ 4,746 4,567 7,876 7,646 7,401 7,642 7,639
Noninterest income.... 355 364 623 682 653 680 744
Noninterest
expense(1)........... 3,012 2,902 4,960 6,518 4,910 4,876 4,506
--------- --------- ------- ------- ------- ------- -------
Income before income
taxes................ 2,089 2,029 3,539 1,810 3,144 3,446 3,877
Income taxes.......... 752 730 1,273 654 1,120 1,257 1,572
--------- --------- ------- ------- ------- ------- -------
Net income.......... $ 1,337 $ 1,299 $ 2,266 $ 1,156 $ 2,024 $ 2,189 $ 2,305
========= ========= ======= ======= ======= ======= =======
<CAPTION>
AT OR FOR THE SEVEN
MONTHS ENDED
JULY 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING
RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Average yield on
interest-earning
assets............... 7.36% 7.42% 7.43% 7.33% 7.35% 7.11% 7.42%
Average rate paid on
interest-bearing
liabilities.......... 4.30 4.26 4.27 4.27 4.20 3.66 3.85
Average interest rate
spread............... 3.06 3.16 3.16 3.06 3.15 3.45 3.57
Net interest margin... 3.40 3.48 3.49 3.38 3.45 3.68 3.88
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities.......... 108.72 108.25 108.37 108.11 107.58 106.65 105.68
Net interest income
after provision for
loan losses to
noninterest expense.. 157.57 157.37 158.79 117.31 150.73 156.73 169.53
Efficiency ratio(2)... 57.09 56.20 55.74 76.61 59.63 56.55 51.30
Noninterest expense as
a percent of average
assets............... 2.03 2.05 2.04 2.74 2.17 2.19 2.10
Return on average
assets............... 0.90 0.92 0.93 0.49 0.89 0.98 1.08
Return on average
equity............... 9.03 9.65 9.62 5.26 9.98 12.07 14.47
Ratio of average
equity to average
assets............... 9.98 9.53 9.65 9.23 8.95 8.14 7.43
</TABLE>
See notes on following page
11
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SEVEN MONTHS
ENDED AT OR FOR THE YEAR ENDED
JULY 31, DECEMBER 31,
-------------- ------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
REGULATORY CAPITAL
RATIOS:
Tangible capital
ratio................. 10.02% 9.70% 9.88% 9.30% 9.07% 8.64% 7.73%
Core capital ratio..... 10.02 9.70 9.88 9.30 9.07 8.64 7.73
Risk-based capital
ratio................. 28.16 26.43 27.27 24.90 24.50 22.48 20.04
ASSET QUALITY RATIOS:
Nonperforming loans and
troubled debt
restructurings as a
percent of total
loans................. 0.41 1.02 0.63 0.94 0.60 3.38 4.20
Nonperforming assets
and troubled debt
restructurings as a
percent of total
assets................ 0.18 0.43 0.25 0.41 0.28 1.70 2.15
Allowance for loan
losses as a percent of
total loans, net...... 0.82 1.38 0.67 1.14 1.01 0.88 0.81
Allowance for loan
losses as a percent of
nonperforming loans
and troubled debt
restructurings........ 197.35 131.79 105.71 118.72 166.36 25.51 18.94
Net loans charged-off
to average interest-
earning loans......... 0.02 0.03 0.89 0.06 0.07 0.18 0.09
FULL SERVICE OFFICES AT
END OF PERIOD........... 3 3 3 3 3 3 3
</TABLE>
- --------
(1) Includes a one-time special assessment of $1.3 million in addition to our
deposit insurance premium paid to the Federal Deposit Insurance Corporation
in 1996.
(2) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of the net interest income and noninterest income.
12
<PAGE>
RECENT DEVELOPMENTS
The following table sets forth certain financial and other data of South Jersey
Savings at and for the periods indicated. Financial and operating data and
financial ratios and other data at and for the year ended December 31, 1997
have been derived from and should be read in conjunction with the audited
Financial Statements of South Jersey Savings and Notes thereto presented
elsewhere in this Prospectus. The data presented for the three and nine months
ended September 30, 1998 and 1997 were derived from unaudited financial
statements and reflect, in the opinion of management, all adjustments
(consisting only of recurring adjustments) which are necessary to present
fairly the results for such interim periods. Interim results at and for the
three and nine months ended September 30, 1998, are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31,
1998. In order to present ratios and other data for the three and nine month
periods ended September 30, 1998 and 1997, which can be compared to the ratios
and data for the annual periods, the ratios and other data for the three and
nine month periods ended September 30, 1998 and 1997 have been presented as if
they related to an annual period.
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA:
Total assets...................................... $261,389 $249,805
Cash and cash equivalents......................... 26,839 19,200
Loans, net........................................ 100,006 98,966
Securities held-to-maturity:
Mortgage-backed securities, net................. 47,953 45,231
Investment securities, net...................... 79,024 79,034
FHLB stock........................................ 1,249 1,233
Deposits.......................................... 233,086 223,206
FHLB advances..................................... 176 176
Total equity...................................... 26,387 24,689
Nonperforming assets and troubled debt
restructurings................................... 379 631
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE THREE MONTHS MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------
1998 1997 1998 1997
---------- ---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income.............. $ 4,581 $ 4,431 $13,648 $13,136
Total interest expense............. 2,519 2,359 7,348 6,940
---------- ---------- ------- -------
Net interest income.............. 2,062 2,072 6,300 6,196
Provision for loan losses.......... 75 100 225 300
---------- ---------- ------- -------
Net interest income after
provision for loan losses....... 1,987 1,972 6,075 5,896
Noninterest income................. 157 157 463 466
Noninterest expense................ 1,316 1,249 3,886 3,719
---------- ---------- ------- -------
Income before income taxes......... 828 880 2,652 2,643
Income taxes....................... 298 316 954 951
---------- ---------- ------- -------
Net income....................... $ 530 $ 564 $ 1,698 $ 1,692
========== ========== ======= =======
<CAPTION>
AT OR FOR THE
AT OR FOR THE NINE MONTHS
THREE MONTHS ENDED SEPTEMBER
ENDED SEPTEMBER 30, 30,
---------------------- ----------------
1998 1997 1998 1997
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER
DATA:
PERFORMANCE RATIOS:
Average yield on interest earning
assets............................ 7.24% 7.44% 7.33% 7.43%
Average rate paid on interest-
bearing liabilities............... 4.31 4.26 4.30 4.26
Average interest rate spread....... 2.93 3.18 3.03 3.17
Net interest margin................ 3.29 3.51 3.37 3.49
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 109.17 108.40 108.82 108.28
Net interest income after provision
for loan losses to noninterest
expense........................... 150.99 157.89 156.33 158.54
Noninterest expense as a percent of
average assets.................... 2.03 2.04 2.03 2.04
Efficiency Ratio(1)................ 59.31 56.03 57.46 55.82
Return on average assets........... 0.82 0.92 0.89 0.93
Return on average equity........... 8.12 9.47 8.86 9.70
Ratio of average equity to average
assets............................ 10.05 9.72 10.00 9.58
</TABLE>
See note on following page
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED SEPTEMBER
SEPTEMBER 30, 30,
-------------- ----------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
REGULATORY CAPITAL RATIOS:
Tangible capital ratio..................... 10.09% 9.88% 10.09% 9.88%
Core capital ratio......................... 10.09 9.88 10.09 9.88
Risk-based capital ratio................... 28.34 27.27 28.34 27.27
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total
loans..................................... 0.38 1.17 0.38 1.17
Nonperforming assets and troubled debt
restructurings as a percent of total
assets.................................... 0.14 0.48 0.14 0.48
Allowance for loan losses as a percent of
total loans, net.......................... 0.86 1.43 0.86 1.43
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings............................ 227.44 122.23 227.44 122.23
Net loans charged-off to average interest-
earning loans............................. 0.02 0.00 0.03 0.03
FULL SERVICE OFFICES AT END OF PERIOD........ 3 3 3 3
</TABLE>
- --------
(1) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of the net interest income and noninterest income.
15
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
Total assets increased by $11.6 million, or 4.6%, to $261.4 million at
September 30, 1998 from $249.8 million at December 31, 1997. The growth in
assets was primarily due to an increase in federal funds sold and the mortgage-
backed security portfolio which was funded primarily through deposit inflows
and net income.
Cash and cash equivalents increased $7.6 million, or 39.9%, to $26.8 million at
September 30, 1998 from $19.2 million at December 31, 1997. The growth in cash
and cash equivalents was primarily due to an increase in federal funds sold.
South Jersey Savings' portfolio of securities held-to-maturity increased by
$2.7 million, or 2.2%, to $127.0 million at September 30, 1998 from $124.3
million at December 31, 1997. The increase was primarily due to an increase in
the level of South Jersey Savings' savings deposits and investment of those
funds in South Jersey Savings' mortgage-backed security portfolio.
South Jersey Savings' outstanding loans, net, increased $1.0 million, or 1.1%,
to $100.0 million at September 30, 1998 from $99.0 million at December 31,
1997. Real estate loans increased by $1.5 million, or 1.9%, to $83.2 million at
September 30, 1998, from $81.7 million at December 31, 1997, primarily due to
increased loan production which was offset by loan prepayments and repayments.
Residential real estate mortgage loans increased by $1.6 million, or 2.1%, to
$80.1 million at September 30, 1998, from $78.5 million at December 31, 1997.
Multi-family and commercial real estate loans decreased by $84,000, or 2.6%, to
$3.1 million at September 30, 1998, from $3.2 million at December 31, 1997.
Consumer loans decreased by $387,000, or 2.1%, to $18.0 million at September
30, 1998 from $18.4 million at December 31, 1997.
Nonperforming loans decreased to $312,000 at September 30, 1998 from $631,000
at December 31, 1997, representing 0.31% and 0.63%, respectively, of total
loans at those dates. Nonperforming assets and troubled debt restructurings
also decreased to 0.14% at September 30, 1998, from 0.25% at December 31, 1997
of total assets at those dates.
Total deposits increased by $9.9 million, or 4.4%, to $233.1 million at
September 30, 1998, from $223.2 million at December 31, 1997. The increase was
primarily due to an increase of $10.1 million, or 9.1%, in certificates of
deposit to $121.4 million at September 30, 1998, from $111.3 million at
December 31, 1997. The increase in certificates of deposit was primarily due to
South Jersey Savings' strategy of offering more competitive rates on
certificates of deposit. Non-interest-bearing demand accounts increased by
$248,000, or 5.8%. Advances from the Federal Home Loan Bank of New York
remained constant at $176,000 during this period.
Total equity increased by $1.7 million, or 6.9%, to $26.4 million at September
30, 1998, from $24.7 million at December 31, 1997. The increase in equity was a
result of net income of $1.7 million.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
GENERAL. Net income for the three months ended September 30, 1998 totalled
$530,000 which was a decrease of $34,000, or 6.0%, from $564,000 for the three
months ended September 30, 1997.
INTEREST INCOME. Total interest income increased by $150,000, or 3.4%, to $4.6
million for the three months ended September 30, 1998 from $4.4 million for the
three months ended September 30, 1997, primarily due to a $14.8 million, or
6.2%, increase in the average balance of interest-earning assets, offset by a
decrease in the weighted average yield on interest-earning assets, which
decreased to 7.24% for the three months ended September 30, 1998 from 7.44% for
the three months ended September 30, 1997. Interest income on real estate loans
decreased $51,000, or 3.1%, to $1.6 million for the three months ended
September 30, 1998 from $1.7 million for the three months ended September 30,
1997, primarily due to a $1.3 million decrease in the average balance of real
estate loans and a 12 basis point decrease in the weighted average yield to
7.79% for the three months ended September 30, 1998, from 7.91% for the three
months ended September 30, 1997. Interest income on consumer loans decreased
$25,000 to $383,000 for the three months ended September 30, 1998 from $408,000
for the three months ended September 30, 1997. This was principally due to a
decrease in the average balance of consumer loans of $1.1 million, or 5.8%, to
$17.7 million for the three months ended
16
<PAGE>
September 30, 1998 from $18.8 million for the three months ended September 30,
1997, and a three basis point decrease in the yield on consumer loans. Interest
income on securities increased by $226,000, or 9.6%, to $2.6 million for the
three months ended September 30, 1998, from $2.4 million for the three months
ended September 30, 1997. This increase was primarily a result of a $222,000
increase in interest income on investment securities, attributable to a $14.9
million increase in the average balance of investment securities to $103.2
million, offset by a decrease in the weighted average yield of ten basis
points.
INTEREST EXPENSE. Interest expense increased by $160,000, or 6.8%, to $2.5
million for the three months ended September 30, 1998 from $2.4 million for the
three months ended September 30, 1997. The increase in interest expense
resulted from increased interest expense on certificates of deposit, which was
a result of a $10.5 million, or 9.7%, increase in the average balance of such
accounts to $119.2 million for the three months ended September 30, 1998, from
$108.7 million for the three months ended September 30, 1997, and by an
increase in the weighted average rate paid on certificates of deposit for the
three months ended September 30, 1998 when compared to the same period in 1997.
The increase in the average balance of certificates of deposit was due
primarily to South Jersey Savings' efforts to solicit certificate accounts by
more competitively pricing those accounts in an effort to attract longer-term
deposits.
PROVISION FOR LOAN LOSSES. South Jersey Savings' provision for loan losses for
the three months ended September 30, 1998 was $75,000 compared to $100,000 for
the three months ended September 30, 1997. The $25,000, or 25.0%, decrease in
the provision for loan losses was primarily due to the payoff in the fourth
quarter of 1997 of South Jersey Savings' largest commercial real estate loan on
which provisions had been made for a probable loss. The allowance for loan
losses at September 30, 1998 was 0.85% of total loans, compared to 1.40% at
September 30, 1997. At September 30, 1998 and 1997, the ratio of the allowance
for loan losses to nonperforming loans was 276.3% and 140.5%, respectively.
NONINTEREST INCOME. Noninterest income for the three months ended September 30,
1998 remained constant at $157,000 compared to the three months ended September
30, 1997.
NONINTEREST EXPENSE. Total noninterest expense increased $67,000, or 5.4%, to
$1.3 million for the three months ended September 30, 1998, from $1.2 million
for the three months ended September 30, 1997. Compensation and employee
benefits increased $39,000, or 5.1%, to $798,000 for the three months ended
September 30, 1998 from $759,000 for the three months ended September 30, 1997,
primarily due to normal increases in salaries as well as increases in benefits
costs. Data processing expense increased $12,000, or 14.6%, to $94,000 for the
three months ended September 30, 1998 from $82,000 for the three months ended
September 30, 1997, primarily due to increased communication charges from the
data center. Other noninterest expense remained stable during the two periods.
South Jersey Financial expects increased expense in the future as a result of
the establishment of the South Jersey Savings Employee Stock Ownership Plan,
stock-based incentive plan, and a supplemental executive retirement plan, as
well as increased costs associated with being a public company (for example,
costs for periodic reports and annual stockholder meetings and professional
fees).
INCOME TAXES. Income tax expense totalled $298,000 for the three months ended
September 30, 1998, compared to $316,000 for the three months ended September
30, 1997, resulting in effective tax rates of 36.0% and 35.9% for the
respective three month periods.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
GENERAL. Net income for the nine months ended September 30, 1998 totalled
$1,698,000 million which was an increase of $6,000, or 0.4%, from $1,692,000
for the nine months ended September 30, 1997.
INTEREST INCOME. Total interest income increased by $512,000, or 3.9%, to $13.6
million for the nine months ended September 30, 1998, from $13.1 million for
the nine months ended September 30, 1997, primarily due to a $12.4 million, or
5.3%, increase in the average balance of interest earning assets, offset by a
decrease in the weighted average yield on interest earning assets, which
decreased ten basis points to 7.33% for the nine
17
<PAGE>
months ended September 30, 1998 from 7.43% for the nine months ended September
30, 1997. Interest income on real estate loans decreased $192,000, or 3.8%, to
$4.8 million for the nine months ended September 30, 1998 from $5.0 million for
the nine months ended September 30, 1997, primarily due to a $2.9 million
decrease in the average balance of real estate loans and a four basis point
decrease in the weighted average yield to 7.88% for the nine months ended
September 30, 1998, from 7.92% for the nine months ended September 30, 1997.
Interest income on consumer loans decreased $58,000 to $1,152,000 for the nine
months ended September 30, 1998 from $1,210,000 for the nine months ended
September 30, 1997. This was principally due to a decrease in the average
balance of consumer loans of $782,000, or 4.2%, to $17.9 million for the nine
months ended September 30, 1998 from $18.7 million for the nine months ended
September 30, 1997, and a six basis point decrease in the yield on consumer
loans. Interest income on securities increased by $762,000, or 11.1%, to $7.6
million for the nine months ended September 30, 1998, from $6.9 million for the
nine months ended September 30, 1997. This increase was primarily a result of a
$724,000 increase in interest income on investment securities, attributable to
a $13.5 million increase in the average balance of investment securities to
$101.4 million, and an increase in the weighted average yield of eight basis
points. Interest income on mortgage-backed securities remained stable at $2.6
million due to a higher average balance of mortgage-backed securities, offset
by a decrease in the weighted average yield on the portfolio of mortgage-backed
securities to 7.41% for the nine months ended September 30, 1998 from 7.73% for
the nine months ended September 30, 1997.
INTEREST EXPENSE. Interest expense increased by $408,000, or 5.9%, to $7.3
million for the nine months ended September 30, 1998 from $6.9 million for the
nine months ended September 30, 1997. The increase in interest expense resulted
from increased interest expense on certificates of deposit, which was a result
of an $8.5 million, or 7.9% increase in the average balance of certificates of
deposit to $116.4 million for the nine months ended September 30, 1998, from
$107.9 million for the nine months ended September 30, 1997, and by an increase
in the weighted average rate paid on certificates of deposit for the nine
months ended September 30, 1998 when compared to the same period in 1997. The
increase in the average balance of certificates of deposit was due primarily to
South Jersey Savings' efforts to solicit certificate accounts by more
competitively pricing those accounts in an effort to attract longer-term
deposits.
PROVISION FOR LOAN LOSSES. South Jersey Savings' provision for loan losses for
the nine months ended September 30, 1998 was $225,000 compared with $300,000
for the nine months ended September 30, 1997. The $75,000, or 25.0%, decrease
in the provision for loan losses was primarily due to the payoff in the fourth
quarter of 1997 of South Jersey Savings' largest commercial real estate loan,
on which provisions had been made for a probable loss. The allowance for loan
losses at September 30, 1998 was 0.85% of total loans, compared to 1.40% at
September 30, 1997. At September 30, 1998 and 1997, the ratio of the allowance
for loan losses to non-performing loans was 276.3% and 140.5%, respectively.
NONINTEREST INCOME. In the nine months ended September 30, 1998, South Jersey
Savings experienced a decrease of $3,000, or 0.6%, in noninterest income to
$463,000 from $466,000 for the nine months ended September 30, 1997. The
decrease was primarily due to a decrease in checking account fees and consumer
insurance fees.
NONINTEREST EXPENSE. Total noninterest expense increased $167,000, or 4.5%, to
$3.9 million for the nine months ended September 30, 1998, from $3.7 million
for the nine months ended September 30, 1997. Compensation and employees
benefits increased $136,000, or 6.1%, to $2.4 million for the nine months ended
September 30, 1998, from $2.2 million for the nine months ended September 30,
1997, primarily due to normal increases in salaries as well as increases in
benefits costs. Other noninterest expense remained stable during the two
periods. South Jersey Financial expects increased noninterest expense in the
future as a result of the establishment of the South Jersey Savings Employee
Stock Ownership Plan, a stock-based incentive plan, and supplemental executive
retirement program, as well as increased costs associated with being a public
company (for example, costs for periodic reports and annual stockholder
meetings and professional fees).
INCOME TAXES. Income tax expense totalled $954,000 for the nine months ended
September 30, 1998 compared to $951,000 for the nine months ended September 30,
1997, resulting in an effective tax rate of 36.0% for both of the nine month
periods ended September 30, 1998 and 1997.
18
<PAGE>
SOUTH JERSEY FINANCIAL CORPORATION, INC.
South Jersey Financial Corporation, Inc. ("South Jersey Financial" or the
"Company") was recently organized in Delaware at the direction of the Board of
Directors of South Jersey Savings and Loan Association ("South Jersey Savings"
or the "Association") for the purpose of acquiring all of the capital stock to
be issued by the Association in its conversion to stock form. The Company has
received approval from the Office of Thrift Supervision (the "OTS") to become a
savings and loan holding company. As a savings and loan holding company, the
Company will be subject to regulation by the OTS. See "The Conversion--
General." Upon the sale of its common stock, the Company will conduct business
initially as a unitary savings and loan holding company. See "Regulation--
Holding Company Regulation." The Company's assets will consist of all of the
outstanding shares of the Association's capital stock and the 50% of the net
proceeds from the sale of its common stock which the Company will retain. The
Company intends to use part of the net proceeds from the sale of its common
stock retained by it to loan funds to the South Jersey Savings Employee Stock
Ownership Plan (the "ESOP") to enable the ESOP to purchase 8% of the common
stock issued, including shares issued to the South Jersey Savings Charitable
Foundation (the "Foundation"). The Company and Association may, however,
alternatively choose to fund the ESOP through a loan to the ESOP trust by a
third-party financial institution. The Company intends initially to utilize the
remaining proceeds for investments in federal funds and securities, primarily
mortgage-backed securities and U.S. government and agency obligations. See "Use
of Proceeds." The management of the Company is set forth under "Management of
the Company." Initially, the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Association.
At the present time, the Company does not intend to employ any persons other
than officers of the Company who are also officers of the Association, but will
utilize the support staff of the Association from time to time. Additional
employees will be hired as appropriate to the extent the Company expands its
business in the future.
Management believes that the holding company structure will provide the Company
with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. In addition, management believes that the Company will be in a
position, subject to regulatory limitations and the Company's financial
position, to take advantage of acquisition and expansion opportunities that may
arise. There are no current arrangements, understandings or agreements, written
or oral, regarding any such opportunities or transactions. The initial
activities of the Company are anticipated to be funded by the net proceeds
retained by the Company and earnings thereon or, alternatively, through
dividends from the Association.
The Company's executive offices are located at 4651 Route 42, Turnersville, New
Jersey, 08012 and its telephone number is (609) 629-6000.
19
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
The Association was originally organized in 1921 and operated as Knight Park
Building and Loan Association of Collingswood, New Jersey. In 1950, the
Association merged with Vineyard Building and Loan Association and changed its
name to South Jersey Savings and Loan Association. The Association conducts
business from its home office and operation centers located in Turnersville,
New Jersey and its two full service branch offices located in Collingswood and
Glendora, New Jersey.
The Association operates as a community savings association and its corporate
philosophy has traditionally been focused on providing a competitive array of
financial products and services to consumers within its market area. The
Association's business primarily consists of accepting deposits from customers
and investing those funds primarily in loans secured by mortgages on
residential real estate, consumer loans and mortgage-backed and investment
securities. At July 31, 1998, the Association had $100.8 million, or 38.8% of
total assets, invested in loans, consisting of: $80.2 million, or 30.9% of
total assets, of residential mortgage loans; $17.6 million, or 6.8% of total
assets, of consumer loans (consisting primarily of home equity loans, home
equity lines of credit and education loans); and $3.0 million, or 1.2% of total
assets, of multi-family and commercial real estate loans. Securities at July
31, 1998 totalled $136.7 million, or 52.6% of total assets, primarily
consisting of $87.1 million, or 33.5% of total assets, of investment securities
(consisting primarily of U.S. Government and agency obligations) and $48.4
million, or 18.6% of total assets, of mortgage-backed securities (consisting
primarily of securities issued by Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"),
and Ginnie Mae ("GNMA")). At July 31, 1998, the Association's deposit accounts
totalled $231.2 million, or 98.9% of total liabilities, of which $107.7
million, or 46.6%, were comprised of core deposits (savings, NOW, money market
and club accounts). In addition to core deposits, the Association had $118.4
million of certificate accounts, or 50.7% of total liabilities, of which $54.7
million were certificates of deposit with maturities of one year or less and
$9.7 million were certificates of deposit having balances of $100,000 or more.
The Association also borrows from the Federal Home Loan Bank ("FHLB") of New
York as a source of funds. At July 31, 1998, such advances totalled $176,000,
or 0.08% of total liabilities.
The Association is subject to extensive regulation, supervision and examination
by the Commissioner (the "Commissioner") of the New Jersey Department of
Banking (the "Department") and the OTS, its primary regulators, and the Federal
Deposit Insurance Corporation (the "FDIC"), which insures its deposits. As of
July 31, 1998, the Association exceeded all regulatory capital requirements
with tangible, core and risk-based capital of $26.0 million, $26.0 million and
$26.8 million, respectively. Additionally, the Association's regulatory capital
was in excess of the amount necessary for it to be deemed "well capitalized"
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). See "Regulatory Capital Compliance" and "Regulation." The
Association is a member of the FHLB of New York which is one of the twelve
regional banks which comprise the FHLB system. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of the
Association."
The Association's executive offices are located at 4651 Route 42, Turnersville,
New Jersey, 08012 and its telephone number is (609) 629-6000.
20
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At July 31, 1998, the Association exceeded all regulatory capital requirements.
See "Regulation--Federal Regulation of Savings Institutions--Capital
Requirements." Set forth below is a summary of the Association's compliance
with the regulatory capital standards as of July 31, 1998, on a historical and
pro forma basis assuming that the indicated number of shares were sold as of
such date and receipt by the Association of 50% of the net proceeds.
<TABLE>
<CAPTION>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
PRO FORMA AT JULY 31, 1998 BASED UPON THE SALE AT $10.00 PER SHARE
-----------------------------------------------------------------------
4,351,025 SHARES
2,796,500 SHARES 3,290,000 SHARES 3,783,500 SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
HISTORICAL AT ESTIMATED PRICE ESTIMATED PRICE ESTIMATED PRICE ESTIMATED PRICE
JULY 31, 1998 RANGE) RANGE) RANGE) RANGE)(1)
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP CAPITAL............ $26,026 10.02% $35,806 13.29% $37,606 13.86% $39,406 14.43% $41,475 15.07%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
TANGIBLE CAPITAL:
Capital Level......... $26,026 10.02% $35,806 13.29% $37,606 13.86% $39,406 14.43% $41,475 15.07%
Requirement........... 3,896 1.50 4,042 1.50 4,069 1.50 4,096 1.50 4,127 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $22,130 8.52% $31,764 11.79% $33,537 12.36% $35,310 12.93% $37,348 13.57%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
CORE CAPITAL:
Capital Level......... $26,026 10.02% $35,806 13.29% $37,606 13.86% $39,406 14.43% $41,475 15.07%
Requirement(3)........ 7,791 3.00 8,085 3.00 8,139 3.00 8,193 3.00 8,255 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $18,235 7.02% $27,721 10.29% $29,467 10.86% $31,213 11.43% $33,220 12.07%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
RISK-BASED CAPITAL:
Capital Level(4)(5)... $26,834 28.16% $36,614 36.54% $38,414 38.00% $40,214 39.43% $42,283 41.04%
Requirement........... 7,624 8.00 8,016 8.00 8,088 8.00 8,160 8.00 8,242 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $19,210 20.16% $28,598 28.54% $30,326 30.00% $32,054 31.43% $34,041 33.04%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- --------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
subscription and community offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets. Risk-
based capital levels are shown as a percentage of risk-weighted assets.
(3) The current OTS core capital requirement for savings associations is a
minimum of 3% of total adjusted assets. The OTS has proposed core capital
requirements which would require a core capital ratio of a minimum of 3% of
total adjusted assets for thrifts that receive the highest supervisory
rating for safety and soundness and a minimum of 4% to 5% core capital
ratio requirement for all other thrifts. See "Regulation--Federal
Regulation of Savings Institutions--Capital Requirements."
(4) Assumes net proceeds are invested in assets that carry a 50% risk-
weighting.
(5) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable to
the addition of the general valuation allowance of $808,000 at July 31,
1998.
21
<PAGE>
USE OF PROCEEDS
The Board of Directors has carefully considered the alternatives available to
the Association with respect to its corporate structure and has determined that
a mutual to stock conversion is in the best interests of the Association, its
depositors and the communities served by the Association. The Board of
Directors believes that the capital raising advantages enjoyed by commercial
banks, more and more thrift institutions and the other types of financial
institutions with which it competes places the Association, as a mutual
institution, at a competitive disadvantage. The restructuring of the
Association into the capital stock form of organization should enable the
Association to compete more effectively through the possible ability to
increase its equity capital base and the possibility of access to capital
markets, when needed, and could promote the Association's ability to expand its
franchise and the products it offers. Although the actual net proceeds from the
sale of common stock by the Company cannot be determined until the sale is
completed, it is presently anticipated that such net proceeds will be between
$26.8 million and $36.6 million (or $42.2 million if the number of shares sold
is increased by 15%). See "Pro Forma Data" and "The Conversion--Stock Pricing"
as to the assumptions used to arrive at such amounts.
The Company will purchase all of the outstanding capital stock of the
Association to be issued in the Association's conversion in exchange for 50% of
the net proceeds from the Company's sale of common stock and will retain the
remaining net proceeds. The number of shares of common stock proposed to be
sold by the Company is based on the $10 per share offering price and an
estimate by FinPro, Inc. ("FinPro"), an independent appraiser, of the aggregate
pro forma market value of the common stock to be sold. FinPro has estimated
that pro forma market value to range between a minimum of $28.0 million to a
maximum of $37.8 million, with a midpoint of $32.9 million (the "Estimated
Price Range"). Based on the midpoint of the Estimated Price Range, the Company
expects to use $15.8 million of net proceeds to purchase the common stock of
the Association. Such portion of net proceeds will be added to the
Association's general funds which the Association intends to use for general
business purposes, including investments in loans and mortgage-backed and
investment securities, and the planned expansion of its operations facilities.
The Association may also use such funds to expand operations through
acquisitions of other financial institutions, branch offices or other financial
services companies. The Association has not yet determined the approximate
amount of net proceeds to be used for any of the purposes mentioned above.
Neither the Association nor the Company has any current arrangements,
understandings or agreements regarding any such opportunities or transactions.
The Company intends to use a portion of the net proceeds retained by it to make
a loan directly to the ESOP to enable the ESOP to purchase 8% of the common
stock issued, including shares issued to the Foundation. The Company and
Association may alternatively choose to fund the ESOP's stock purchases through
a loan by a third-party financial institution. The remaining net proceeds
retained by the Company will initially be invested in federal funds and
securities, primarily mortgage-backed securities and U.S. government and agency
obligations. Based upon the combined sale of common stock and issuance of
shares to the Foundation of 3,020,220 shares, 3,553,200 shares or 4,086,180
shares at the minimum, midpoint and maximum of the Estimated Price Range,
respectively (or 4,699,107 shares if the Estimated Price Range is increased by
15%), the amount of the loan to the ESOP would be $2.4 million, $2.8 million or
$3.3 million, respectively (or $3.8 million if the Estimated Price Range is
increased by 15%) to be repaid over a 15-year period at the prevailing prime
rate of interest. See "Management of the Association--Other Benefit Plans--
Employee Stock Ownership Plan and Trust."
The Company will be a unitary savings and loan holding company, which under
existing laws would generally not be restricted as to the types of business
activities in which it may engage, provided that the Association continues to
be a qualified thrift lender ("QTL"). See "Regulation--Holding Company
Regulation" for a description of regulations applicable to the Company.
The Board of Directors of the Company will have the authority to adopt stock
repurchase plans, subject to statutory and regulatory requirements. Current OTS
regulations generally prohibit the Company from repurchasing any shares of
common stock for three years except (i) for an offer to all stockholders on a
pro rata
22
<PAGE>
basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Association's conversion , the OTS regulations
permit the Company to repurchase its common stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a 12-
month period; (ii) the repurchases do not cause the Association to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and (iii) the Company provides to the Regional Director of the OTS
no later than 10 days prior to the commencement of a repurchase program written
notice containing a full description of the program to be undertaken and such
program is not disapproved by the Regional Director. See "Regulation--Prompt
Corrective Regulatory Action." Under current OTS policies, repurchases may be
allowed in the first year following the Association's conversion and in amounts
greater than 5% in the second and third years following that conversion
provided there are valid and compelling business reasons for such repurchases
and the OTS does not object to such repurchases.
Based upon facts and circumstances and subject to applicable regulatory
requirements, the Board of Directors may determine to repurchase stock in the
future. Such facts and circumstances may include but are not limited to: (i)
market and economic factors such as the price at which the common stock is
trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the opportunity to improve the Company's
return on equity; (ii) the avoidance of dilution to stockholders by not having
to issue additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its stockholders.
Although the Company has no current plans to repurchase its stock, in the event
the Company does determine to repurchase stock, such repurchases could impact
the market price of the common stock.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Association will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that such capital will be adequate, taking into account, among other things,
the level of non-performing and other risk assets, the Company's and the
Association's current and projected results of operations and asset/liability
structure, the economic environment, tax and other considerations. See "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion."
Additionally, the Company and Association have committed to the OTS that during
the one-year period following the completion of the Association's conversion,
the Company will not make any distribution to stockholders that, for federal
tax purposes, would be treated as a return of capital without prior approval of
the OTS.
23
<PAGE>
DIVIDEND POLICY
The Board of Directors of the Company will have the authority to declare
dividends on the common stock, subject to statutory and regulatory
requirements. In the future, the Board of Directors intends to consider a
policy of paying cash or stock dividends on the common stock. However, no
decision has been made with respect to the payment of dividends. Declarations
of dividends by the Board of Directors, if any, will depend upon a number of
factors, including the amount of net proceeds retained by the Company,
investment opportunities available to the Company or the Association, capital
requirements, regulatory limitations, the Company's and the Association's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid or, if commenced, will continue to be paid.
The Association will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation Rights."
New Jersey law provides that dividends may be paid by the Association only out
of net income, earned surplus or undivided profits. For information concerning
federal regulations which apply to the Association in determining the amount of
proceeds which may be retained by the Company and regarding a savings
institution's ability to make capital distributions, including payment of
dividends to its holding company, see "Federal and State Taxation--Federal
Taxation" and "Regulation--Federal Regulation of Savings Institutions--
Limitation on Capital Distributions."
Unlike the Association, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Association. The Company is subject, however, to the requirements of
Delaware law, which generally limits dividends to an amount equal to the excess
of the net assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital (generally defined as the aggregate par
value of the outstanding shares of the Company's capital stock having a par
value plus the amount of the consideration paid for shares of the Company's
capital stock without par value) or, if there is no such excess, to its net
profits for the current and/or immediately preceding fiscal year.
Additionally, the Company and Association have committed to the OTS that during
the one-year period following the consummation of the Association's conversion,
the Company will not make any distribution to stockholders that, for federal
tax purposes, would be treated as a return of capital without prior approval of
the OTS.
MARKET FOR THE COMMON STOCK
The Company and Association have not previously issued capital stock and,
consequently, there is no established market for the common stock. The Company
expects to receive approval to have its common stock quoted on the Nasdaq
National Market (the "Nasdaq") under the symbol "SJFC". Such approval is
subject to various conditions, including sale of the stock and the presence of
at least two registered and active market makers. The Company will seek to
encourage and assist at least two market makers to make a market in its common
stock. Making a market involves maintaining bid and ask quotations and being
able, as principal, to effect transactions in reasonable quantities to those
quoted prices, subject to various securities laws and other regulatory
requirements. There can be no assurance that the common stock will be able to
meet the applicable listing criteria in order to maintain its quotation on the
Nasdaq or that an active and liquid trading market will develop or, if
developed, will be maintained. A public market having the desirable
characteristics of depth, liquidity and orderliness, however, depends upon the
presence in the marketplace of both willing buyers and sellers of common stock
at any given time, which is not within the control of the Company. No assurance
can be given that an investor will be able to resell the common stock at or
above the purchase price of the common stock.
24
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical capitalization of the
Association at July 31, 1998, and the pro forma consolidated capitalization of
the Company after giving effect to the proposed sale of common stock and the
issuance of shares to the Foundation, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER
SHARE
-----------------------------------------------
4,351,025
2,796,500 3,783,500 SHARES
SHARES 3,290,000 SHARES (15% ABOVE
(MINIMUM OF SHARES (MAXIMUM OF MAXIMUM OF
ESTIMATED (MIDPOINT OF ESTIMATED ESTIMATED
ASSOCIATION PRICE ESTIMATED PRICE PRICE
HISTORICAL RANGE) PRICE RANGE) RANGE) RANGE)(1)
----------- ----------- ------------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BORROWINGS:
Deposits(2)........... $231,156 $231,156 $231,156 $231,156 $231,156
FHLB advances......... 176 176 176 176 176
-------- -------- -------- -------- --------
Total............... $231,332 $231,332 $231,332 $231,332 $231,332
======== ======== ======== ======== ========
STOCKHOLDERS' EQUITY:
Preferred stock, $.01
par value, 1,000,000
shares authorized;
none to be issued.... $ -- $ -- $ -- $ -- $ --
Common stock, $.01 par
value, 14,000,000
shares authorized;
shares to be issued
as reflected......... -- 30 36 41 47
Additional paid-in
capital(3)........... -- 26,778 31,651 36,525 42,129
Retained earnings(4).. 26,026 26,026 26,026 26,026 26,026
Less: Expense of
contribution to the
Foundation, net of
taxes(5)............. -- (1,432) (1,684) (1,937) (2,228)
Plus: Shares issued to
the Foundation....... -- 2,237 2,632 3,027 3,481
Less: Common stock
acquired by the
ESOP(6).............. -- (2,416) (2,843) (3,269) (3,759)
Less: Common stock
acquired by the
stock-based incentive
plan(7).............. -- (1,208) (1,421) (1,634) (1,880)
-------- -------- -------- -------- --------
Total stockholders'
equity............. $ 26,026 $ 50,015 $ 54,397 $ 58,779 $ 63,816
======== ======== ======== ======== ========
</TABLE>
- --------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
subscription and community offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock. Such withdrawals would reduce pro forma deposits by the
amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of common
stock to the Foundation at a value of $10.00 per share or to the issuance
of additional shares for option grants under the stock-based incentive plan
intended to be adopted by the Company. An amount equal to 10% of the shares
of common stock sold and issued to the Foundation, will be reserved for
issuance upon the exercise of options to be granted under the stock-based
incentive plan. See "Risk Factors--The Implementation of Stock-Based
Benefits to Management and Directors Will Increase Our Future Compensation
Expense," Footnote 6 to the tables under "Pro Forma Data" and "Management
of the Association--Other Benefit Plans."
(4) The retained earnings of the Association will be substantially restricted.
See "The Conversion--Liquidation Rights" and "Regulation--Federal
Regulation of Savings Institutions--Limitations on Capital Distributions."
(5) Represents the value of the contribution of common stock to the Foundation
at $10.00 per share reduced by the associated tax benefit of $805,000,
$948,000, $1.1 million and $1.3 million at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Price Range, respectively. The
realization of the federal tax benefit is limited annually to 10% of the
Company's annual taxable income, subject to the ability of the Company to
carry forward any unused portion of the deduction for five years following
25
<PAGE>
the year in which the contribution is made. For state income tax purposes,
the Company will be able to deduct the contribution and to carry forward any
unused portion of the deduction for a five-year period following the year in
which the contribution is initially made. Such deductions by the Company for
New Jersey income tax purposes can be utilized only if the Company generates
sufficient state taxable income on an unconsolidated basis, and also are
subject to the limitation of 10% of unconsolidated income of the Company.
(6) Assumes that 8% of the shares sold and issued to the Foundation, will be
purchased by the ESOP and that the funds used to acquire such shares will
be borrowed from the Company. The common stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Management of the
Association--Other Benefit Plans--Employee Stock Ownership Plan and
Trust."
(7) Assumes an amount equal to 4% of the shares of common stock sold and
issued to the Foundation, is purchased by the stock-based incentive plan
through open market purchases at the purchase price of $10.00 per share.
The common stock purchased by the stock-based incentive plan is reflected
as a reduction of stockholders' equity. See "Risk Factors--The
Implementation of Stock-Based Benefits to Management and Directors Will
Increase Our Future Compensation Expense," Footnote 3 to the tables under
"Pro Forma Data" and "Management of the Association--Other Benefit Plans."
26
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be determined
until the sale is completed. However, net proceeds are currently estimated to
be between $26.8 million and $36.6 million (or $42.1 million in the event the
Estimated Price Range is increased by 15%) based upon the following
assumptions: (i) 100% of the shares of common stock will be sold in the
subscription offering to holders of deposit accounts with balances of $50 or
more in the Association as of June 30, 1997 ("Eligible Account Holders"), the
ESOP and holders of deposit accounts with balances of $50 or more in the
Association as of September 30, 1998 ("Supplemental Eligible Account Holders");
(ii) directors, officers and employees of the Association and members of their
immediate families (collectively, "Insiders") will purchase an aggregate of
$1.0 million of common stock and the ESOP will purchase 8% of the common stock
issued, including shares issued to the Foundation; (iii) Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill") will receive a fee equal to 1.25% of the
aggregate purchase price of shares sold in the subscription and community
offerings, excluding shares purchased by directors, officers, employees and any
immediate family member thereof and the ESOP for which Sandler O'Neill will not
receive a fee; and (iv) expenses of the conversion of the Association to stock
form, the formation and organization of the Company and its acquisition of the
Association's capital stock, and the sale by the Company of its common stock
and issuance of shares to the Foundation, excluding the marketing fees paid to
Sandler O'Neill, will be approximately $850,000. The Association's conversion
to stock form, its acquisition by the Company and the Company's sale of its
common stock will be referred to as the "Conversion." Actual Conversion
expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the seven months ended
July 31, 1998 and for the year ended December 31, 1997, has been calculated as
if the common stock had been sold at the beginning of the respective periods
and the net proceeds had been invested at 5.37% (the one year U.S. Treasury
bill rate as of July 31, 1998). The calculations have been based on the one
year Treasury rate, as opposed to the arithmetic average of the Association's
average yield on all interest-earning assets and average rate paid on deposits,
as contemplated by OTS regulations, because the Association will initially
invest the proceeds in shorter term assets at a lower yield, although it will
seek to more efficiently invest the proceeds over time. The tables below do not
reflect the effect of withdrawals from deposit accounts for the purchase of
common stock or the effect of any possible use of the net Conversion proceeds.
The pro forma after-tax yields for the Company and the Association are assumed
to be 3.44% for both the seven months ended July 31, 1998 and for the year
ended December 31, 1997 based on an effective tax rate of 36%. Historical and
pro forma net earnings per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of common
stock issued, as adjusted to give effect to the purchase of shares by the ESOP
and the issuance of shares to the Foundation. Historical and pro forma
stockholders' equity per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of common
stock issued. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds.
The following pro forma information may not be representative of the financial
effects of the foregoing transactions at the dates on which such transactions
actually occur and should not be taken as indicative of future results of
operations. Pro forma consolidated stockholders' equity represents the
difference between the stated amount of assets and liabilities of the Company.
The pro forma consolidated stockholders' equity is not intended to represent
the fair market value of the common stock and may be stated in an amount
greater than amounts that would be available for distribution to stockholders
in the event of liquidation.
The following tables summarize historical data of the Association and pro forma
data of the Company on a consolidated basis at or for the seven months ended
July 31, 1998 and at or for the year ended December 31, 1997, based on the
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the common stock following the Conversion.
The tables below give effect to stock awards reserved for grant under the
stock-based incentive plan, which is expected to be adopted by the Company
following the Conversion. See Footnote 3 to the tables and "Management of the
Association--Other Benefit Plans." No effect has been given in the tables to
the possible issuance of additional shares of common
27
<PAGE>
stock upon the exercise of stock options to be granted under the stock-based
incentive plan, nor does book value give any effect to the liquidation account
to be established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders or, in the event of liquidation of the Association, to
the tax effect of the bad debt reserve and other factors. See Footnote 6 to the
tables below, "The Conversion--Liquidation Rights" and "Management of the
Association--Other Benefit Plans." THE FOLLOWING TABLES ASSUME THAT THE
FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND THEREFORE GIVE EFFECT TO
THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO
THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE
VALUATION RANGE (THE AGGREGATE ESTIMATED PRO FORMA MARKET VALUE OF THE COMMON
STOCK BEING OFFERED FOR SALE, WHICH RANGES FROM $28.0 MILLION TO $37.8 MILLION,
WITH A MIDPOINT OF $32.9 MILLION), AS SET FORTH HEREIN AND IN THE TABLES BELOW,
TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE
FOUNDATION.
28
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE SEVEN MONTHS ENDED JULY 31, 1998
------------------------------------------------------------
2,796,500 3,290,000 3,783,500 4,351,025
SHARES SHARES SHARES SHARES
SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF ABOVE MAXIMUM
ESTIMATED ESTIMATED ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(8)
-------------- -------------- -------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross Proceeds........................ $27,965 $32,900 $37,835 $43,510
Plus: Shares issued to Foundation
(equal to 8% of the stock sold in
the Conversion)................... 2,237 2,632 3,027 3,481
------- ------- ------- -------
Pro forma market capitalization....... $30,202 $35,532 $40,862 $46,991
======= ======= ======= =======
Gross proceeds........................ $27,965 $32,900 $37,835 $43,510
Less: Offering expenses and
commissions.......................... (1,157) (1,213) (1,269) (1,334)
------- ------- ------- -------
Estimated net proceeds................ 26,808 31,687 36,566 42,176
Less: Common stock purchased by ESOP.. (2,416) (2,843) (3,269) (3,759)
Common stock purchased by stock-
based incentive plan............... (1,208) (1,421) (1,634) (1,880)
------- ------- ------- -------
Estimated net proceeds, as
adjusted............................ $23,184 $27,423 $31,663 $36,537
======= ======= ======= =======
Consolidated net earnings(1):
Historical........................... $ 1,337 $ 1,337 $ 1,337 $ 1,337
Pro forma earnings on net proceeds... 465 550 635 733
Less: Pro forma ESOP adjustment(2)... (60) (71) (81) (94)
Pro forma stock-based incentive
plan adjustment(3)................ (90) (106) (122) (140)
------- ------- ------- -------
Pro forma net earnings............. $ 1,652 $ 1,710 $ 1,769 $ 1,836
======= ======= ======= =======
Per share net earnings(1):
Historical........................... $ 0.48 $ 0.41 $ 0.35 $ 0.31
Pro forma earnings on net proceeds... 0.17 0.17 0.17 0.17
Less: Pro forma ESOP adjustment(2)... (0.02) (0.02) (0.02) (0.02)
Pro forma stock-based incentive
plan adjustment(3)................ (0.03) (0.03) (0.03) (0.03)
------- ------- ------- -------
Pro forma net earnings per
share(4).......................... $ 0.60 $ 0.53 $ 0.47 $ 0.43
======= ======= ======= =======
Stockholders' equity:
Historical........................... $26,026 $26,026 $26,026 $26,026
Estimated net proceeds............... 26,808 31,687 36,566 42,176
Plus: Shares issued to Foundation.... 2,237 2,632 3,027 3,481
Less: After tax cost of
Foundation(5)....................... (1,432) (1,684) (1,937) (2,228)
Common stock acquired by ESOP(2)... (2,416) (2,843) (3,269) (3,759)
Common stock acquired by stock-
based incentive plan(3)........... (1,208) (1,421) (1,634) (1,880)
------- ------- ------- -------
Pro forma stockholders'
equity(3)(5)(6)(7)................ $50,015 $54,397 $58,779 $63,816
======= ======= ======= =======
Stockholders' equity per share:
Historical........................... $ 8.62 $ 7.32 $ 6.37 $ 5.54
Estimated net proceeds............... 8.88 8.92 8.95 8.98
Plus: Shares issued to the
Foundation.......................... 0.74 0.74 0.74 0.74
Less: After tax cost of
Foundation(5)....................... (0.47) (0.47) (0.47) (0.47)
Common stock acquired by ESOP(2)... (0.80) (0.80) (0.80) (0.80)
Common stock acquired by stock-
based incentive plan(3)........... (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity per
share(3)(5)(6)(7)................. $ 16.57 $ 15.31 $ 14.39 $ 13.59
======= ======= ======= =======
Offering price as a percentage of pro
forma stockholders' equity per
share................................ 60.35% 65.32% 69.49% 73.58%
Offering price to pro forma net
earnings per share (annualized)...... 9.72x 11.01x 12.41x 13.57x
</TABLE>
(FOOTNOTES ON NEXT PAGE)
29
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that is expected to be
recognized in 1999 if the establishment of the Foundation is approved. In
that event, the Company will recognize an after-tax expense for the amount
of the contribution to the Foundation which is expected to be $1.4 million,
$1.7 million, $1.9 million, and $2.2 million at the minimum, midpoint,
maximum, and 15% above the maximum of the Estimated Price Range,
respectively. In addition, assuming that the contribution to the Foundation
was expensed during the seven month period ended July 31, 1998, pro forma
net earnings (loss) per share would be $0.09, $0.02, ($0.04) and ($0.08) at
each of the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of common stock sold in the Conversion
and issued to the Foundation, will be purchased by the ESOP. For purposes
of this table, the funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Association intends
to make annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Association's total
annual payment of the ESOP debt is based upon 15 equal annual installments
of principal, with an assumed interest rate at 8.5%. The pro forma net
earnings assume: (i) that the Association's contribution to the ESOP is
equivalent to the debt service requirement for the seven months ended July
31, 1998, and was made at the end of the period; (ii) that 9,397, 11,055,
12,713 and 14,620 shares at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, were committed to be released
during the seven months ended July 31, 1998 at an average fair value of
$10.00 per share in accordance with Statement of Position ("SOP") 93-6; and
(iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net earnings per share calculations. See
"Management of the Association--Other Benefit Plans--Employee Stock
Ownership Plan and Trust."
(3) Gives effect to the stock awards available for grant under the stock-based
incentive plan expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of stockholders. The
stock-based incentive plan intends to acquire an amount of common stock
equal to 4% of the shares of common stock sold in the Conversion and issued
to the Foundation, or 120,808, 142,128, 163,447 and 187,964 shares of
common stock at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Price Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of common
stock or treasury stock of the Company, if any. Funds used by the stock-
based incentive plan to purchase the shares will be contributed to the
stock-based incentive plan by the Company. In calculating the pro forma
effect of the stock-based incentive plan, it is assumed that the shares
were acquired by the stock-based incentive plan at the beginning of the
period presented in open market purchases at the purchase price and that
20% of the amount contributed was an amortized expense during such period.
The issuance of authorized but unissued shares of the Company's common
stock to the stock-based incentive plan instead of open market purchases
would dilute the voting interests of existing stockholders by approximately
3.8% and pro forma net earnings per share would be $0.58, $0.57, $0.46 and
$0.41 at the minimum, midpoint, maximum, and 15% above the maximum of the
range, respectively, and pro forma stockholders' equity per share would be
$15.92, $14.72, $13.83 and $13.06 at the minimum, midpoint, maximum, and
15% above the maximum of the range, respectively. There can be no assurance
that stockholder approval of the stock-based incentive plan will be
obtained, or that the actual purchase price of the shares will be equal to
$10 per share. See "Management of the Association--Other Benefit Plans."
(4) Pro forma net earnings per share is the same for both the basic and diluted
presentations.
(5) Assumes a combined federal and state effective income tax rate of 36%.
(6) No effect has been given to the issuance of additional shares of common
stock upon the exercise of options to be granted under the stock-based
incentive plan. An amount equal to 10% of the common stock sold in the
Conversion and issued to the Foundation, or 302,022, 355,320, 408,618 and
469,910 shares at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the stock-based
incentive plan. The issuance of common stock pursuant to the exercise of
options under the stock-based incentive plan will result in the dilution of
existing stockholders' interests. Assuming all options were exercised at
the end of the period at an exercise price of $10.00 per share, the pro
forma net earnings per share would be $0.53, $0.47, $0.42 and $0.38,
respectively, and the pro forma stockholders' equity per share would be
$15.96, $14.83, $13.99 and $13.26, respectively. See "Management of the
Association--Other Benefit Plans."
(7) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions."
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
subscription and community offerings.
30
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------
2,796,500 3,290,050 3,783,500 4,351,025
SHARES SHARES SHARES SHARES
SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF ABOVE MAXIMUM
ESTIMATED ESTIMATED ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(8)
-------------- -------------- -------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross Proceeds........................ $27,965 $32,900 $37,835 $43,510
Plus: Shares issued to Foundation
(equal to 8% of the stock sold in
the conversion)................... 2,237 2,632 3,027 3,481
------- ------- ------- -------
Pro forma market capitalization....... $30,202 $35,532 $40,862 $46,991
======= ======= ======= =======
Gross proceeds........................ $27,965 $32,900 $37,835 $43,510
Less: Offering expenses and
commissions.......................... (1,157) (1,213) (1,269) (1,334)
------- ------- ------- -------
Estimated net proceeds................ 26,808 31,687 36,566 42,176
Less: Common stock purchased by ESOP.. (2,416) (2,843) (3,269) (3,759)
Common stock purchased by stock-
based incentive plan............... (1,208) (1,421) (1,634) (1,880)
------- ------- ------- -------
Estimated net proceeds, as adjusted.. $23,184 $27,423 $31,663 $36,537
======= ======= ======= =======
Consolidated net earnings(1):
Historical........................... $ 2,266 $ 2,266 $ 2,266 $ 2,266
Pro forma earnings on net proceeds... 798 943 1,089 1,257
Less: Pro forma ESOP adjustment(2)... (103) (121) (139) (160)
Pro forma stock-based incentive
plan adjustment(3)................ (155) (182) (209) (241)
------- ------- ------- -------
Pro forma net earnings............. $ 2,806 $ 2,906 $ 3,007 $ 3,122
======= ======= ======= =======
Per share net earnings(1):
Historical........................... $ 0.81 $ 0.69 $ 0.60 $ 0.52
Pro forma earnings on net proceeds... 0.29 0.29 0.29 0.29
Less: Pro forma ESOP adjustment(2)... (0.04) (0.04) (0.04) (0.04)
Pro forma stock-based incentive
plan adjustment(3)................ (0.06) (0.06) (0.06) (0.06)
------- ------- ------- -------
Pro forma net earnings per
share(4).......................... $ 1.00 $ 0.88 $ 0.79 $ 0.71
======= ======= ======= =======
Stockholders' equity:
Historical........................... $24,689 $24,689 $24,689 $24,689
Estimated net proceeds............... 26,808 31,687 36,566 42,176
Plus: Shares issued to Foundation.... 2,237 2,632 3,027 3,481
Less: After tax cost of
Foundation(5)....................... (1,432) (1,684) (1,937) (2,228)
Common stock acquired by ESOP(2).. (2,416) (2,843) (3,269) (3,759)
Common stock acquired by stock-
based incentive plan(3)........... (1,208) (1,421) (1,634) (1,880)
------- ------- ------- -------
Pro forma stockholders'
equity(3)(5)(6)(7)................ $48,678 $53,060 $57,442 $62,479
======= ======= ======= =======
Stockholders' equity per share:
Historical........................... $ 8.17 $ 6.95 $ 6.04 $ 5.25
Estimated net proceeds............... 8.88 8.92 8.95 8.98
Plus: Shares issued to the
Foundation.......................... 0.74 0.74 0.74 0.74
Less: After tax cost of
Foundation(5)....................... (0.47) (0.47) (0.47) (0.47)
Common stock acquired by ESOP(2).. (0.80) (0.80) (0.80) (0.80)
Common stock acquired by stock-
based incentive plan(3)........... (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity per
share(3)(5)(6)(7)................. $ 16.12 $ 14.94 $ 14.06 $ 13.30
======= ======= ======= =======
Offering price as a percentage of pro
forma stockholders' equity per
share................................ 62.03% 66.93% 71.12% 75.19%
Offering price to pro forma net
earnings per share................... 10.00x 11.36x 12.66x 14.08x
</TABLE>
(FOOTNOTES ON NEXT PAGE)
31
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that is expected to be
recognized in 1999 if the establishment of the Foundation is approved. In
that event, the Company will recognize an after-tax expense for the amount
of the contribution to the Foundation which is expected to be $1.4 million,
$1.7 million, $1.9 million, and $2.2 million at the minimum, midpoint,
maximum, and 15% above the maximum of the Estimated Price Range,
respectively.
(2) It is assumed that 8% of the shares of common stock sold in the Conversion
and issued to the Foundation, will be purchased by the ESOP. For purposes
of this table, the funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Association intends
to make annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Association's total
annual payment of the ESOP debt is based upon 15 equal annual installments
of principal, with an assumed interest rate at 8.5%. The pro forma net
earnings assume: (i) that the Association's contribution to the ESOP is
equivalent to the debt service requirement for the year ended December 31,
1997, and was made at the end of the period; (ii) that 16,109, 18,951,
21,794 and 25,063 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 $10.00
per share in accordance with SOP 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net earnings per share calculations. See "Management of the Association--
Other Benefit Plans--Employee Stock Ownership Plan and Trust."
(3) Gives effect to the stock awards available for grant under the stock-based
incentive plan expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of stockholders. Stock-
based incentive plan intends to acquire an amount of common stock equal to
4% of the shares of common stock sold in the Conversion and issued to the
Foundation, or 120,808, 142,128, 163,447 and 187,964 shares of common stock
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, either through open market purchases,
if permissible, or from authorized but unissued shares of common stock or
treasury stock of the Company, if any. Funds used by the stock-based
incentive plan to purchase the shares will be contributed to the stock-
based incentive plan by the Company. In calculating the pro forma effect of
the stock-based incentive plan, it is assumed that the shares were acquired
by stock-based incentive plan at the beginning of the period presented in
open market purchases at the purchase price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Company's common stock to the stock-
based incentive plan instead of open market purchases would dilute the
voting interests of existing stockholders by approximately 3.8% and pro
forma net earnings per share would be $0.98, $0.86, $0.78 and $0.70 at the
minimum, midpoint, maximum, and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be $15.50,
$14.36, $13.52 and $12.78 at the minimum, midpoint, maximum, and 15% above
the maximum of the range, respectively. There can be no assurance that
stockholder approval of the stock-based incentive plan will be obtained, or
that the actual purchase price of the shares will be equal to $10 per
share. See "Management of the Association--Other Benefit Plans."
(4) Pro forma net earnings per share is the same for both the basic and diluted
presentations.
(5) Assumes a combined federal and state effective income tax rate of 36%.
(6) No effect has been given to the issuance of additional shares of common
stock upon the exercise of options to be granted under the stock-based
incentive plan. An amount equal to 10% of the common stock sold in the
Conversion and issued to the Foundation, or 302,022, 355,320, 408,618, and
469,910 shares at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Price Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the stock-based
incentive plan. The issuance of common stock pursuant to the exercise of
options under the stock-based incentive plan will result in the dilution of
existing stockholders' interests. Assuming all options were exercised at
the end of the period at an exercise price of $10.00 per share, the pro
forma net earnings per share would be $0.91, $0.80, $0.72 and $0.85,
respectively, and the pro forma stockholders' equity per share would be
$15.56, $14.48, $13.69 and $13.00, respectively. See "Management of the
Association--Other Benefit Plans."
(7) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions."
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
subscription and community offerings.
32
<PAGE>
COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, FinPro has estimated that the pro forma market capitalization of
the Association would be approximately $38.0 million, at the midpoint, which is
approximately $2.5 million greater than the pro forma market capitalization of
the Association if the Foundation is approved by members of the Association and
would result in approximately a $5.1 million increase, or 15.5%, in the amount
of common stock offered for sale in the Conversion. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the midpoint of the Estimated Price
Range, pro forma stockholders' equity per share and pro forma earnings per
share would be substantially the same with the Foundation as without the
Foundation. In this regard, pro forma stockholders' equity per share and pro
forma net income per share would be $15.31 and $0.51, respectively, at the
midpoint of the estimate, assuming no Foundation, and $15.31 and $0.53,
respectively, with the Foundation. The pro forma price to book ratio and the
pro forma price to earnings ratio are 65.32% and 11.44x, respectively, at the
midpoint of the estimate, assuming no Foundation and are 65.32% and 11.01x,
respectively, with the Foundation. This estimate by FinPro was prepared at the
request of the OTS and is solely for purposes of providing members with
sufficient information with which to make an informed decision on the
Foundation. There is no assurance that in the event the Foundation is not
approved at the special meeting of members that the appraisal prepared at that
time would conclude that the pro forma market value of the Company would be the
same as that estimated herein. Any appraisal prepared at that time would be
based on the facts and circumstances existing at that time, including, among
other things, market and economic conditions.
For comparative purposes only, set forth below are pricing ratios and financial
data and ratios, at the minimum, midpoint, maximum and maximum, as adjusted, of
the Estimated Price Range, assuming the Conversion was completed at July 31,
1998, using the assumptions set forth in "Pro Forma Data."
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
--------------------- --------------------- --------------------- ---------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering
amount................. $ 27,965 $ 32,300 $ 32,900 $ 38,000 $ 37,835 $ 43,700 $ 43,510 $ 50,255
Pro forma market
capitalization......... 30,202 32,300 35,532 38,000 40,862 43,700 46,991 50,255
Pro forma total assets.. 283,698 286,924 288,080 291,875 292,462 296,825 297,499 302,519
Pro forma total
liabilities............ 233,683 233,683 233,683 233,683 233,683 233,683 233,683 233,683
Pro forma stockholders'
equity................. 50,015 53,241 54,397 58,192 58,779 63,142 63,816 68,836
Pro forma consolidated
net earnings........... 1,652 1,723 1,710 1,793 1,769 1,864 1,836 1,946
Pro forma stockholders'
equity per share....... 16.57 16.49 15.31 15.31 14.39 14.45 13.59 13.70
Pro forma consolidated
net earnings per
share.................. 0.60 0.58 0.53 0.51 0.47 0.46 0.43 0.43
Pro Forma Pricing
Ratios:
Offering price as a
percentage of pro
forma stockholders'
equity per share...... 60.35% 60.64% 65.32% 65.32% 69.49% 69.20% 73.58% 72.99%
Offering price to pro
forma net earnings per
share (annualized).... 9.72x 10.06x 11.01x 11.44x 12.41x 12.68x 13.57x 13.57x
Offering price to
assets................ 10.65% 11.26% 12.33% 13.02% 13.97% 14.72% 15.80% 16.61%
Pro Forma Financial
Ratios:
Return on assets....... 1.00% 1.03% 1.02% 1.05% 1.04% 1.08% 1.06% 1.10%
Return on stockholders'
equity................ 5.66% 5.55% 5.39% 5.28% 5.16% 5.06% 4.93% 4.85%
Stockholders' equity to
assets................ 17.63% 18.56% 18.88% 19.94% 20.10% 21.27% 21.45% 22.75%
</TABLE>
33
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF INCOME
The following Statements of Income of the Association for the years ended
December 31, 1997, 1996 and 1995 have been audited by Deloitte & Touche, LLP,
independent auditors, whose report thereon is included elsewhere in this
Prospectus. With respect to the information for the seven-month periods ended
July 31, 1998 and 1997, which is unaudited, in the opinion of management, all
adjustments for a fair presentation of such interim periods have been included
and are of a normal recurring nature. Results for the seven-month period ended
July 31, 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 included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEVEN-MONTH PERIOD
ENDED JULY 31, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income:
Loans................. $4,681,019 $4,881,565 $8,322,469 $8,549,929 $8,918,175
Mortgage-backed
securities........... 2,018,253 1,986,097 3,434,287 2,960,443 2,529,125
Investment securities:
Taxable.............. 3,893,513 3,307,399 5,849,573 5,445,569 4,708,680
Non-taxable.......... -- -- -- -- 15,981
---------- ---------- ---------- ---------- ----------
Total interest
income............. 10,592,785 10,175,061 17,606,329 16,955,941 16,171,961
Interest expense:
Deposits.............. 5,665,348 5,368,124 9,318,673 9,117,553 8,579,780
FHLB advances and
other................ 6,762 6,794 11,674 11,971 11,642
---------- ---------- ---------- ---------- ----------
Total interest
expense............ 5,672,110 5,374,918 9,330,347 9,129,524 8,591,422
---------- ---------- ---------- ---------- ----------
Net interest income..... 4,920,675 4,800,143 8,275,982 7,826,417 7,580,539
Provision for loan
losses................. 175,000 233,333 400,000 180,000 180,000
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses............ 4,745,675 4,566,810 7,875,982 7,646,417 7,400,539
Noninterest Income:
Service charges and
other fees........... 349,793 356,515 623,372 668,779 605,383
Gain (loss) on sale
of:
Real estate owned... -- -- (14,654) -- 16,197
Loans............... -- -- -- -- 9,016
Other................. 4,767 8,132 14,007 12,636 22,487
---------- ---------- ---------- ---------- ----------
Total noninterest
income............. 354,560 364,647 622,725 681,415 653,083
Noninterest expense:
Personnel............. 1,845,000 1,736,255 2,976,599 2,919,817 2,717,349
Fixed asset........... 424,838 413,439 723,206 668,676 600,015
Federal deposit
insurance............ 80,170 81,506 138,217 455,811 462,595
SAIF assessment....... -- -- -- 1,313,798 --
Service bureau........ 206,440 193,687 326,529 326,022 315,925
Advertising........... 39,456 32,821 55,497 76,330 72,023
Other................. 415,684 444,534 739,854 757,168 741,643
---------- ---------- ---------- ---------- ----------
Total noninterest
expense............ 3,011,588 2,902,242 4,959,902 6,517,622 4,909,550
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 2,088,647 2,029,215 3,538,805 1,810,210 3,144,072
Income taxes............ 751,800 730,100 1,273,300 653,800 1,120,400
---------- ---------- ---------- ---------- ----------
Net income.............. $1,336,847 $1,299,115 $2,265,505 $1,156,410 $2,023,672
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to Financial Statements.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results of
operations. The Association's results of operations are dependent primarily on
net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Association's provision for loan losses, security sales
activities, service charges and other fee income, and noninterest expense. The
Association's noninterest expense principally consists of compensation and
employee benefits, office occupancy and equipment expense, federal deposit
insurance premiums, data processing, advertising and business promotion and
other expenses. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of the
Company. These forward-looking statements are generally identified by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project,"
or similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations of the Company and the
subsidiaries include, but are not limited to, changes in interest rates,
general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board ("FRB"), the quality or composition of the loan
or investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company's market area and accounting
principles and guidelines. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be
placed on such statements. The Company does not undertake--and specifically
disclaims any obligation--to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
MANAGEMENT STRATEGY
The Association operates as a family and consumer-oriented community savings
and loan association, offering traditional savings deposit and loan products to
its local community. In recent years, the Association's strategy has been to
maintain profitability while managing its equity position and limiting its
credit and interest rate risk exposure. To accomplish these objectives, the
Association has sought to:
. Control credit risk by emphasizing the origination of single-family,
owner-occupied residential mortgage loans and consumer loans, consisting
primarily of home equity loans and lines of credit and education loans
. Offer superior service and competitive rates to increase its core
deposit base
. Invest funds in excess of loan demand in mortgage-backed and investment
securities
. Control operating expenses
In recent years, most locally headquartered competitors in the Association's
primary market area have been acquired by larger, regional financial
institutions, resulting in a reduced presence of local, community-based
institutions. The Association believes that this reduction of community-based
institutions has created opportunities for the Association, as one of the few
remaining locally headquartered financial institutions in its primary market
area, to achieve controlled asset growth and moderate geographic expansion. To
take advantage of this perceived opportunity, the Association intends to
continue its current operating strategy in an effort to enhance its long-term
profitability while maintaining a reasonable level of interest rate risk. The
Association also intends to enhance its current operating strategy by expanding
the products and services it offers, as
35
<PAGE>
necessary, in order to improve its market share in its primary market area. In
this regard, the Association has begun to offer new Individual Retirement
Account ("IRA") deposit products and has recently introduced 24 hour banking by
telephone with voice response capabilities. The Association may also seek to
expand its lending activities into areas outside of its primary market area.
See "Risk Factors--The Low Demand for Mortgage Loans In Our Primary Market Area
Has Lowered Our Profitability."
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
QUALITATIVE INFORMATION ABOUT MARKET RISK
The principal objective of the Association's interest rate risk management is
to evaluate the interest rate risk included in balance sheet accounts,
determine the level of risk appropriate given the Association's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the Association's
Interest Rate Risk Management Policy. Through such management, the Association
seeks to reduce the vulnerability of its operations to changes in interest
rates. The Board of Directors is responsible for reviewing asset/liability
policies and interest rate risk position. The Board of Directors reviews the
Association's interest rate risk position on a quarterly basis. In connection
with such review, the Board evaluates the Association's business activities and
strategies, the effect of those strategies on the Association's net interest
margin, the market value of the portfolio, and the effect the changes in
interest rates will have on the Association's portfolio and exposure limits.
The extent of the movement of interest rates is an uncertainty that could have
a negative impact on the earnings of the Association. Besides the risk that
rising interest rates could cause the cost of liabilities to rise faster than
the yield on assets, the Association's interest rate spread and margin could
also be negatively affected in a declining interest rate environment if
prepayments were to increase and the Association were to reinvest such proceeds
at a lower rate. The Association's spread and margin would also be negatively
impacted if deposit interest rates did not decline commensurate with asset
yields in such a declining interest rate environment. Similarly, spreads and
margins would contract in a so-called flat- or inverse-yield curve environment,
in which traditional spreads between short- and long-term interest rates were
to be compressed or become negative. See "Risk Factors--Increasing Interest
Rates May Hurt Our Profits."
In recent years, the Association has utilized the following strategies to
manage interest rate risk: (1) emphasizing and competitively pricing its
adjustable-rate and shorter-term (up to 15 years) fixed-rate loan products in
an effort to make those products more attractive to potential borrowers; and
(2) investing in shorter-term securities which generally bear lower yields,
compared to longer-term investments, but which better position the Association
for increases in market interest rates.
QUANTITATIVE INFORMATION ABOUT MARKET RISK
NET PORTFOLIO VALUE. The Association's interest rate sensitivity is primarily
monitored by management through the use of a model which internally generates
estimates of the change in the Association's net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio,
under any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The OTS model is
based upon data submitted on the Association's quarterly Thrift Financial
Reports. See "Regulation--Federal Regulation of Savings Institutions." The
following table sets forth the Association's NPV as of June 30, 1998 (the
latest NPV analysis prepared by the OTS), as calculated by the OTS.
36
<PAGE>
<TABLE>
<CAPTION>
NPV AS PERCENT OF
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES -------------------------- ----------------------
IN BASIS POINTS NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
--------------- ------- -------- -------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400................... $29,269 $(3,700) (11)% 11.57% (84)
300................... 30,737 (2,232) (7) 11.98 (43)
200................... 32,092 (877) (3) 12.34 (7)
100................... 33,026 57 -- 12.54 13
Static................. 32,969 -- -- 12.41 --
(100).................. 33,107 138 -- 12.33 (8)
(200).................. 32,681 (288) (1) 12.07 (34)
(300).................. 32,974 5 -- 12.04 (37)
(400).................. 33,519 550 2 12.09 (32)
</TABLE>
- --------
(1) Expressed in basis points.
Shortcomings are inherent in the methodology used in the above interest rate
risk measurements. Modeling changes in NPV require the making of assumptions
which may or may not reflect the manner in which actual yields and costs
respond to changes in market interest rates. In this regard, the NPV model
presented assumes that the composition of the Association's interest sensitive
assets and liabilities existing at the beginning of a period remains constant
over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the NPV table provides an indication of the Association's
interest rate risk exposure at a particular point in time, such measurements
are not intended to and do not provide a precise forecast of the effect of
changes in market interest rates on the Association's net interest income and
will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
also depends upon the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rate earned or paid on them.
37
<PAGE>
AVERAGE BALANCE SHEETS. The following tables set forth information relating to
the Association at and for the seven months ended July 31, 1998 and 1997 and
for the years ended December 31, 1997, 1996 and 1995. The average yields and
costs are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods shown, except where noted otherwise, and reflect annualized yields and
costs. Average balances are derived from average monthly balances. The use of
average monthly balances rather than average daily balances does not result in
any material differences in the following presentation. The yields and costs
include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE SEVEN MONTHS ENDED JULY 31,
-------------------------------------------------------
AT JULY 31, 1998 1998 1997
------------------- --------------------------- ---------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST EARNING ASSETS:
Loans(1):
Real estate............. $ 82,105 7.89% $ 82,006 $ 3,782 7.91% $ 85,343 $ 3,944 7.92%
Consumer................ 17,458 8.55 17,930 899 8.63 18,632 938 8.67
---------- -------- ------- -------- -------
Total loans........... 99,563 8.01 99,936 4,681 8.06 103,975 4,882 8.06
Mortgage-backed
securities............. 48,352 7.35 46,516 2,018 7.44 43,972 1,986 7.74
Investment
securities(2):
Taxable................ 88,305 6.74 84,226 3,371 6.86 77,478 2,996 6.63
Non-taxable(3)......... -- -- -- -- -- -- -- --
Interest-bearing
deposits............... 14,796 6.42 16,208 523 5.55 9,880 311 5.41
---------- -------- ------- -------- -------
Total interest-earning
assets............... 251,016 7.34 246,886 10,593 7.36 235,305 10,175 7.42
Noninterest-earning
assets................. 8,693 7,372 6,831
---------- -------- --------
Total assets.......... $ 259,709 $254,258 $242,136
========== ======== ========
LIABILITIES AND EQUITY:
INTEREST-BEARING
LIABILITIES:
Deposits................ $ 231,156 4.30 $226,907 5,665 4.30 $217,188 5,368 4.26
FHLB advances........... 176 6.62 176 7 6.62 176 7 6.62
---------- -------- ------- -------- -------
Total interest-
bearing liabilities.. 231,332 4.30 227,083 5,672 4.30 217,364 5,375 4.26
------- -------
Noninterest-bearing
liabilities............ 2,351 1,804 1,697
---------- -------- --------
Total liabilities..... 233,683 228,887 219,061
Equity.................. 26,026 25,371 23,075
---------- -------- --------
Total liabilities and
equity............... $ 259,709 $254,258 $242,136
========== ======== ========
Net interest-earning
assets................. $ 19,803 $ 17,941
======== ========
Net interest
income/interest rate
spread(4).............. 3.04% $ 4,921 3.06% $ 4,800 3.16%
====== ======= ==== ======= ====
Net interest margin as a
percentage of interest-
earning assets(5)...... 3.40% 3.48%
======= =======
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 108.51% 108.72% 108.25%
========== ======== ========
</TABLE>
- --------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and include nonperforming loans.
(2) Includes investment securities held-to-maturity and stock in the FHLB New
York.
(3) Interest and Yield/Rate are presented on a taxable equivalent basis using
the combined Federal and state income tax marginal rate of 36% for 1995.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
38
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST EARNING ASSETS:
Loans(1):
Real estate............ $ 84,564 $ 6,705 7.93% $ 88,209 $ 7,007 7.94% $ 91,259 $ 7,360 8.06%
Consumer............... 18,691 1,618 8.66 17,559 1,543 8.79 17,235 1,558 9.04
-------- ------- -------- ------- -------- -------
Total loans.......... 103,255 8,323 8.06 105,768 8,550 8.08 108,494 8,918 8.22
Mortgage-backed
securities............. 44,506 3,434 7.72 37,609 2,960 7.87 31,152 2,529 8.12
Investment
securities(2):
Taxable................ 78,114 5,244 6.71 77,974 4,941 6.34 69,371 4,122 5.94
Non-taxable(3)......... -- -- -- -- -- -- 190 25 13.16
Interest-bearing
deposits............... 11,152 605 5.42 9,892 505 5.10 10,689 587 5.49
-------- ------- -------- ------- -------- -------
Total interest-
earning assets...... 237,027 17,606 7.43 231,243 16,956 7.33 219,896 16,181 7.35
Noninterest-earning
assets................ 7,037 6,794 6,798
-------- -------- --------
Total assets......... $244,064 $238,037 $226,694
======== ======== ========
LIABILITIES AND EQUITY:
INTEREST-BEARING
LIABILITIES:
Deposits............... $218,553 9,318 4.26 $213,715 9,118 4.27 $204,220 8,579 4.20
FHLB advances.......... 176 12 6.62 176 12 6.62 176 12 6.62
-------- ------- -------- ------- -------- -------
Total interest-
bearing
liabilities......... 218,729 9,330 4.27 213,891 9,130 4.27 204,396 8,591 4.20
Noninterest-bearing
liabilities........... 1,787 2,171 2,014
-------- -------- --------
Total liabilities.... 220,516 216,062 206,410
Equity................. 23,548 21,975 20,284
-------- -------- --------
Total liabilities and
equity.............. $244,064 $238,037 $226,694
======== ======== ========
Net interest-earning
assets................ $ 18,298 $ 17,352 $ 15,500
======== ======== ========
Net interest
income/interest rate
spread(4)............. $ 8,276 3.16% $ 7,826 3.06% $ 7,590 3.15%
======= ==== ======= ==== =======
Net interest margin as
a percentage of
interest-earning
assets(5)............. 3.49% 3.38% 3.45%
======= ======= =======
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 108.37% 108.11% 107.58%
======== ======== ========
</TABLE>
- --------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and include nonperforming loans.
(2) Includes investment securities held-to-maturity and stock in the FHLB New
York.
(3) Interest and Yield/Rate are presented on a taxable equivalent basis using
the combined Federal and state income tax marginal rate of 36% for 1995.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
39
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Association'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
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED YEAR ENDED YEAR ENDED
JULY 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO SEVEN COMPARED TO COMPARED TO
MONTHS ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ------------------- --------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
-------------- ------------ -------------
RATE VOLUME NET RATE VOLUME NET RATE VOLUME NET
----- ------- ------ ---- ------ ----- ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Real estate........... $ (6) $ (156) $ (162) $(11) $(291) $(302) $(110) $(243) $(353)
Consumer.............. (4) (35) (39) (24) 99 75 (44) 29 (15)
----- ------ ------ ---- ----- ----- ----- ----- -----
Total loans......... (10) (191) (201) (35) (192) (227) (154) (214) (368)
Mortgage-backed
securities............ (80) 112 32 (62) 536 474 (85) 516 431
Investment securities
(taxable)............. 109 266 375 294 9 303 292 527 819
Investment securities
(non taxable)(1)...... -- -- -- -- -- -- (25) -- (25)
Interest-earning
deposits.............. 8 204 212 34 66 100 (40) (42) (82)
----- ------ ------ ---- ----- ----- ----- ----- -----
Total interest-
earning assets..... 27 391 418 231 419 650 (12) 787 775
----- ------ ------ ---- ----- ----- ----- ----- -----
INTEREST-BEARING
LIABILITIES:
Deposits............... 53 244 297 (14) 214 200 141 398 539
----- ------ ------ ---- ----- ----- ----- ----- -----
Increase (decrease) in
net interest income... $ (26) $ 147 $ 121 $245 $ 205 $ 450 $(153) $ 389 $ 236
===== ====== ====== ==== ===== ===== ===== ===== =====
</TABLE>
- --------
(1) Interest and Yield/Rate are presented on a taxable equivalent basis using
the combined Federal and state income tax margin rate of 36% for 1995.
COMPARISON OF FINANCIAL CONDITION AT JULY 31, 1998 AND DECEMBER 31, 1997
Total assets increased by $9.9 million, or 4.0%, to $259.7 million at July 31,
1998 from $249.8 million at December 31, 1997. The growth in assets was
primarily due to an increase in investment securities which was funded
primarily through deposit inflows and retained earnings.
Cash and cash equivalents decreased $2.0 million, or 10.4%, to $17.2 million at
July 31, 1998 from $19.2 million at December 31, 1997. The decrease in cash and
cash equivalents was primarily due to a decrease in federal funds sold. The
Association's portfolio of securities held-to-maturity increased by $11.2
million, or 8.9%, to $136.7 million at July 31, 1998 from $125.5 million at
December 31, 1997. The increase was primarily due to growth in the U.S. agency
callable security portfolio and the mortgage-backed security portfolio.
The Association's outstanding loans, net, increased $596,000, or 0.6%, to $99.6
million at July 31, 1998 from $99.0 million at December 31, 1997. Real estate
loans increased by $1.5 million, or 1.9%, to $83.2 million at July 31, 1998,
from $81.7 million at December 31, 1997. One- to four-family loans increased by
$1.7 million,
40
<PAGE>
or 2.2%, and multi-family and commercial real estate loans decreased by
$167,000, or 5.3%. Consumer loans decreased by $841,000, or 4.6%, to $17.6
million at July 31, 1998 from $18.4 million at December 31, 1997.
Nonperforming loans decreased to $415,000 at July 31, 1998 from $631,000 at
December 31, 1997, representing 0.41% and 0.63%, respectively, of total loans
at such dates. Nonperforming assets and troubled debt restructurings also
decreased to 0.18% at July 31, 1998, from 0.25% at December 31, 1997 of total
assets at such dates.
Total deposits increased by $8.0 million, or 3.6%, to $231.2 million at July
31, 1998, from $223.2 million at December 31, 1997. The increase was primarily
due to an increase of $7.1 million, or 6.4%, in certificates of deposit to
$118.4 million at July 31, 1998 from $111.3 million at December 31, 1997. The
increase in certificates of deposit was primarily due to the Association's
strategy of offering more competitive rates on such deposits. Noninterest-
bearing demand accounts increased by $726,000, or 17.0%, due primarily to the
Association's active solicitation of such accounts. FHLB advances remained
constant at $176,000 during this period.
Total equity increased by $1.3 million, or 5.4%, to $26.0 million at July 31,
1998 from $24.7 million at December 31, 1997. The increase in equity was a
result of net income of $1.3 million.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets increased by $8.6 million, or 3.6%, to $249.8 million at December
31, 1997 from $241.2 million at December 31, 1996. The growth in assets was
primarily due to an increase in federal funds sold and the mortgage-backed
security portfolio which was funded primarily through deposit inflows and
retained earnings.
Cash and cash equivalents increased $8.3 million, or 76.2%, to $19.2 million at
December 31, 1997 from $10.9 million at December 31, 1996. The growth in cash
and cash equivalents was primarily due to an increase in federal funds sold.
The Association's portfolio of securities held-to-maturity increased by $5.8
million, or 4.9%, to $125.5 million at December 31, 1997 from $119.7 million at
December 31, 1996. The increase was primarily due to growth in the mortgage-
backed security portfolio and the U.S. agency callable security portfolio.
The Association's outstanding loans, net, decreased $5.3 million, or 5.1%, to
$99.0 million at December 31, 1997 from $104.3 million at December 31, 1996.
Real estate loans decreased by $5.7 million, or 6.5%, to $81.7 million at
December 31, 1997, from $87.4 million at December 31, 1996. One- to four-family
loans decreased by $2.2 million, or 2.7%, and multi-family and commercial real
estate loans decreased by $3.5 million, or 52.6%. The decrease in multi-family
and commercial real estate loans was primarily due to a payoff, in the amount
of $2.6 million, of the Association's largest commercial real estate loan.
Consumer loans decreased by $293,000, or 1.6%, to $18.4 million at December 31,
1997 from $18.7 million at December 31, 1996.
Nonperforming loans decreased to $631,000 at December 31, 1997 from $844,000 at
December 31, 1996, representing 0.63% and 0.80%, respectively, of total loans
at such dates. Nonperforming assets and troubled debt restructurings also
decreased to 0.25% at December 31, 1997, from 0.41% at December 31, 1996 of
total assets at such dates.
Total deposits increased by $6.4 million, or 2.9%, to $223.2 million at
December 31, 1997, from $216.8 million at December 31, 1996. The increase was
primarily due to an increase of $4.0 million, or 3.7%, in certificates of
deposit to $111.3 million at December 31, 1997 from $107.3 million at December
31, 1996. The increase in certificates of deposit was primarily due to the
Association's strategy of offering more competitive rates on such deposits in
an effort to attract longer-term deposits. The increase in certificate accounts
was augmented by an increase in core deposits (savings, money market and NOW
accounts) which increased to $107.7 million at December 31, 1997 from $105.3
million at December 31, 1996. Non-interest-bearing demand accounts remained
constant at $4.2 million. FHLB advances remained constant at $176,000 during
this period.
41
<PAGE>
Total equity increased by $2.3 million, or 10.1%, to $24.7 million at December
31, 1997 from $22.4 million at December 31, 1996. The increase in equity was a
result of net income of $2.3 million.
COMPARISON OF OPERATING RESULTS FOR THE SEVEN MONTHS ENDED JULY 31, 1998 AND
JULY 31, 1997
GENERAL. Net income for the seven months ended July 31, 1998 totalled
$1,337,000 which was an increase of $38,000, or 2.9%, from $1,299,000 for the
seven months ended July 31, 1997. The increase was due to an increase in net
interest income and a decrease in the provision for loan loss allowance. These
items were mostly offset by an increase in non-interest expense.
INTEREST INCOME. Total interest income increased by $418,000, or 4.1%, to $10.6
million for the seven months ended July 31, 1998, from $10.2 million for the
seven months ended July 31, 1997, primarily due to a $11.6 million, or 4.9%,
increase in the average balance of interest earning assets, offset by a slight
decrease in the weighted average yield on interest earning assets, which
decreased to 7.36% for the seven months ended July 31, 1998 from 7.42% for the
seven months ended July 31, 1997. Interest income on real estate loans
decreased $161,000, or 4.1%, to $3.8 million for the seven months ended July
31, 1998 from $3.9 million for the seven months ended July 31, 1997, primarily
due to a $3.3 million decrease in the average balance of real estate loans and
a 1 basis point decrease in the weighted average yield to 7.91% for the seven
months ended July 31, 1998, from 7.92% for the seven months ended July 31,
1997. The decrease in the average balance of real estate loans was primarily
due to a decrease in the average balance of multi-family and commercial real
estate loans of $3.5 million. Interest income on consumer loans decreased
$39,000 to $899,000 for the seven months ended July 31, 1998 from $938,000 for
the seven months ended July 31, 1997. This was principally due to a decrease in
the average balance of consumer loans of $702,000, or 3.8%, to $17.9 million
for the seven months ended July 31, 1998 from $18.6 million for the seven
months ended July 31, 1997, and a four basis point decrease in the yield on
such loans. Interest income on securities increased by $618,000, or 11.7%, to
$5.9 million for the seven months ended July 31, 1998, from $5.3 million for
the seven months ended July 31, 1997. This increase was primarily a result of a
$586,000 increase in interest income on investment securities, attributable to
a $13.1 million increase in the average balance of such securities to $100.4
million, and an increase in the weighted average yield of 14 basis points.
Interest income on mortgage-backed securities remained stable at $2.0 million
due to a higher average balance of such securities, offset by a decrease in the
weighted average yield of such portfolio to 7.44% for the seven months ended
July 31, 1998 from 7.74% for the seven months ended July 31, 1997.
INTEREST EXPENSE. Interest expense increased by $297,000, or 5.5%, to $5.7
million for the seven months ended July 31, 1998 from $5.4 million for the
seven months ended July 31, 1997. The increase in interest expense resulted
from increased interest expense on certificates of deposit, which was a result
of a $7.2 million, or 6.7%, increase in the average balance of such accounts to
$114.8 million for the seven months ended July 31, 1998, from $107.6 million
for the seven months ended July 31, 1997, and by a nine basis point increase in
the weighted average rate paid on such accounts for the seven months ended July
31, 1998 when compared to the same period in 1997. The increase in the average
balance of certificates of deposit was due primarily to the Association's
efforts to solicit certificate accounts by more competitively pricing such
accounts in an effort to attract longer-term deposits.
PROVISION FOR LOAN LOSSES. The Association's provision for loan losses for the
seven months ended July 31, 1998 was $175,000 compared with $233,000 for the
seven months ended July 31, 1997. The $58,000, or 24.9%, decrease in the
provisions for loan losses in 1998 was primarily due to the payoff in 1997 of
the Associations largest commercial real estate loan, on which provisions had
been made for a probable loss. At July 31, 1998 and 1997, the ratio of the
allowance for loan losses to non-performing loans was 197.4% and 154.4%,
respectively. Management periodically analyzes the sufficiency of its allowance
based upon portfolio composition, asset classifications, loan-to-value ratios,
potential impairments in the loan portfolio, and other factors. Management
plans to continue its emphasis on one- to four-family mortgage loans and
consumer loans, and therefore believes that the provision for loan losses and
the allowance for loan losses are currently reasonable and adequate to cover
any probable losses reasonably expected in the existing loan portfolio. While
management estimates loan losses using the best available information, no
assurance can be given that future
42
<PAGE>
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
problem loans, identification of additional problem loans and other factors,
both within and outside of managements control.
NONINTEREST INCOME. In the seven months ended July 31, 1998, the Association
experienced a decrease of $9,000, or 2.8%, in noninterest income to $355,000
from $364,000 for the seven months ended July 31, 1997. The decrease was
primarily due to decreases in checking account fees and consumer insurance
fees.
NONINTEREST EXPENSE. Total noninterest expense increased $109,000, or 3.8%, to
$3.0 million for the seven months ended July 31, 1998, from $2.9 million for
the seven months ended July 31, 1997. Compensation and employee benefits
increased $109,000, or 6.3% to $1.8 million for the seven months ended July 31,
1998, from $1.7 million for the seven months ended July 31, 1997, primarily due
to normal increases in salaries as well as increases in benefits costs. Other
noninterest expense remained stable during the two periods. The Company expects
increased expenses in the future as a result of the establishment of the ESOP,
stock-based incentive plan and supplemental executive retirement plan and the
need to satisfy reporting and other obligations of a publicly owned company.
INCOME TAXES. Income tax expense totalled $752,000 for the seven months ended
July 31, 1998 compared to $730,000 for the seven months ended July 31, 1997,
resulting in effective tax rates of 36.0% for both the seven months ended July
31, 1998 and 1997, respectively. The increase in income tax expense for the
seven months ended July 31, 1998 was attributable to an increase in pre-tax
income, which increased to $2.1 million for the seven months ended July 31,
1998 from $2.0 million for the seven months ended July 31, 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL. Net income for the year ended December 31, 1997 totalled $2.3 million
which was an increase of $l.1 million, or 95.9%, from $1.2 million for the year
ended December 31, 1996. The increase was primarily due to a decrease in
noninterest expense and, in particular, insurance premiums, resulting from the
absence of the one time special assessment of $1.3 million to recapitalize the
Saving Association Insurance Fund (the "SAIF") which occurred in the fourth
quarter of 1996. Net income also increased due to an increase in net interest
income and a decrease in noninterest expense. These items were partially offset
by an increase in the provision for loan losses, and a decrease in noninterest
income.
INTEREST INCOME. Total interest income increased by $650,000, or 3.8%, to $17.6
million for the year ended December 31, 1997 from $17.0 million in 1996,
primarily due to a $5.8 million, or 2.5%, increase in the average balance of
interest earning assets and an increase in the weighted average yield on
interest earning assets, which increased to 7.43% for the year ended December
31, 1997 from 7.33% for the year ended December 31, 1996. Interest income on
real estate loans decreased $302,000, or 4.3%, to $6.7 million for the year
ended December 31, 1997 from $7.0 million for the year ended December 31, 1996,
primarily due to a $3.6 million decrease in the average balance of real estate
loans and a 1 basis point decrease in the weighted average yield to 7.93% for
the year ended December 31, 1997, from 7.94% for the year ended December 31,
1996. Interest income on consumer loans increased $74,000, or 4.8%, to $1.6
million for the year ended December 31, 1997 from $1.5 million for the year
ended December 31, 1996. This was principally due to an increase of $1.1
million in the average balance of consumer loans, to $18.7 million for the year
ended December 31, 1997 from $17.6 million for the year ended December 31,
1996, and was partially offset by a 13 basis point decrease in the yield on
such loans. Interest income on securities increased by $878,000, or 10.4% to
$9.3 million for the year ended December 31, 1997, from $8.4 million for the
year ended December 31, 1996. This increase was primarily a result of a
$403,000 increase in interest income on investment securities, attributable to
a $1.4 million increase in the average balance of such securities to $89.3
million, and an increase in the weighted average yield of 35 basis points.
Interest income on mortgage-related securities increased $474,000, or 16.0%, to
$3.4 million for the year ended December 31, 1997 from $3.0 million for the
year ended December 31, 1996 due to a higher average balance of such securities
and partially offset by a decrease
43
<PAGE>
in the weighted average yield of such portfolio to 7.72% for the year ended
December 31, 1997, from 7.87% for the year ended December 31, 1996.
INTEREST EXPENSE. Interest expense increased by $201,000, or 2.2%, to $9.3
million for the year ended December 31, 1997, from $9.1 million for the year
ended December 31, 1996. The increase in interest expense resulted from
increased interest expense on certificates of deposit, which was a result of a
$1.8 million, or 1.7%, increase in the average balance of such accounts to
$108.5 million for the year ended December 31, 1997, from $106.7 for the year
ended December 31, 1996, offset by a two basis point decrease in the weighted
average rate paid on such accounts for the year ended December 31, 1997. The
increase was also due to an increase in interest expense on savings accounts
which was a result of a $2.7 million increase in the average balance of such
accounts, which increased to an average of $104.8 million for the year ended
December 31, 1997 from $102.1 million for the year ended December 31, 1996, and
a three basis point increase in the weighted average rate paid on such accounts
to 2.98% for the year ended December 31, 1997, from 2.95% for the year ended
December 31, 1996. The increase in the average balance of certificates of
deposit and the increase in the average balance of savings accounts were due
primarily to the Association's efforts to solicit certificate accounts by more
competitively pricing such accounts in order to attract longer-term fixed-rate
funds, and by marketing efforts to increase core deposits such as checking
accounts.
PROVISION FOR LOAN LOSSES. During 1997, the provision for loan losses was
increased to $400,000 from the prior year's level of $180,000. The higher
provision was based on management's evaluation of non-performing loans. In
particular, the Association experienced increased net charge-offs, which
increased to $919,000 for the year ended December 31, 1997 compared to $62,000
for the year ended December 31, 1996. The increased charge-offs in 1997 were
primarily due to a loss on a large commercial real estate loan and losses on
single family investment property loans. At December 31, 1997, the
Association's allowance for loan losses to total non-performing loans and to
total loans were 105.7% and 0.67%, compared to 140.5% and 1.12% at December 31,
1996.
NONINTEREST INCOME. In the year ended December 31, 1997, the Association
experienced a decrease of $45,000 in non-interest income to $637,000 from
$682,000 for the year ended December 31, 1996. The decrease was primarily due
to a decrease in consumer insurance fees because the product was not offered
for the full year due to a change in insurance carriers.
NONINTEREST EXPENSE. Noninterest expense decreased $1.5 million, or 23.7%, for
the year ended December 31, 1997, to $5.0 million compared to $6.5 million for
the year ended December 31, 1996. The decrease was primarily due to the absence
of the special assessment by the FDIC for SAIF recapitalization of $1.3 million
in 1996, and a decrease in the regular SAIF premium.
INCOME TAXES. Income tax expense totalled $1.3 million for the year ended
December 31, 1997 compared to $654,000 for the year ended December 31, 1996,
resulting in effective tax rates of 36.0% and 36.2% for 1997 and 1996,
respectively. The increase in income tax expense for the year ended December
31, 1997 was attributable to higher pre-tax income, which increased to $3.5
million for the year ended December 31, 1997 from $1.8 million for the year
ended December 31, 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL. Net income for the year ended December 31, 1996 totalled $1.2 million
which was a decrease of $867,000, or 42.9%, from $2.0 million for the year
ended December 31, 1995. The decrease was primarily due to an increase in
noninterest expense resulting from the one time special assessment of $1.3
million to recapitalize the SAIF which occurred in 1996. This was partially
offset by an increase in net interest income.
INTEREST INCOME. Total interest income increased by $784,000, or 4.8%, to $17.0
million for the year ended December 31, 1996, from $16.2 million for the year
ended December 31, 1995, primarily due to a $11.3 million, or 5.2%, increase in
the average balance of interest earning assets, partially offset by a slight
decrease
44
<PAGE>
in the weighted average yield on interest earning assets, which decreased to
7.33% for the year ended December 31, 1996 from 7.35% for the year ended
December 31, 1995. Interest income on real estate loans decreased $353,000 or
4.8%, to $7.0 million for the year ended December 31, 1996 from $7.4 million
for the year ended December 31, 1995, primarily due to a $3.1 million decrease
in the average balance of real estate loans and a 12 basis point decrease in
the weighted average yield to 7.94% for the year ended December 31, 1996, from
8.06% for the year ended December 31, 1995. Interest income on consumer loans
decreased $15,000 to $1,543,000 for the year ended December 31, 1996 from
$1,558,000 for the year ended December 31, 1995. This was principally due to a
25 basis point decrease in the yield. Interest income on securities increased
by $1.1 million, or 15.9%, to $8.4 million for the year ended December 31,
1996, from $7.3 million for the year ended December 31, 1995. This increase was
primarily a result of a $721,000 increase in interest income on investment
securities, attributable to a $7.6 million increase in the average balance of
such securities to $87.9 million, and an increase in weighted average yield of
30 basis points. Interest income on mortgage-related securities increased by
$431,000, or 17.0%, to $3.0 million for the year ended December 31, 1996 from
$2.5 million for the year ended December 31, 1995. This increase was
attributable to an increase in the average daily balance of $6.4 million offset
by a decrease in the weighted average yield of 25 basis points to 7.87%, for
the year ended December 31, 1996, from 8.12% for the year ended December 31,
1995.
INTEREST EXPENSE. Interest expense increased by $538,000, or 6.3%, to $9.1
million for the year ended December 31, 1996, from $8.6 million for the year
ended December 31, 1995. The increase in interest expense resulted from
increased interest expense on certificates of deposit, which was a result of a
$7.8 million, or 7.9%, increase in the average balance of such accounts to
$106.7 million for the year ended December 31, 1996, from $98.9 million for the
year ended December 31, 1995, and a three basis point increase in the weighted
average rate paid on such accounts for the year ended December 31, 1996. The
increase was also due to an increase in interest expense of $64,000 on core
accounts due to an increase in the average balance of such accounts, which
increased to an average of $102.1 million for the year ended December 31, 1996
from $100.9 million for the year ended December 31, 1995, and a three basis
point increase in the weighted average rate paid on such accounts to 2.95% for
the year ended December 31, 1996, from 2.92% for the year ended December 31,
1995. The increase in the average balance of certificates of deposit and the
increase in the average balance of core accounts were due primarily to the
Association's efforts to solicit certificate accounts by more competitively
pricing such accounts, and by marketing efforts to increase core deposits such
as checking accounts.
PROVISION FOR LOAN LOSSES. In both 1996 and 1995, the provision for loan losses
remained constant at $180,000. The ratio of the allowance for loan losses to
non-performing loans was 140% and 203% at December 31, 1996 and 1995,
respectively. The ratio of the allowance for loan losses to total loans was
1.12% and 1.00% at December 31, 1996 and 1995, respectively.
NONINTEREST INCOME. In the year ended December 31, 1996, the Association
experienced an increase of $29,000 in non-interest income to $682,000 from
$653,000 for the year ended December 31, 1995. The increase was due to an
increase in checking account activity and safe deposit rental fees.
NONINTEREST EXPENSE. Noninterest expense increased $1.6 million, or 32.8%, for
the year ended December 31, 1996, to $6.5 million compared to $4.9 million for
the year ended December 31, 1995. The increase was primarily due to the special
assessment by the FDIC for SAIF recapitalization of $1.3 million in 1996.
INCOME TAXES. Income tax expense totalled $654,000 for the year ended December
31, 1996 compared to $1.1 million for the year ended December 31, 1995,
resulting in effective tax rates of 36.2% and 35.6% for 1996 and 1995,
respectively. The decrease in income tax expense for the year ended December
31, 1996 was attributable to a decrease in pre-tax income, which decreased to
$1.8 million for the year ended December 31, 1996 from $3.1 million for the
year ended December 31, 1995.
45
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and borrowings
from the FHLB-New York. The Association uses the funds generated to support its
lending and investment activities as well as any other demands for liquidity
such as deposit outflows. While maturities and scheduled amortization of loans
are predictable sources of funds, deposit flows, mortgage prepayments and the
exercise of call features are greatly influenced by general interest rates,
economic conditions and competition. The Association has continued to maintain
the required levels of liquid assets as defined by OTS regulations. This
requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Association's currently
required liquidity ratio is 4.0%. At July 31, 1998 and December 31, 1997, the
Association's liquidity ratios were 46.68% and 43.39%, respectively.
At July 31, 1998, the Association exceeded all of its regulatory capital
requirements with a tangible capital level of $26.0 million, or 10.02%, of
total adjusted assets, which is above the required level of $3.9 million, or
1.5%; core capital of $26.0 million, or 10.02%, of total adjusted assets, which
is above the required level of $7.8 million, or 3.0%; and risk-based capital of
$26.8 million, or 28.16%, of risk-weighted assets, which is above the required
level of $7.6 million, or 8.0%. See "Regulatory Capital Compliance."
The Association's most liquid assets are cash and cash equivalents. The levels
of these assets are dependent on the Association's operating, financing,
lending and investing activities during any given period. At July 31, 1998,
cash and cash equivalents totalled $17.2 million, or 6.6% of total assets.
The Association has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At July 31, 1998, the Association had $176,000
in advances outstanding from the FHLB, and at July 31, 1998, had an additional
overall borrowing capacity from the FHLB of $64.9 million. Depending on market
conditions, the pricing of deposit products and FHLB advances, the Association
may rely on FHLB borrowing to fund asset growth.
Outstanding commitments to originate first mortgage loans totalled $2.0 million
at July 31, 1998. Management of the Association anticipates that it will have
sufficient funds available to meet its current loan commitments. Certificates
of deposit which are scheduled to mature in one year or less from July 31, 1998
totalled $54.7 million. From July 31, 1997 to July 31, 1998, the Association
experienced a 60% retention rate on funds maturing from certificates of
deposit. It has been and will continue to be a priority of management to retain
time deposits. The Association relies primarily on competitive rates, customer
service, and long-standing relationships with customers to retain deposits.
From time to time, the Association will also offer competitive special products
to its customers to increase retention. Based upon the Association's experience
with deposit retention and current retention strategies, management believes
that, although it is not possible to predict future terms and conditions upon
renewal, a significant portion of such deposits will remain with the
Association.
The initial impact of the Conversion on the liquidity and capital resources of
the Company will be significant as it will substantially increase the liquid
assets of the Company and the capital base on which the Company operates.
Additionally, the Company expects the substantial majority of conversion
proceeds will initially be invested in readily marketable investment grade
securities which, if liquidity needs developed, could be sold by the Company to
provide additional liquidity. Further, the additional capital resulting from
the offerings is expected to increase the capital base of the Company. At July
31, 1998, the Association had total equity, determined in accordance with GAAP,
of $26.0 million, or 10.02% of total assets, which equalled the Association's
regulatory tangible capital at that date. An institution with a ratio of
tangible capital to total assets of greater than or equal to 5% is considered
to be "well-capitalized" pursuant to OTS regulations. Assuming that the Company
uses 50% of the net proceeds at the maximum of the Estimated Price Range to
purchase the stock of the Association, the Association's GAAP capital will
increase to $39.4 million or a ratio of GAAP capital to adjusted assets, on a
pro forma basis, of 14.43% after the Conversion. The investment of
46
<PAGE>
the net proceeds from the sale of the common stock is expected to provide the
Association with additional income to increase further its capital position.
The additional capital may also assist the Association in offering new programs
and expanded services to its customers. See "Use of Proceeds."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged regarding
how existing computer application software programs and operating systems can
accommodate this date value. Many existing application software products are
designed to accommodate only two digits. If not corrected, many computer
applications and systems could fail or create erroneous results by or at the
year 2000. While the Association maintains an internal computer system for many
operating functions, the substantial majority of the Association's data
processing is out-sourced to a third party vendor. The Association has formed a
Year 2000 Committee (the "Y2K Committee") and has adopted a Year 2000 Policy.
The Y2K Committee has been identifying potential problems associated with the
Year 2000 issue and has implemented a plan designated to ensure that all
software used in connection with the Association's business will manage and
manipulate data involving the transition with data from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
data. The Association has prepared a critical issues schedule with a timeline
and assigned responsibilities. In addition, the Association recognizes that its
ability to be Year 2000 compliant is dependent upon the cooperation of its
vendors. The Association is requiring its computer systems and software vendors
to represent that the products provided are or will be Year 2000 compliant and
has planned a program of testing for compliance. The Association has received
representations from its primary third party data processing vendor that it has
resolved any Year 2000 problems in its software and is Year 2000 compliant. The
Association participated in Year 2000 testing with its primary third party data
processing vendor in August 1998. The validation process revealed no material
problems with the third party processor. The Association will participate in
integration and proxy testing of the third party data processor with Automated
Teller Machine (ATM), Electronic Funds Transfer (EFT) and check processing
systems. The Association anticipates that all of its vendors also will have
resolved any Year 2000 problems in their software or hardware by June 30, 1999.
The Association has completed testing of its minor hardware and software
systems. The results indicated that most applications were Year 2000 compliant.
All Year 2000 issues for the Association, including testing, are expected to be
addressed and any problems remedied by June 30, 1999. The Association has also
provided brochures to its customers to make them aware of the Year 2000 issue.
The Association's operations may also be affected by the Year 2000 compliance
of its significant suppliers and other vendors, including those vendors that
provide non-information and technology systems. The Association has begun the
process of requesting information related to the Year 2000 compliance of its
significant suppliers and other vendors. However, the Association does not
currently have complete information concerning the compliance status of its
significant suppliers and other vendors. In the event that any of the
Association's significant suppliers or other vendors do not successfully
achieve Year 2000 compliance in a timely manner, the Association's business or
operations could be adversely affected. The Association has prepared a
contingency plan in the event that there are any system interruptions. As part
of the contingency plan, the Association intends to engage alternative
suppliers or other vendors if its current significant suppliers or vendors fail
to meet Year 2000 operating requirements. There can be no assurances, however,
that such plan or the performances by any of the Association's suppliers and
vendors will be effective to remedy all potential problems.
The lending activities of the Association are concentrated almost exclusively
in one- to four-family mortgage lending. Due to the small individual and
aggregate balance of loans to multi-family and commercial borrowers, it has
been determined that customer Year 2000 readiness issues should have an
insignificant impact on the Association. Since the Association plans to
continue its emphasis on one- to four-family mortgage loans, Year 2000
compliance of potential borrowers will not be a major issue. If the Association
were to entertain loan applications from significant multi-family or commercial
borrowers, the Association would request statements concerning Year 2000
readiness from the potential borrowers.
47
<PAGE>
The Association is currently engaging in an upgrade of its technology systems
in addition to implementing its Year 2000 policy. The Association has budgeted
approximately $150,000 in connection with the costs associated with achieving
Year 2000 compliance and its related technology systems upgrade and, as of
September 30, 1998, had expended approximately $6,000. Material costs, if any,
that may arise from the failure to achieve Year 2000 compliance by either the
Association's third party data processing vendor or its significant suppliers
and other vendors is not currently determinable. To the extent that the
Association's systems are not fully Year 2000 compliant, there can be no
assurance that potential systems interruptions or the cost necessary to update
software would not have a materially adverse effect on the Association's
business, financial condition, results of operations, cash flows or business
prospects. In the event that the Association's progress towards becoming Year
2000 compliant is deemed inadequate, regulatory action may be undertaken.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been prepared
in accordance with GAAP, which require the measurement of financial position
and operating results generally in terms of historical dollar amounts without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Association's operations. Unlike industrial companies, nearly all of the assets
and liabilities of the Association are monetary in nature. As a result,
interest rates have a greater impact on the Association's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR EARNINGS PER SHARE. In February 1997 the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." This statement establishes standards
for computing and presenting earnings per share ("EPS") and applies to entities
with publicly-held common stock or potential common stock. This statement
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board ("APB") Opinion No. 15, "Earnings per Share," and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. This statement is effective for
financial statements of publicly held companies issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted.
REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
and the Association will make the appropriate disclosures in the applicable
consolidated financial statements, as required.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998 the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
for derivative instruments, including instruments embedded in other contracts,
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. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Management has not yet determined the impact, if any, of this statement
on the Company's and the Association's consolidated financial statements.
48
<PAGE>
BUSINESS OF THE ASSOCIATION
GENERAL
The Association was originally organized in 1921 and operated as Knight Park
Building and Loan Association of Collingswood, New Jersey. In 1950, the
Association merged with Vineyard Building and Loan Association and changed its
name to South Jersey Savings and Loan Association. The Association conducts
business from its home office and operation centers located in Turnersville,
New Jersey and its two full service branch offices located in Collingswood and
Glendora, New Jersey. The Association's principal business has been and
continues to be attracting retail deposits from the general public in the areas
surrounding its three banking offices and investing those deposits, together
with funds generated from operations and borrowings, primarily in one- to four-
family mortgage loans and consumer loans, including home equity loans, home
equity lines of credit and education loans. To a lesser extent, the Association
also originates multi-family and commercial real estate loans. The Association
currently originates all of its loans for investment. The Association also
invests in mortgage-backed securities and investment securities, primarily U.S.
government and agency obligations, and other permissible investments. The
Association's revenues are derived principally from interest on its loans, and
to a lesser extent, interest and dividends on its investment and mortgage-
backed securities and other noninterest income. The Association's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage-backed securities and FHLB advances.
MARKET AREA
The Association is a community-oriented banking institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Association's lending and deposit gathering is concentrated in its
primary market area consisting of Gloucester and Camden Counties, New Jersey.
All of the Association's offices are located within 20 miles of Philadelphia,
Pennsylvania. The Association invests primarily in loans secured by first or
second mortgages on properties located in areas surrounding its offices.
Turnersville is located in largely suburban Gloucester County, New Jersey on
State Highway 42 approximately 50 miles northwest of Atlantic City, New Jersey
and 20 miles southeast of Philadelphia. Collingswood and Glendora are located
in Camden County, New Jersey, which county primarily consists of mature fully
developed communities. Heavily traveled U.S. Interstates 95, 295, 676 and 76
run through the Association's primary market area. These highways provide easy
access to the cities of Philadelphia, New York and Newark, New Jersey, which
are major international centers for business, commerce and trade. In recent
years, Gloucester County has experienced an influx of new residents and
employers as the Philadelphia suburbs have expanded into the Association's
primary market area.
The economy in the Association's primary market area is based upon a mixture of
service and retail trade. Other employment is provided by a variety of
wholesale trade, manufacturing, federal, state and local government, hospitals,
universities and utilities. This area is also home to commuters working in
Philadelphia and, to a lesser extent, New York. In the late 1980's and early
1990's, due in part to the effects of a prolonged decline in the national and
regional economy, layoffs in the financial services industry and corporate
relocations, New Jersey experienced reduced levels of employment. These events,
in conjunction with a surplus of available commercial and residential
properties, resulted in an overall decline during this period in the underlying
values of properties located in New Jersey. However, New Jersey's real estate
market has recovered in recent periods. Whether improvement will continue is
dependent, in large part, upon the general economic health of the United States
and New Jersey, and other factors beyond the Association's control and,
therefore, cannot be estimated.
COMPETITION
The Association faces significant competition both in generating loans and in
attracting deposits. The Association's primary market area is highly
competitive and the Association faces direct competition from a
49
<PAGE>
significant number of financial institutions, many with a state wide or
regional presence and, in some cases, a national presence. Many of these
financial institutions are significantly larger and have greater financial
resources than the Association. The Conversion, by increasing the Association's
capital and adding the resources of the Company as a possible source of
strength for the Association, should promote the Association's ability to
compete and to take advantage of growth opportunities that might arise. The
Association's competition for loans comes principally from commercial banks,
savings banks, mortgage brokers, mortgage banking companies and insurance
companies. Its most direct competition for deposits has historically come from
savings banks and associations, commercial banks and credit unions. In
addition, the Association faces increasing competition for deposits from non-
bank institutions such as brokerage firms and insurance companies in such
instruments as short-term money market funds, corporate and government
securities funds, mutual funds and annuities. Competition may also increase as
a result of the lifting of restrictions on the interstate operations of
financial institutions.
In recent years, most locally headquartered competitors in the Association's
primary market area have been acquired by larger, regional financial
institutions, resulting in a reduced presence of local, community-based
institutions. The Association believes that this reduction of community-based
institutions has created opportunities for the Association, as one of the few
remaining locally headquartered financial institutions in its primary market
area, to achieve controlled asset growth and moderate geographic expansion. To
take advantage of this perceived opportunity, the Association intends to
enhance its current operating strategy by expanding the products and services
it offers, as necessary, in order to improve its market share in its primary
market area. In this regard, the Association has begun to offer new IRA deposit
products and has recently introduced 24 hour banking by telephone with voice
response capabilities. The Association may also seek to expand its lending
activities into areas outside of its primary market area.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Association's loan portfolio consists primarily
of first mortgage loans secured by one- to four-family residential real estate.
At July 31, 1998, the Association's loans totalled $100.8 million, of which
$80.2 million, or 79.6%, were one- to four-family residential first mortgage
loans. Such residential mortgage loans consisted of 90.4% of fixed-rate loans
and 9.6% of adjustable-rate loans, most of which were indexed to the one or
three year Constant Maturity Treasury ("CMT") Index. At July 31, 1998, the
Association also had $3.0 million, or 3.0% of total loans, in multi-family and
commercial real estate loans.
The Association's consumer loans at July 31, 1998 aggregated $17.6 million, or
17.4% of total loans. Such consumer loans included $13.4 million of home equity
loans, $1.2 million of home equity lines of credit, $2.3 million of education
loans and $665,000 of other consumer loans. The Association's home equity loans
and lines of credit and education loans constituted 83.2% and 13.0% of consumer
loans, respectively, and 14.5% and 2.3% of total loans, respectively, at July
31, 1998.
The Association generally has not sold loans in recent years and had no
mortgage loans held for sale at July 31, 1998 and at each of the five years
ended December 31, 1997. The types of loans that the Association may originate
are subject to federal and state laws and regulations. Interest rates charged
by the Association on loans are affected by the demand for such loans and the
supply of money available for lending purposes and the rates offered by
competitors. These factors are, in turn, affected by, among other things,
economic conditions, monetary policies of the federal government, including the
FRB, and legislative tax policies.
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<PAGE>
The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT JULY 31, AT DECEMBER 31,
---------------- ----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------------- ---------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------- -------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE
LOANS:
One- to four-
family.......... $80,188 79.57% $78,488 78.42% $ 80,681 76.05% $ 82,935 77.45% $ 88,033 78.37% $ 84,628 77.04%
Multi-family and
commercial...... 3,012 2.99 3,179 3.18 6,707 6.32 7,007 6.54 7,303 6.50 8,430 7.67
------- ------ ------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real
estate loans.... 83,200 82.56 81,667 81.60 87,388 82.37 89,942 83.99 95,336 84.87 93,058 84.71
CONSUMER LOANS:
Home equity
loans and lines
of credit....... 14,615 14.50 15,254 15.24 15,313 14.43 14,301 13.35 14,154 12.60 13,029 11.86
Education....... 2,292 2.27 2,427 2.43 2,514 2.37 1,912 1.79 1,829 1.63 2,691 2.45
Other........... 665 0.66 732 0.73 879 0.83 935 0.87 1,008 0.90 1,074 0.98
------- ------ ------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans........... 17,572 17.44 18,413 18.40 18,706 17.63 17,148 16.01 16,991 15.13 16,794 15.29
------- ------ ------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans..... 100,772 100.00% 100,080 100.00% 106,094 100.00% 107,090 100.00% 112,327 100.00% 109,852 100.00%
====== ====== ====== ====== ====== ======
LESS:
Deferred loan
origination fees
and discounts... 390 447 645 670 741 765
Allowance for
loan losses..... 819 667 1,186 1,068 968 874
------- ------- -------- -------- -------- --------
Total loans,
net............. $99,563 $98,966 $104,263 $105,352 $110,618 $108,213
======= ======= ======== ======== ======== ========
</TABLE>
51
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual maturity of
the Association's total loans at July 31, 1998. The table does not include the
effect of future principal prepayments.
<TABLE>
<CAPTION>
AT JULY 31, 1998
------------------------------------
MULTI-
FAMILY AND
ONE- TO COMMERCIAL
FOUR- REAL TOTAL
FAMILY ESTATE CONSUMER LOANS
------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts due in:
One year or less......................... $ 74 $ 950 $ 879 $ 1,903
After one year:
More than one year to three years........ 492 76 2,155 2,723
More than three years to five years...... 1,627 167 2,804 4,598
More than five years to 10 years......... 18,493 486 5,824 24,803
More than 10 years to 15 years........... 16,151 367 5,910 22,428
More than 15 years....................... 43,351 966 -- 44,317
------- ------ ------- --------
Total amount due....................... $80,188 $3,012 $17,572 $100,772
======= ====== ======= ========
</TABLE>
The following table sets forth, at July 31, 1998, the dollar amount of loans
contractually due after July 31, 1999, and whether such loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JULY 31, 1999
--------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family............................... $72,380 $ 7,734 $80,114
Multi-family and commercial....................... 1,133 929 2,062
Total real estate loans......................... 73,513 8,663 82,176
Consumer loans...................................... 13,900 2,793 16,693
------- ------- -------
Total loans..................................... $87,413 $11,456 $98,869
======= ======= =======
</TABLE>
ORIGINATION AND SERVICING OF LOANS. The Association's mortgage lending
activities are conducted primarily by its loan personnel operating at its
banking offices. All loans originated by the Association are underwritten
pursuant to the Association's policies and procedures. The Association
originates both adjustable-rate and fixed-rate loans, the substantial majority
of which are fixed-rate loans. The Association's ability to originate fixed- or
adjustable-rate loans is dependent upon the relative customer demand for such
loans, which is affected by the current and expected future level of interest
rates. It is the general policy of the Association to retain all loans
originated in its portfolio.
In recent periods, loan repayments and prepayments have exceeded loan
originations. This has resulted in a decrease in the Association's total loans,
net, over the past three fiscal periods from a year-end high of $110.6 million
at December 31, 1994, representing 49.6% of total assets, to a year-end low of
$99.0 million at December 31, 1997, representing 39.6% of total assets.
However, for the seven months ended July 31, 1998, the Association has
increased loan originations, primarily of one- to four-family real estate
loans. Such increase was attributable in significant part to refinancings due
to a favorable interest rate environment and a greater acceptability by the
Association to refinancing its own loans.
In an effort to address the diminished loan growth in recent years, the
Association is focusing its lending activities on the communities surrounding
its Turnersville, New Jersey office which is located in more suburban
Gloucester County. The Association may also seek to expand its primary market
area and its lending activities to areas outside of Gloucester and Camden
Counties. However, there can be no assurances that such geographic expansion
activities will take place or, if they do take place, that they will be
successful. See "Risk Factors--
52
<PAGE>
The Low Demand for Mortgage Loans In Our Primary Market Area Has Lowered Our
Profitability."
The following table sets forth the Association's loan originations, sales and
principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE SEVEN
MONTHS ENDED JULY FOR THE YEAR ENDED
31, DECEMBER 31,
-------------------- ----------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans at beginning of
period................. $100,080 $106,094 $106,094 $107,090 $112,327
-------- -------- -------- -------- --------
Originations:
Real estate:
One- to four-
family........... 8,837 3,767 8,580 8,149 4,986
Multi-family and
commercial....... 217 106 205 197 214
-------- -------- -------- -------- --------
Total real
estate loan
originations... 9,054 3,873 8,785 8,346 5,200
Consumer:
Home equity loans
and lines of
credit........... 3,566 3,376 6,343 6,244 5,262
Education......... 160 146 290 846 1,222
Other............. 306 319 606 786 769
-------- -------- -------- -------- --------
Total consumer
loan
originations... 4,032 3,841 7,239 7,876 7,253
-------- -------- -------- -------- --------
Total loans
originated..... 13,086 7,714 16,024 16,222 12,453
Deduct:
Principal loan
repayments and
prepayments.......... 12,254 10,549 22,011 17,218 16,488
Loan sales.......... 90(1) -- -- -- 932 (2)
Transfers to REO.... 50 -- 27 -- 270
-------- -------- -------- -------- --------
Total
deductions..... 12,394 10,549 22,038 17,218 17,690
-------- -------- -------- -------- --------
Net loan activity....... 692 (2,835) (6,014) (996) (5,237)
-------- -------- -------- -------- --------
Loans at end of
period............. $100,772 $103,259 $100,080 $106,094 $107,090
======== ======== ======== ======== ========
</TABLE>
- --------
(1) In 1998, the Association sold its FHLMC servicing portfolio and its related
participatory interest of $90,000 in such loan portfolio.
(2) Consists of education loans which were sold to the New England Education
Loan Marketing Corporation.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Association currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by single residences, which are considered to be real property
which contain one to four residences. Most of such loans are located in the
Association's primary market area. One- to four-family mortgage loan
originations are generally obtained from the Association's in-house loan
representatives, from existing or past customers and through advertising and
referrals from members of the Association's local communities. At July 31,
1998, the Association's one- to four-family mortgage loans totalled $80.2
million, or 79.6% of total loans. Of the one- to four-family mortgage loans
outstanding at that date, 90.4% were fixed-rate loans and 9.6% were ARM loans.
The Association currently offers fixed-rate mortgage loans with terms of up to
30 years. In recent years, the Association has emphasized fixed-rate loans with
10-, 15- and 20-year maturities and, since 1996, such loans have represented
approximately 70% of the Association's one- to four-family mortgage loan
production. The Association also currently offers a number of ARM loans with
terms of up to 30 years and interest rates which adjust every one or three
years from the outset of the loan. The interest rates for the Association's ARM
loans are indexed to either the one or three year CMT Index. The Association's
ARM loans generally provide for periodic (not more than 2%) and overall (not
more than 6%) caps on the increase or decrease in the interest rate at any
adjustment date and over the life of the loan.
53
<PAGE>
The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Association's exposure
to increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing
the potential for default. Periodic and lifetime caps on interest rate
increases help to reduce the risks associated with adjustable-rate loans but
also limit the interest rate sensitivity of such loans.
All one- to four-family mortgage loans are underwritten according to the
Association's policies and guidelines. Generally, the Association originates
one- to four-family residential mortgage loans in amounts of up to 80% of the
lower of the appraised value or selling price of the property securing the loan
and up to 95% of the appraised value or selling price if private mortgage
insurance ("PMI") is obtained. Mortgage loans originated by the Association
generally include due-on-sale clauses which provide the Association with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Association's consent.
Due-on-sale clauses are an important means of adjusting the yields on the
Association's fixed-rate mortgage loan portfolio and the Association has
generally exercised its rights under these clauses. The Association requires
fire, casualty, title and, when applicable, flood insurance on all properties
securing real estate loans made by the Association.
The Association offers employees of the Association, other than executive
officers and directors, who satisfy certain criteria and the general
underwriting standards of the Association fixed and adjustable-rate mortgage
loans with reduced loan origination fees and/or interest rates which are
currently 100 basis points below the rates offered to the Association's other
customers, the Employee Mortgage Rate ("EMR"). The EMR is limited to the
purchase, construction or refinancing of an employee's owner-occupied primary
residence. The EMR normally ceases upon termination of employment or if the
property no longer is the employee's primary residence. Upon termination of the
EMR, the interest rate reverts to the contract rate in effect at the time that
the loan was extended. All other terms and conditions contained in the original
mortgage and note continue to remain in effect. As of July 31, 1998, the
Association had $1.6 million of EMR loans, or 1.8% of total loans.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Association originates
multi-family and commercial real estate loans that are generally secured by
five or more unit apartment buildings and properties used for business purposes
such as small office buildings or retail facilities located in the
Association's primary market area. The Association's multi-family and
commercial real estate underwriting policies provide that such real estate
loans may be made in amounts of up to 70% of the appraised value of the
property, subject to the Association's current loans-to-one-borrower policy
limit, which at July 31, 1998 was $2.6 million. The Association's multi-family
and commercial real estate loans may be made with terms of up to 20 years and
are offered with interest rates that adjust periodically. In reaching its
decision on whether to make a multi-family or commercial real estate loan, the
Association considers the net operating income of the property, the borrower's
expertise, credit history and profitability and the value of the underlying
property. Environmental risk evaluations are generally required for all multi-
family and commercial real estate loans. Generally, all multi-family and
commercial real estate loans made to corporations, partnerships and other
business entities require personal guarantees by the principals. On an
exception basis, the Association may not require a personal guarantee on such
loans depending on the creditworthiness of the borrower and the amount of the
downpayment and other mitigating circumstances. The Association's multi-family
and commercial real estate loan portfolio at July 31, 1998 was $3.0 million, or
3.0% of total loans. The largest multi-family or commercial real estate loan in
the Association's portfolio at July 31, 1998 was a performing $256,000 loan
secured by a 26-unit apartment building located in Salem, New Jersey.
Loans secured by multi-family and commercial real estate properties generally
involve larger principal amounts and a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
multi-family and commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
The Association seeks to minimize these risks through its underwriting
standards.
54
<PAGE>
CONSUMER LENDING. Consumer loans at July 31, 1998 amounted to $17.6 million, or
17.4% of the Association's total loans, and consisted primarily of home equity
loans, home equity lines of credit, education loans and, to a significantly
lesser extent, secured and unsecured personal loans and new and used automobile
loans. Such loans are generally originated in the Association's primary market
area and generally are secured by real estate, deposit accounts and
automobiles. These loans are typically shorter term and generally have higher
interest rates than one- to four-family mortgage loans.
The Association offers home equity loans ("HELs") and home equity lines of
credit ("HELOCs") (collectively, "equity loans"). Most of the Association's
equity loans are secured by second mortgages on one- to four-family residences
located in the Association's primary market area. At July 31, 1998, these loans
totalled $14.6 million, or 14.5% of the Association's total loans and 83.0% of
consumer loans. HELs are generally offered with terms of up to 15 years and
only with fixed-rates of interest which rates will vary depending on the
amortization period chosen by the borrower. At July 31, 1998, HELs totalled
$13.4 million, or 13.3% of the Association's total loans and 76.1% of consumer
loans. HELOCs generally have adjustable-rates of interest which adjust on a
monthly basis. The adjustable-rate of interest charged on such loans is indexed
to the prime rate as reported in The Wall Street Journal. Adjustable-rate
HELOCs generally provide for overall caps (not more than 6% above the initial
interest rate) on the increase or decrease in the interest rate over the life
of the loan. At July 31, 1998, the Association had $3.1 million of HELOCs of
which $1.2 million, or 1.2% of total loans, was drawn down at such date. The
underwriting standards employed by the Association for equity 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 and the value of the collateral securing the loan. Generally, the maximum
combined loan-to-value ratio ("LTV") on equity loans is 80% on owner-occupied
properties and 70% on non-owner -occupied properties. 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.
With respect to education lending, the Association participates in the United
States Department of Education (the "DOE") Title IV loan programs commonly
referred to as the Federal Family of Education Loan Programs ("FFELP"). The
loans in this program that the Association participates in include the Federal
Subsidized Stafford Loan and the Federal Parent Loan to Undergraduate Students
(PLUS) Loan. All FFELP loans that were disbursed prior to October 1, 1993 are
100% guaranteed as to principal and interest by the full faith of the United
States Government if serviced properly. Loans disbursed after October 1, 1993
are guaranteed to at least 98% of principal plus eligible interest by the full
faith of the United States Government if serviced properly. Under certain
circumstances loans guaranteed at the 98% level will be insured to the 100%
level. Education loans held by the Association are administrated and guaranteed
by the New Jersey Higher Education Assistance Authority ("NJHEAA"). The
Association underwrites, operates and administrates participation in the FFELP
under the policies and procedures outlined in the NJHEAA guidelines for Loan
Guaranty Programs. At July 31, 1998, education loans totalled $2.3 million, or
13.0% of consumer loans and 2.3% of the Association's total loans.
The Association also originates other types of consumer loans primarily
consisting of secured and unsecured personal loans and new and used automobile
loans. At July 31, 1998, these consumer loans totalled $665,000, or 0.66% of
the Association's total loans and 3.8% of consumer loans. Secured personal
loans are generally secured by deposit accounts. Unsecured personal loans
generally have a maximum borrowing limitation of $7,500 and generally require a
debt ratio (the ratio of debt service to net earnings) of 36%. Automobile loans
have a maximum borrowing limitation of 80% of the sale price of a new
automobile or 80% of the fair market value of a used automobile. At July 31,
1998 personal loans totalled $581,000, or 3.3% of consumer loans; and
automobile loans totalled $84,000, or 0.5% of consumer loans.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family mortgage loans. In such
cases, 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,
55
<PAGE>
loss or depreciation of the underlying collateral. Further, consumer loan
collections on these loans 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. 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.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes the
lending policies of the Association and oversees the Association's lending
activity. The Board of Directors has established a Loan Committee comprised of
four members of the Association's Board of Directors. In addition, the
Association maintains an "In House" Loan Committee comprised of the
Association's President, Executive Vice President, Senior Lending Officer and
Vice President of Lending.
The Board of Directors has authorized the following persons and groups of
persons to approve loans up to the amounts indicated: one- to four-family
mortgage loans in amounts up to $150,000 may be approved by the Association's
In House Loan Committee; and all such loans in excess of $150,000 require the
approval of the Boards' Loan Committee. All multi-family and commercial real
estate loans require the approval of the Board's Loan Committee.
With respect to consumer loans, home equity loans and equity lines of credit in
amounts up to $25,000 and automobile loans in amounts up to $10,000 may be
approved by the Association's Vice President of Lending; home equity loans and
equity lines of credit in excess of $25,000 and up to $50,000 and automobile
loans in excess of $10,000 and up to $15,000 require the approval of the
Association's Senior Lending Officer; home equity loans and equity lines of
credit in excess of $50,000 and up to $100,000 and automobile loans in excess
of $15,000 and up to $25,000 require the approval of the Association's In House
Loan Committee; and home equity loans and equity lines of credit in excess of
$100,000 and automobile loans in excess of $25,000 require the approval of the
Board's Loan Committee.
Certain education loans (PLUS loans) may be approved by the Association's Vice
President of Lending or Senior Lending Officer. Other education loans (Federal
Subsidized Stafford Loans) are reviewed by the Association but are actually
approved by the NJHEAA. All education loans are made in amounts up to that
which is guaranteed by the NJHEAA. Loans on savings accounts may be approved by
any branch manager or assistant branch manager. Such loans are fully secured by
the savings account or certificate of deposit utilized as collateral for the
loan.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
DELINQUENCIES AND CLASSIFIED ASSETS. Reports listing all delinquent accounts
are generated and reviewed by management on a monthly basis and the Board of
Directors performs a quarterly review of all loans or lending relationships
delinquent 30 days or more and all real estate owned ("REO"). The procedures
taken by the Association with respect to delinquencies vary depending on the
nature of the loan, period and cause of delinquency and whether the borrower
has been habitually delinquent. When a borrower fails to make a required
payment on a loan, the Association may take a number of steps to have the
borrower cure the delinquency and restore the loan to current status. The
Association generally sends the borrower a written notice of non-payment after
the loan is first past due. The Association's guidelines provide that
telephone, written correspondence and/or face-to-face contact will be attempted
to ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the
Association will attempt to obtain full payment, work out a repayment schedule
with the borrower to avoid foreclosure or, in some instances, accept a deed in
lieu of foreclosure. In the event payment is not then received or the loan not
otherwise satisfied, additional letters and telephone calls generally are made.
If the loan is still not brought current or satisfied and it becomes necessary
for the Association to take legal action, which typically occurs after a loan
is 90 days or more delinquent, the Association will commence foreclosure
proceedings against any real or personal property that secures the loan. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the property securing the loan
generally is sold at foreclosure and, if purchased by the Association, becomes
real estate owned.
56
<PAGE>
Federal regulations and the Association's Asset Classification Policy require
that the Association utilize an internal asset classification system as a means
of reporting problem and potential problem assets. The Association has
incorporated the OTS internal asset classifications as a part of its credit
monitoring system. The Association currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the 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," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When the Association classifies one or more assets, or portions thereof, as
Substandard, it establishes a general valuation allowance for loan losses in an
amount deemed prudent by management. General valuation allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When the Association
classifies one or more assets, or portions thereof, as Doubtful, it establishes
a specific allowance for losses equal to 50% of the amount of the asset so
classified, with respect to uncollateralized assets, and the difference between
the loan amount and the collateral value with respect to collateralized assets.
Assets, or portions thereof, classified as Loss are charged off.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS
which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the
portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. Although management believes that, based on information
currently available to it at this time, its allowance for loan losses is
adequate, actual losses are dependent upon future events and, as such, further
additions to the level of allowances for loan losses may become necessary. In
addition, the OTS or other federal banking agencies may require the Association
to recognize additions to the allowance, based on their judgments about
information available to them at the time of their examination.
57
<PAGE>
The Association's Loan Committee reviews and classifies the Association's
assets on a quarterly basis and the Board of Directors reviews the results of
the reports on a quarterly basis. The Association classifies assets in
accordance with the management guidelines described above. At July 31, 1998,
the Association had $578,000 of assets designated as Substandard which
consisted of 12 one- to four-family mortgage loans, six consumer loans and a
single parcel of REO. At that same date the Association had $81,000 of assets
classified as Doubtful consisting of three one- to four-family mortgage loans
and three unsecured personal consumer loans. At July 31, 1998, the Association
had no loans classified as Loss. As of July 31, 1998, the Association also had
a total of three loans, totalling $116,000, designated as Special Mention. At
July 31, 1998, the largest adversely (other than Special Mention) classified
loan was a second mortgage loan with an aggregate carrying balance of $72,000
and was secured by a commercial real estate property. The following table sets
forth the delinquencies in the Association's loan portfolio as of the dates
indicated.
<TABLE>
<CAPTION>
JULY 31, 1998 DECEMBER 31, 1997
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family... -- $-- 8 $279 3 $162 11 $328
Multi-family and
commercial........... 1 57 -- -- -- -- 1 57
Consumer Loans:
Home equity loans and
lines of credit...... -- -- 3 126 4 133 2 100
Education............. 27 64 21 41 16 31 46 110
Other................. -- -- 5 10 2 6 2 7
--- ---- --- ---- --- ---- --- ----
Total............... 28 $121 37 $456 25 $332 62 $602
=== ==== === ==== === ==== === ====
Delinquent loans to
total loans, net....... 0.12% 0.46% 0.34% 0.61%
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family... -- $-- 19 $783 2 $ 64 7 $292
Multi-family and
commercial........... -- -- -- -- -- -- 1 142
Consumer Loans:
Home equity loans and
lines of credit...... 1 30 1 23 1 52 2 37
Education............. 20 46 54 109 2 2 4 5
Other................. 1 7 1 1 1 1 2 2
--- ---- --- ---- --- ---- --- ----
Total............... 22 $ 83 75 $916 6 $119 16 $478
=== ==== === ==== === ==== === ====
Delinquent loans to
total loans, net....... 0.08% 0.88% 0.11% 0.43%
</TABLE>
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding non-accrual loans and REO. At July 31, 1998, non-accrual
loans totalled $415,000 consisting of 16 loans, and REO totalled $50,000
consisting of a one-to four-family loan. At July 31, 1998, the Association had
$41,000 of
58
<PAGE>
education loans which were 90 days or more delinquent, but for which it
continued to accrue interest because of government guarantees. It is the policy
of the Association to cease accruing interest on mortgage loans 90 days or more
past due and to cease accruing interest on consumer loans 60 days or more past
due (unless the loan principal and interest are determined by management to be
fully secured and in the process of collection) and to charge off most of the
accrued interest. On January 1, 1995, the Association adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118.
At July 31, 1998 and December 31, 1997 and 1996, the Association had recorded
investments of $81,000, $77,000 and $553,000, respectively, in impaired loans
which had specific allowances of $12,000, $10,000 and $160,000, respectively.
For the seven months ended July 31, 1998 and the years ended December 31, 1997
and 1996, the amount of additional interest income that would have been
recognized on non-accrual loans if such loans had continued to perform in
accordance with their contractual terms was $21,000, $54,000 and $50,000,
respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JULY 31, --------------------------------
1998 1997 1996 1995 1994 1993
----------- ---- ---- ---- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family real estate.. $279 $328 $783 $292 $ 519 $ 538
Multi-family and commercial real
estate.......................... -- 57 -- 142 -- --
Consumer......................... 136 246 61 92 32 52
---- ---- ---- ---- ------ ------
Total(1)....................... 415 631 844 526 551 590
Real estate owned (REO)(2)......... 50 -- -- 23 -- 143
---- ---- ---- ---- ------ ------
Total nonperforming assets(3).. 465 631 844 549 551 733
Troubled debt restructurings....... -- -- 155 116 3,244 4,024
---- ---- ---- ---- ------ ------
Troubled debt restructurings and
total nonperforming assets........ $465 $631 $999 $665 $3,795 $4,757
==== ==== ==== ==== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans......... 0.41% 0.63% 0.94% 0.60% 3.38% 4.20%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets........ 0.18% 0.25% 0.41% 0.28% 1.70% 2.15%
</TABLE>
- --------
(1) Total non-accruing loans equals total nonperforming loans.
(2) Real estate owned balances are shown net of related specific loss
allowances.
(3) Nonperforming assets consist of nonperforming loans (and impaired loans),
other repossessed assets and REO.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risks
inherent in its loan portfolio and the general economy. The allowance for loan
losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Association's allowance for loan losses. Such agencies may require the
Association to make additional provisions for estimated loan losses based upon
their judgments about information available to them at the time of their
examination. As of July 31, 1998, the Association's allowance for loan losses
was 0.82% of total loans compared to 0.67% as of December 31, 1997. The
Association had non-accrual loans of $415,000 and $631,000 at July 31, 1998 and
December 31, 1997, respectively. The Association will continue to monitor and
modify its allowance for loan losses as conditions dictate. While management
believes the Association's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the Association's level of allowance for loan losses will be sufficient to
cover loan losses incurred by the Association or that adjustments to the
allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan losses.
59
<PAGE>
The following table sets forth activity in the Association's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
SEVEN MONTHS
ENDED JULY AT OR FOR THE YEAR ENDED
31, DECEMBER 31,
-------------- ------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan
losses, beginning of
period................. $ 667 $1,186 $1,186 $1,068 $ 968 $ 874 $ 575
Charged-off loans:
One- to four-family
real estate.......... 12 17 370 4 35 6 --
Multi-family and
commercial
real estate.......... -- -- 516 20 -- 157 --
Consumer.............. 14 11 37 41 45 48 101
------ ------ ------ ------ ------ ----- -----
Total charged-off
loans.............. 26 28 923 65 80 211 101
------ ------ ------ ------ ------ ----- -----
Recoveries on loans
previously charged off:
One- to four-family
real estate.......... 2 -- -- -- -- -- --
Consumer.............. 1 2 4 3 -- 5 --
------ ------ ------ ------ ------ ----- -----
Total recoveries.... 3 2 4 3 -- 5 --
------ ------ ------ ------ ------ ----- -----
Net loans charged-off... (23) (26) (919) (62) (80) (206) (101)
Provision for loan
losses................. 175 233 400 180 180 300 400
------ ------ ------ ------ ------ ----- -----
Allowance for loan
losses, end of period.. $ 819 $1,393 $ 667 $1,186 $1,068 $ 968 $ 874
====== ====== ====== ====== ====== ===== =====
Net loans charged-off to
average interest-
earning loans.......... 0.02% 0.03% 0.89% 0.06% 0.07% 0.18% 0.09%
Allowance for loan
losses to total loans,
net.................... 0.82% 1.38% 0.67% 1.14% 1.01% 0.88% 0.81%
Allowance for loan
losses to nonperforming
loans and troubled debt
restructuring.......... 197.35% 131.79% 105.71% 118.72% 166.36% 25.51% 18.94%
Net loans charged-off to
allowance for loan
losses................. 2.81% 1.87% 137.78% 5.23% 7.49% 21.28% 11.56%
Recoveries to charge-
offs................... 11.54% 7.14% 0.43% 4.62% --% 2.37% --%
</TABLE>
60
<PAGE>
The following table sets forth the Association's allowance for loan losses in
each of the categories listed at the dates indicated and the percentage of such
amounts to the total allowance and the percentage of loans in each category to
total loans.
<TABLE>
<CAPTION>
AT JULY 31,
---------------------------------------------------
1998 1997
------------------------- -------------------------
% OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- -------- ------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate............. $308 37.61% 82.56% $ 904 64.90% 81.93%
Consumer................ 114 13.92 17.44 105 7.54 18.07
Unallocated............. 397 48.47 -- 384 27.56 --
---- ------ ------ ------ ------ ------
Total allowance for
loan losses........... $819 100.00% 100.00% $1,393 100.00% 100.00%
==== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------------- ------------------------- ------------------------- -------------------------
% OF PERCENT % OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT
------ --------- -------- ------ --------- -------- ------ --------- -------- ------ --------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate...... $313 46.93% 81.60% $ 915 77.15% 82.37% $ 766 71.72% 83.99% $625 64.57% 84.87% $471
Consumer......... 129 19.34 18.40 105 8.85 17.63 102 9.55 16.01 52 5.37 15.13 49
Unallocated...... 225 33.73 -- 166 14.00 -- 200 18.73 -- 291 30.06 -- 354
---- ------ ------ ------ ------ ------ ------ ------ ------ ---- ------ ------ ----
Total allowance
for loan
losses.......... $667 100.00% 100.00% $1,186 100.00% 100.00% $1,068 100.00% 100.00% $968 100.00% 100.00% $874
==== ====== ====== ====== ====== ====== ====== ====== ====== ==== ====== ====== ====
<CAPTION>
1993
------------------
% OF PERCENT
ALLOWANCE OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
ALLOWANCE LOANS
--------- --------
<S> <C> <C>
Real estate...... 53.89% 84.71%
Consumer......... 5.61 15.29
Unallocated...... 40.50 --
--------- --------
Total allowance
for loan
losses.......... 100.00% 100.00%
========= ========
</TABLE>
61
<PAGE>
REAL ESTATE OWNED. At July 31, 1998 and December 31, 1997, the Association had
$50,000 and $0 of real estate owned, respectively. When the Association
acquires property through foreclosure or deed in lieu of foreclosure, it is
initially recorded at the lesser of the carrying value of the loan or fair
value of the property at the date of acquisition less costs to sell.
Thereafter, if there is a further deterioration in value, the Association
provides for a specific valuation allowance and charges operations for the
diminution in value. It is the policy of the Association to have obtained an
appraisal or broker's price opinion on all real estate subject to foreclosure
proceedings prior to the time of foreclosure. It is the Association's policy to
require appraisals on a periodic basis on foreclosed properties and conduct
inspections on foreclosed properties.
INVESTMENT ACTIVITIES
New Jersey chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and certificates of deposit of insured
banks and savings institutions. Subject to various restrictions, New Jersey
chartered savings institutions may also invest their assets in investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a state-chartered savings institution is otherwise authorized
to make directly. Additionally, the Association must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations. See
"Regulation--Federal Regulation of Savings Institutions--Liquidity."
Historically, the Association has maintained liquid assets above the minimum
OTS requirements and at a level considered to be adequate to meet its normal
daily activities.
The investment policy of the Association, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and
credit risk and to complement the Association's lending activities. The
Association primarily utilizes investments in securities for liquidity
management and as a method of deploying excess funding not utilized for
investment in loans. Generally, the Association's investment policy is more
restrictive than the OTS regulations allow and, accordingly, the Association
has invested primarily in U.S. government and agency securities, which qualify
as liquid assets under the OTS regulations, federal funds and U.S. government
sponsored agency issued mortgage-backed securities. As required by SFAS No.
115, the Association has established an investment portfolio of securities that
are categorized as held-to-maturity, available-for-sale or held for trading.
The Association generally invests in securities as a method of utilizing funds
not utilized for loan origination activity and as a method of maintaining
liquidity at levels deemed appropriate by management. The Association does not
currently maintain a portfolio of securities categorized as held for trading.
At July 31, 1998, the Association's securities portfolio totalled $136.7
million, or 52.6% of assets, all of which was categorized as held-to-maturity.
At July 31, 1998, the Association had invested $48.4 million in FNMA, FHLMC and
GNMA mortgage-backed securities, or 18.6% of total assets, all of which were
classified as held-to-maturity. In addition, $46.1 million, or 17.7%, of total
assets, were debt obligations issued by federal agencies which generally have
stated maturities from one month to four years. Also, $41.0 million, or 15.8%
of total assets were debt obligations issued by federal agencies which have
stated maturities from 30 months to 20 years, but which also have call
features. Such callable securities allow the issuer, after a specified period
of time, to repay the security prior to its stated maturity. Based on interest
rate ranges anticipated by the Association, the Association estimates that the
substantial majority of such securities will be called prior to their stated
maturities. The Association is subject to additional interest rate risk and
reinvestment risk compared to its evaluation of that risk if changes in
interest rates exceed ranges anticipated by the Association in estimating the
anticipated life of such callable investment securities. Investments in
mortgage-backed securities involve a risk that actual prepayments will be
greater than estimated prepayments over the life of the security, which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates.
62
<PAGE>
The following table sets forth information regarding the amortized cost and
fair value of the Association's securities at the dates indicated.
<TABLE>
<CAPTION>
AT JULY 31, AT DECEMBER 31,
------------------ --------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Debt securities held-
to-maturity:
Obligations of U.S.
government agencies... $ 86,956 $ 87,293 $ 78,934 $ 79,502 $ 77,010 $ 77,028 $ 71,580 $ 72,285
Other securities....... 100 100 100 100 100 100 600 598
-------- -------- -------- -------- -------- -------- -------- --------
Total investment
securities.......... 87,056 87,393 79,034 79,602 77,110 77,128 72,180 72,883
-------- -------- -------- -------- -------- -------- -------- --------
FHLB stock.............. 1,249 1,249 1,233 1,233 1,150 1,150 1,182 1,182
-------- -------- -------- -------- -------- -------- -------- --------
Mortgage-backed
securities:
Mortgage-backed
securities held to
maturity:
FHLMC.................. 21,901 22,522 26,679 27,013 23,529 23,526 15,150 15,511
FNMA................... 25,681 26,035 17,627 17,673 16,752 16,496 15,112 15,337
GNMA................... 770 839 925 977 1,117 1,152 1,410 1,486
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed
securities.......... 48,352 49,396 45,231 45,663 41,398 41,174 31,672 32,334
-------- -------- -------- -------- -------- -------- -------- --------
Total securities..... $136,657 $138,038 $125,498 $126,498 $119,658 $119,452 $105,034 $106,399
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the Association's securities activities for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE FOR THE YEAR ENDED
SEVEN MONTHS DECEMBER 31,
ENDED JULY 31, -------------------------
1998 1997 1996 1995
-------------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES (HELD TO
MATURITY):
Mortgage-backed securities,
beginning of period............... $45,231 $41,398 $31,672 $29,923
Purchases: mortgage-backed
securities........................ 10,994 10,030 16,029 6,023
Repayments and prepayments:
Mortgage-backed securities....... 7,862 6,167 6,217 4,252
Decrease in premium................ (11) (30) (86) (22)
------- ------- ------- -------
Mortgage-backed securities, end of
period............................ $48,352 $45,231 $41,398 $31,672
======= ======= ======= =======
INVESTMENT SECURITIES (HELD TO
MATURITY):
Investment securities, beginning of
period............................ $79,034 $77,110 $72,180 $65,904
Purchases: investment securities... 29,611 36,215 30,549 26,827
Calls: investment securities....... 14,000 17,000 6,000 4,000
Maturities: investment securities.. 7,500 17,000 19,000 15,745
Decrease in premium................ (89) (291) (619) (806)
------- ------- ------- -------
Investment securities, end of
period............................ $87,056 $79,034 $77,110 $72,180
======= ======= ======= =======
FHLB STOCK:
FHLB stock, beginning of period.... $ 1,233 $ 1,150 $ 1,182 $ 1,150
Purchases.......................... 16 83 -- 32
Redemptions........................ -- -- 32 --
------- ------- ------- -------
FHLB stock, end of period.......... $ 1,249 $ 1,233 $ 1,150 $ 1,182
======= ======= ======= =======
</TABLE>
63
<PAGE>
The table below sets forth information regarding the carrying value, weighted
average yields and contractual maturities of the Association's investment
securities and mortgage-backed securities as of July 31, 1998.
<TABLE>
<CAPTION>
AT JULY 31, 1998
-----------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
YEAR YEARS MORE THAN TEN
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS YEARS TOTAL
----------------- ----------------- ----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity
securities:
Investment securities:
Obligations of U.S.
Government agencies... $12,591 6.89% $34,256 6.14% $3,997 7.38% $36,112 7.17% $ 86,956 6.73%
Other investments...... -- -- 100 3.50 -- -- -- -- 100 3.50
Mortgage-backed
securities............. -- -- 933 9.03 4,908 7.71 42,511 7.27 48,352 7.35
FHLB stock.............. 1,249 7.45 -- -- -- -- -- -- 1,249 7.45
------- ------- ------ ------- --------
Total securities at
amortized cost......... $13,840 6.94% $35,289 6.21% $8,905 7.56% $78,623 7.22% $136,657 6.95%
======= ======= ====== ======= ========
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, cash flows generated from
operations and FHLB advances are the primary sources of the Association's funds
for use in lending, investing and for other general purposes.
DEPOSITS. The Association offers a variety of deposit accounts with a range of
interest rates and terms. The Association's deposits consist of checking, money
market, savings, NOW, certificate accounts and Individual Retirement Accounts.
More than 50% of the funds deposited in the Association are in certificate of
deposit accounts. At July 31, 1998, core deposits (savings, NOW, money market
and club accounts) represented 46.6% of total deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Association's
deposits are obtained predominantly from the areas in which its branch offices
are located. The Association has historically relied primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Association's ability to
attract and retain deposits. The Association uses traditional means of
advertising its deposit products, including print media and generally does not
solicit deposits from outside its market area. The Association does not
actively solicit certificate accounts in excess of $100,000 or use brokers to
obtain deposits. At July 31, 1998, $54.7 million, or 46.2% of the Association's
certificate of deposit accounts were to mature within one year.
The following table presents the deposit activity of the Association for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE
SEVEN MONTHS FOR THE YEAR ENDED
ENDED JULY 31, DECEMBER 31,
-------------- ------------------------
1998 1997 1997 1996 1995
------ ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Increase (decrease) before interest
credited............................ $3,149 $(2,238) $(2,336) $(2,725) $1,699
Interest credited.................... 4,801 4,595 8,708 8,439 7,912
------ ------- ------- ------- ------
Net increase......................... $7,950 $ 2,357 $ 6,372 $ 5,714 $9,611
====== ======= ======= ======= ======
</TABLE>
64
<PAGE>
At July 31, 1998, the Association had $9.7 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
--------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less.......... $ 1,205 5.11%
Over 3 through 6 months....... 858 5.30%
Over 6 through 12 months...... 1,205 5.36%
Over 12 months................ 6,394 6.18%
------------
Total....................... $ 9,662 5.87%
============
</TABLE>
The following table sets forth the distribution of the Association's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented and such information at July 31,
1998. Averages for the periods presented utilize month-end balances.
<TABLE>
<CAPTION>
FOR THE SEVEN MONTHS ENDED
AT JULY 31, 1998 JULY 31, 1998
---------------------- ---------------------------
PERCENT OF
PERCENT TOTAL AVERAGE
OF TOTAL RATE AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
-------- -------- ---- -------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts........... $ 34,572 15.0% 2.75% $ 34,353 15.1% 2.73%
Money market accounts...... 43,447 18.8 3.44 43,759 19.3 3.47
NOW accounts............... 27,989 12.1 2.25 28,275 12.5 2.26
Club accounts.............. 1,720 0.7 2.59 1,102 0.5 2.78
Certificates of deposit.... 118,443 51.2 5.80 114,818 50.6 5.77
Noninterest-bearing
deposits:
Demand deposits........... 4,985 2.2 -- 4,600 2.0 --
-------- ----- -------- -----
Total average deposits.... $231,156 100.0% 4.32% $226,907 100.0% 4.30%
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE
AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
-------- ---------- ------- -------- ---------- ------- -------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts........ $ 35,599 16.3% 2.68% $ 38,738 18.1% 2.75% $ 44,109 21.6% 2.73%
Money market accounts... 41,597 19.0 3.67 37,495 17.6 3.64 31,328 15.3 3.80
NOW accounts............ 27,598 12.6 2.34 25,882 12.1 2.24 25,447 12.5 2.16
Club accounts........... 1,009 0.5 2.52 1,013 0.5 2.53 999 0.5 2.63
Certificates of
deposit................ 108,506 49.7 5.68 106,665 49.9 5.70 98,898 48.4 5.67
Noninterest-bearing
deposits:
Demand deposits........ 4,244 1.9 -- 3,922 1.8 -- 3,439 1.7 --
-------- ----- -------- ----- -------- -----
Total average
deposits.............. $218,553 100.0% 4.26% $213,715 100.0% 4.27% $204,220 100.0% 4.20%
======== ===== ======== ===== ======== =====
</TABLE>
65
<PAGE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at July 31, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JULY 31, 1998 AT DECEMBER 31,
----------------------------------------- --------------------------
LESS ONE TWO TO OVER
THAN ONE TO TWO THREE THREE
YEAR YEARS YEARS YEARS TOTAL 1997 1996 1995
-------- ------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%............. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 3,266
4.01 to 5.00%.......... 10,279 25 -- 4,495 14,799 5,052 33,291 18,476
5.01 to 6.00%.......... 40,884 16,986 10,111 29,166 97,147 71,398 35,266 40,620
6.01 to 7.00%.......... 3,259 2,648 305 -- 6,212 33,474 35,708 35,340
7.01 to 8.00%.......... 254 -- 26 -- 280 1,357 1,804 1,998
8.01 to 9.00%.......... 5 -- -- -- 5 5 1,259 5,042
Over 9.00%............. -- -- -- -- -- -- -- 18
------- ------- ------- ------- -------- -------- -------- --------
Total certificate
accounts.............. $54,681 $19,659 $10,442 $33,661 $118,443 $111,286 $107,328 $104,760
======= ======= ======= ======= ======== ======== ======== ========
</TABLE>
BORROWINGS. The Association utilizes advances from the FHLB of New York as an
alternative to retail deposits to fund its operations as part of its operating
strategy. These FHLB advances are collateralized primarily by the Association's
mortgage loans and mortgage-backed securities and secondarily by the
Association's investment in capital stock of the FHLB of New York. FHLB
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB of New York will advance to member institutions, including the
Association, fluctuates from time to time in accordance with the policies of
the FHLB of New York. See "Regulation--Federal Home Loan Bank System." At July
31, 1998 and December 31, 1997, the Association had $176,000 in outstanding
FHLB advances.
The following table sets forth information regarding the Association's borrowed
funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
SEVEN MONTHS YEAR ENDED
ENDED JULY 31, DECEMBER 31,
---------------- ----------------
1998 1997 1997 1996 1995
------- ------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding............... $ 176 $ 176 $176 $176 $176
======= ======= ==== ==== ====
Maximum amount outstanding at any month-
end during the period.................... $ 176 $ 176 $176 $176 $176
======= ======= ==== ==== ====
Balance outstanding at end of period...... $ 176 $ 176 $176 $176 $176
======= ======= ==== ==== ====
Weighted average interest rate during the
period................................... 6.62% 6.62% 6.62% 6.62% 6.62%
======= ======= ==== ==== ====
Weighted average interest rate at end of
period................................... 6.62% 6.62% 6.62% 6.62% 6.62%
======= ======= ==== ==== ====
</TABLE>
66
<PAGE>
PROPERTIES
The Association currently conducts its business through three full service
banking offices and two operations centers located in Gloucester and Camden
Counties, New Jersey. Consistent with its business planning strategy, the
Association is planning to expand and remodel its administrative and home
office in order to move the functions of its two operation centers to that
single location. The Association expects to incur capital expenditures of up to
$2.5 million in connection with such expansion. Once the expansion is complete,
in or about the first quarter of 2000, the Company believes that the
Association's facilities will be adequate to meet the then-present and
immediately foreseeable needs of the Association and the Company. The following
table sets forth the Association's offices as of July 31, 1998.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
ORIGINAL LEASEHOLD TOTAL
LEASED YEAR DATE OF IMPROVEMENTS DEPOSITS AT
OR LEASED OR LEASE AT JULY 31, JULY 31,
LOCATION OWNED ACQUIRED EXPIRATION 1998 1998
-------- ------ ------------ ---------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ADMINISTRATIVE/HOME
OFFICE:
4651 Route 42
Turnersville, NJ 08012 Owned 1979 -- $1,012 $ 48,217
BRANCH OFFICES:
627 Haddon Avenue
Collingswood, NJ 08108 Owned 1957 -- 1,291 108,776
10 E. Evesham Road
Glendora, NJ 08029 Owned 1967 -- 94 74,163
OPERATIONS CENTERS:
4641 Route 42
Turnersville, NJ 08012 Leased July 1996 June 1999(1) 5 --
251 Johnson Road
Turnersville, NJ 08012 Leased January 1988 December 1998(2) -- --
------ --------
Total.................................................... $2,402 $231,156
====== ========
</TABLE>
- --------
(1) The Association is currently in the first of two one-year renewal options.
(2) Since the expiration of the lease's original three-year term, the
Association has continuously renewed the lease for one-year periods.
LEGAL PROCEEDINGS
The Association is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition, results of operations or cash
flows.
PERSONNEL
As of July 31, 1998, the Association had 65 authorized full-time employee
positions and 22 authorized part-time employee positions. The employees are not
represented by a collective bargaining unit and the Association considers its
relationship with its employees to be good. See "Management of the
Association--Other Benefit Plans" for a description of compensation and benefit
programs offered to the Association's employees.
67
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association will report their income on a December
31 calendar year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Association's reserve for bad
debts discussed below. The following discussion of tax matters material to the
operations of the Company and the Association is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Association or the Company. The Association was last audited by the
Internal Revenue Service ("IRS") in 1991 and has not been audited by the New
Jersey Department of Revenue ("DOR") in the past five years.
BAD DEBT RESERVE. For taxable years beginning after December 31, 1995, although
the 1996 Tax Act generally repealed the bad debt method of accounting for
thrift institutions, thrift institutions such as the Association that are
treated as small banks under the Internal Revenue Code of 1986, as amended
("Code") (those with assets under $500 million) are allowed to utilize the
experience method or the specific charge-off method to account for bad debt
losses. Thus, the Association will take a bad debt deduction for federal income
tax purposes which is based on its current or historic net charge-offs. For tax
years beginning prior to December 31, 1995, the Association as a qualifying
thrift had been permitted to establish a reserve for bad debts and to make
annual additions to such reserve, which were deductible for federal income tax
purposes. Under such prior tax law, generally the Association recognized a bad
debt deduction equal to 8% of taxable income.
Under the 1996 Tax Act, the Association is required to recapture all or a
portion of the additions to its bad debt reserve made subsequent to the base
year (which is the Association's last taxable year beginning before January 1,
1988). The Association began to recapture such bad debt reserves ratably over a
six-year period commencing in the Association's calendar 1996 tax year. In
fiscal 1997, the Association recorded a deferred tax liability for this bad
debt recapture. As a result, the recapture is not anticipated to have an effect
on the Association's future net income or federal income tax expense for
financial reporting purposes.
POTENTIAL RECAPTURE OF BASE YEAR BAD DEBT REVENUE. The Association's bad debt
reserve as of the base year is not subject to automatic recapture as long as
the Association continues to carry on the business of banking. If the
Association no longer qualifies as a bank, the balance of the pre-1988 reserves
(and the supplemental reserves) is restored to income ratably over a six-year
period beginning in the tax year the Association no longer qualifies as a bank.
The base year bad debt reserve is also subject to recapture to the extent that
the Association makes "non-dividend distributions" that are considered as made
from the pre-1988 bad debt reserves. To the extent that such reserves exceed
the amount that would have been allowed under the experience method ("Excess
Distributions"), then an amount based on the amount distributed will be
included in the Association's taxable income. "Non-dividend distributions"
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock, and distributions
in partial or complete liquidation. However, dividends paid out of the
Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Association's bad debt reserve. The amount of additional taxable
income created from an Excess Distribution is the amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, if after the Conversion, the Association makes a "non-dividend
distribution," then approximately one and one-half times the amount so
distributed would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" and "Dividend Policy" for limits on the payment
of dividends of the Association. The Association does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction claimed by the Association over the
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deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. Generally, only 90% of
AMTI can be offset by net operating loss carryovers of which the Association
currently has none. AMTI is increased by an amount equal to 75% of the amount
by which the Association's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). In addition, for taxable years beginning after June 30, 1986
and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI
(with certain modifications) over $2 million was imposed on corporations,
including the Association, whether or not an Alternative Minimum Tax ("AMT") is
paid. The Association does not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. For federal purposes, the
Company may exclude from its income 100% of dividends received from the
Association as a member of the same affiliated group of corporations. This
corporate dividends received deduction is generally 70% in the case of
dividends received from unaffiliated corporations with which the Company and
the Association will not file a consolidated tax return, except that if the
Company or the Association own more than 20% of the stock of a corporation
distributing a dividend then, generally, 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
The Association is subject to New Jersey's Savings Institution Tax at the rate
of 3% on its taxable income, before net operating loss deductions and special
deductions for federal income tax purposes. The Company will be required to
file a New Jersey income tax return because it will be doing business in New
Jersey. For New Jersey tax purposes, regular corporations are presently taxed
at a rate equal to 9% of taxable income. For this purpose, "taxable income"
generally means Federal taxable income subject to certain adjustments
(including addition of interest income on state and municipal obligations).
DELAWARE TAXATION
As a Delaware holding company not earning income in Delaware, the Company is
exempt from Delaware corporate income tax but is required to file an annual
report with and pay an annual franchise tax to the State of Delaware. However,
to the extent that the Company conducts business outside of Delaware, the
Company may be considered doing business and subject to additional taxing
jurisdictions outside of Delaware.
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REGULATION
GENERAL
The Association is subject to extensive regulation, examination and supervision
by the Department, as its chartering agency, the OTS, as its primary federal
regulator, and the FDIC, as the deposit insurer. The Association is a member of
the FHLB System. The Association's deposit accounts are insured up to
applicable limits by the SAIF managed by the FDIC. The Association must file
reports with the Commissioner, the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the
Department, the OTS and the FDIC to test the Association's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the Department, the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Association
and their operations. Assuming that the holding company form of organization is
utilized, the Company, as a savings and loan holding company, will also be
required to file certain reports with, and otherwise comply with the rules and
regulations of the OTS and of the Securities and Exchange Commission (the
"SEC") under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Department, the OTS, the FDIC or the Congress,
could have a material impact on the Company, the Association, their operations
or the Association's Conversion. Congress currently has under consideration
various proposals to eliminate the federal thrift charter, abolish the OTS and
restrict the activities of savings and loan holding companies. The results of
such consideration, including possible enactment of legislation is uncertain.
Therefore, the Association is unable to determine the extent to which the
results of consideration or possible legislation, if enacted, would affect its
business.
The description of statutory provisions and regulations applicable to savings
associations set forth in this Prospectus do not purport to be complete
descriptions of such statutes and regulations and their effects on the
Association and the Company and is qualified in its entirety by reference to
such statutes and regulations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
BUSINESS ACTIVITIES. The activities of New Jersey chartered, FDIC insured
savings institutions are governed by the New Jersey Savings and Loan Act
(1963), as amended ("NJSLA"), the Home Owners' Loan Act, as amended ("HOLA")
and, the Federal Deposit Insurance Act ("FDI Act") and the regulations issued
by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings associations
may engage.
ACTIVITIES AND INVESTMENT. The FDI Act imposes certain restrictions on the
activities and investments of state savings associations such as the
Association. No state savings association may engage as principal in any
activity that is not permissible for federally chartered savings associations
unless the association is in compliance with federal regulatory capital
requirements and the FDIC has determined that the activity does not pose a
significant risk to the deposit insurance fund. A state savings association may
engage in an activity that is permissible for a federal savings association,
but in a greater amount, only if the institution is in capital compliance and
the FDIC has not determined that engaging in that amount of activity poses a
risk to the affected deposit insurance fund. Also, a state savings association
may not acquire directly an equity investment of a type or in an amount that is
not permissible for federal associations. However, state savings associations
may acquire shares of service corporations so long as the institution is in
capital compliance, and the FDIC
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determines that no significant risk to the deposit insurance fund is posed by
the amount that the institution seeks to acquire on the activities of the
savings association.
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include financial
instruments and bullion. At July 31, 1998, the Association's regulatory limit
on loans-to-one borrower was $6.5 million. At July 31, 1998, the Association's
largest aggregate amount of loans-to-one borrower consisted of $1.1 million in
real estate mortgage loans all of which were secured by one- to four-family
properties.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under the
QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including mortgage-
backed and related securities) in at least 9 months out of each 12-month
period. A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. As of July 31, 1998, the
Association maintained 72% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations upon
all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in regulatory capital requirements
before and after a proposed capital distribution and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice to, but without the approval of the OTS, make capital distributions
during a calendar year equal to the greater of: (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event the Association's capital fell
below its capital requirements or the OTS notified it that it was in need of
more than normal supervision, the Association's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
LIQUIDITY. The Association is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus short-
term borrowings. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Association's average liquidity ratio for the seven
months ended July 31, 1998 was 45.75%, which exceeded the applicable
requirements. The Association has never been subject to monetary penalties for
failure to meet its liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
ASSESSMENTS. Savings institutions are required by regulation to pay assessments
to the OTS and to the Department to fund the agencies' operations. The
assessments paid by the Association to these agencies for the year ended
December 31, 1997 totalled $78,000.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of
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covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20% of the savings institution's capital
and surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally requires that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies.
ENFORCEMENT. Under the FDI Act, the OTS has primary federal enforcement
responsibility over federally insured savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal
of officers or directors, receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or $1 million per day in especially egregious cases.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal and state law also
establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal banking
agency to prescribe for all insured depository institutions standards relating
to, among other things, internal controls, information systems and audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, and compensation, fees and benefits and such other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies have adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness ("Guidelines") to implement these safety and
soundness standards. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
The Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings institutions
to meet three capital standards: a 1.5% tangible capital standard, a 3.0%
leverage ("core" or "Tier 1" capital) ratio and an 8.0% risk based capital
standard. Core (Tier 1) capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank. In addition, the OTS
prompt corrective action regulation provides that a savings institution that
has a leverage capital ratio of less than 4% (3% for institutions receiving the
highest examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions. See "--Prompt Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8.0%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent in the type
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of asset. The components of core capital are equivalent to those discussed
earlier under the 3% leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital. Effective October 1998,
institutions may also include in supplementary capital up to 45% of the pretax
unrealized holding gains on available-for-sale equity securities with readily
determinable fair values.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule adjusts the risk-weighting for
certain mortgage derivative securities. Under the rule as written, savings
associations with "above normal" interest rate risk exposure would be subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk would be
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the Association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% would be
required to deduct an interest rate component in calculating its total risk-
based capital. The interest rate risk component would be an amount equal to
one-half of the difference between the institution's measured interest rate
risk and 2% multiplied by the estimated economic value of the association's
assets. That dollar amount would be deducted from an association's total
capital in calculating compliance with its risk-based capital requirement.
Under the rule as written, there is a two quarter lag between the reporting
date of an institution's financial data and the effective date for the new
capital requirement based on that data. A savings association with assets of
less than $300 million and risk-based capital ratios in excess of 12% would be
not subject to the interest rate risk component, unless the OTS determined
otherwise. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis.
The OTS has postponed the date that the component will first be deducted from
an institution's total capital to provide it with an opportunity to review the
interest rate risk approaches taken by other federal banking agencies.
At July 31, 1998, the Association met each of its capital requirements, in each
case on a fully phased-in basis. See "Regulatory Capital Compliance" for a
table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Association's historical
amounts and percentages at July 31, 1998, and pro forma amounts and percentages
based upon the issuance of the shares within the Estimated Price Range and
assuming that a portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Generally, a
savings institution that has a total risk-based capital of less than 8.0% or a
leverage ratio or a Tier 1 capital or risk-based assets ratio that is less than
4.0% is considered to be undercapitalized. A savings institution that has a
total risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary
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supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns
an institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven months before
the assessment period. The capital categories are (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized. An institution is also placed
in one of three supervisory subcategories within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned with the most well
capitalized, healthy institutions receiving the lowest rates.
Deposits of the Association are presently insured by the SAIF. Both the SAIF
and the Bank Insurance Fund of the FDIC ("BIF") are statutorily required to be
recapitalized to a 1.25% of insured reserve deposits ratio. Until recently,
members of the SAIF and BIF were paying average deposit insurance assessments
of between 24 and 25 basis points. The BIF met the required reserve in 1995,
whereas the SAIF was not expected to meet or exceed the required level until
2002 at the earliest. This situation was primarily due to the statutory
requirement that SAIF members make payments on bonds issued in the late 1980s
by the Financing Corporation ("FICO") to recapitalize the predecessor to the
SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted a
new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association could have been placed at a substantial
competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law the
Funds Act which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Association, to recapitalize the SAIF.
As required by the Funds Act, the FDIC imposed a special assessment of 65.7
basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment
was recognized by the Association as an expense in the quarter ended September
30, 1996 and is generally tax deductible. The SAIF Special Assessment recorded
by the Association amounted to $1.3 million on a pre-tax basis and $841,000 on
an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds across
all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable
to that of BIF members. The FDIC recently adopted the 0 to 27 basis point
assessment schedule for the second half of 1998. SAIF members will also
continue to make the FICO payments described above. Management cannot predict
the level of FDIC insurance assessments on an on-going basis, or whether the
BIF and SAIF will eventually be merged.
The Association's assessment rate for 1997 was 6.5 basis points and the regular
premium expense for this period was $138,000.
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The FDIC is authorized to raise the assessment rates in certain circumstances.
The FDIC has exercised this authority several times in the past and may raise
insurance premiums in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Association, as a member of the FHLB, is required to acquire
and hold shares of capital stock in the FHLB in an amount at least equal to
1.0% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Association was in
compliance with this requirement with an investment in FHLB stock at July 31,
1998 of $1.2 million. FHLB advances must be secured by specified types of
collateral and all long-term advances may only be obtained for the purpose of
providing funds for residential housing finance. At July 31, 1998, the
Association had $176,000 in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent thrifts
and to contribute funds for affordable housing programs. These requirements
could reduce the amount of dividends that the FHLBs pay to their members and
could also result in the FHLBs imposing a higher rate of interest on advances
to their members. For the years ended December 31, 1997, 1996 and 1995,
dividends from the FHLB to the Association amounted to approximately $81,000,
$76,000 and $91,000, respectively. If dividends were reduced, the Association's
net interest income would likely also be reduced. Further, there can be no
assurance that the impact of recent or future legislation on the FHLBs will not
also cause a decrease in the value of the FHLB stock held by the Association.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts. The Federal
Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $47.8
million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3.0% and for accounts greater than $47.8 million, the
reserve requirement is $1.43 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Association is in
compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a non-interest-bearing account at
a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the
Association's interest-earning assets. FHLB System members are also authorized
to borrow from the Federal Reserve "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
NEW JERSEY LAW
GENERAL. The Commissioner regulates, among other things, the Association's
internal business procedures as well as its deposits, lending and investment
activities, and its ability to declare and pay dividends. The Commissioner must
approve changes to the Association's Certificate of Incorporation,
establishment or
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relocation of branch offices, mergers and the issuance of additional stock. In
addition, the Commissioner conducts periodic examinations of the Association.
Certain of the areas regulated by the Commissioner are not subject to similar
regulation by the FDIC.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and SAIF-insured savings institutions in New Jersey
with respect to lending and investment authority, as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for commercial
banks, New Jersey legislation and regulations ("parity legislation") have given
New Jersey chartered savings institutions, such as the Association, certain of
the powers of federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of particular triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by, New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
permits interstate branching to the same extent OTS permits interstate
branching in federal savings and loans.
ENFORCEMENT. Under the NJSLA, the Commissioner has extensive enforcement
authority over New Jersey savings and loan institutions and, under certain
circumstances, affiliated parties, insiders, and agents. The Commissioner's
enforcement authority includes: cease and desist orders, receivership,
conservatorship, restraining orders, removal of officers and directors,
emergency closures, dissolution, and liquidation. Fines for violations range
from $100 per day to $5,000.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and loan
holding company within the meaning of the HOLA. As such, the Company will be
required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Association must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will not
be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Association continues to be a QTL. See
"--Federal Regulation of Savings Institutions--QTL Test" for a discussion of
the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation. Previously proposed legislation would have
treated all savings and loan holding companies as bank holding companies and
limit the activities of such companies to those permissible for multiple
savings and loan holding companies.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution, or holding company thereof, without prior
written approval of the OTS; from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also
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prohibits a savings and loan holding company from acquiring more than 5% of a
company engaged in activities other than those authorized for savings and loan
holding companies by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933 (the "Securities Act") for the registration of the
common stock to be issued pursuant to the Conversion (the "Registration
Statement"). Upon completion of the Conversion, the Company's common stock will
be registered with the SEC under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the common stock to be
issued in the Conversion does not cover the resale of such shares. Shares of
the common stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities
Act. If the Company meets the current public information requirements of Rule
144 under the Securities Act, each affiliate of the Company who complies with
the other conditions of Rule 144 (including those that require the affiliate's
sale to be aggregated with those of certain other persons) would be able to
sell in the public market, without registration, a number of shares not to
exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
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MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Arthur E. Armitage, Jr., Gregory M. DiPaolo and John V. Field,
has a term of office expiring at the first annual meeting of stockholders, a
second class, consisting of Robert J. Colacicco, Richard G. Mohrfeld and Martin
Rosner, has a term of office expiring at the second annual meeting of
stockholders, and a third class, consisting of Richard W. Culbertson, Jr. and
Ronald L. Woods, has a term of office expiring at the third annual meeting of
stockholders. Information concerning the principal occupations, employment and
other information concerning the directors and officers of the Company during
the past five years is set forth under "Management of the Association--
Biographical Information."
The Company has established an Audit Committee of the Board of Directors,
consisting of the following members: Messrs. Armitage, Culbertson, Field,
Mohrfeld, Rosner and Woods. The Company has also established a Compensation
Committee consisting of the full Board of Directors.
The following individuals are the executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
EXECUTIVE POSITION(S) HELD WITH COMPANY
--------- -----------------------------
<S> <C>
Robert J. Colacicco..... President and Chief Executive Officer
Gregory M. DiPaolo...... Executive Vice President, Treasurer and Chief Operating Officer
Joseph M. Sidebotham.... Corporate Secretary and Chief Accounting Officer
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.
DIRECTOR COMPENSATION
Since the formation of the Company, none of the executive officers or other
personnel has received remuneration from the Company. Outside directors of the
Company receive an annual retainer of $3,500 but do not receive additional fees
for meetings of the Board of Directors of the Company. For information
regarding fees paid to the Association's Board of Directors see "Management of
the Association--Director Compensation."
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MANAGEMENT OF THE ASSOCIATION
DIRECTORS
The following table sets forth information regarding the Board of Directors of
the Association.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE ASSOCIATION SINCE EXPIRES
---- ------ ------------------------------------- -------- -------
<S> <C> <C> <C> <C>
Arthur E. Armitage, Jr...... 77 Director 1969 1999
Robert J. Colacicco......... 63 Director, President and Chief
Executive Officer 1976 2000
Richard W. Culbertson, Jr... 53 Director and Chairman of the Board 1992 2001
Gregory M. DiPaolo.......... 49 Director, Executive Vice President,
Treasurer and Chief Operating Officer 1982 1999
John V. Field............... 54 Director 1998 1999(2)
Richard G. Mohrfeld......... 52 Director 1983 2000
Martin Rosner............... 91 Director 1943 2000
Ronald L. Woods............. 39 Director 1998 1999(3)
</TABLE>
- --------
(1) As of July 31, 1998.
(2) In May, 1998, the Association's Board of Directors elected Mr. Field to
fill a newly created position on the Board until the Association's next
annual meeting.
(3) In May, 1998, the Association's Board of Directors elected Mr. Woods to
fill a vacant board position until the Association's next annual meeting,
at which time he may stand for election to fill the expired two year term
of a director who resigned.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information regarding the executive officers of
the Association who are not also directors.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION(S) HELD WITH ASSOCIATION
---- ------- ---------------------------------
<S> <C> <C>
Jane E. Brode................. 49 Senior Vice President--Savings
Joseph M. Sidebotham.......... 43 Senior Vice President and Controller
Paul D. Wampler............... 38 Senior Vice President--Lending
</TABLE>
- --------
(1) As of July 31, 1998.
Each of the executive officers of the Association will retain his/her office in
the converted Association until their re-election at the annual meeting of the
Board of Directors of the Association, held immediately after the first annual
meeting of stockholders subsequent to the Conversion, and until their
successors are elected and qualified or until they are removed or replaced.
Officers are subject to re-election by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
ARTHUR E. ARMITAGE, JR. is the former President and owner of Arthur E. Armitage
Agency, Inc., a general insurance firm. He has been a member of the
Association's Board of Directors since 1969 and served as Chairman of the Board
from 1995 to July, 1998.
ROBERT J. COLACICCO has been employed with the Association since 1967 and has
served as President and Chief Executive Officer of the Association since 1971.
Mr. Colacicco has been a member of the Board of Directors since 1976.
RICHARD W. CULBERTSON, JR. is a certified public accountant and a partner in
the firm of Bowman & Company LLP, Voorhees, New Jersey. Mr. Culbertson has been
a member of the Board of Directors since 1992 and has served as Chairman of the
Board since July, 1998.
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<PAGE>
GREGORY M. DIPAOLO is Executive Vice President, Treasurer and Chief Operating
Officer of the Association. Mr. DiPaolo has been employed by the Association
since 1973 and has been a member of the Board of Directors since 1982.
JOHN V. FIELD has been a practicing attorney for the past 29 years. He is sole
shareholder in the firm of John V. Field, PA. In 1977, Mr. Field became General
Counsel of the Association. Mr. Field has been a director of the Association
since May, 1998.
RICHARD G. MOHRFELD is President of Mohrfeld, Inc., a heating oil distributor
located in Collingswood, New Jersey. Mr. Mohrfeld has been a member of the
Board of Directors since 1983.
MARTIN ROSNER has served on the Association's Board of Directors since 1943.
Mr. Rosner is a former retailer in Collingswood, New Jersey. Mr. Rosner is now
retired.
RONALD L. WOODS is a representative of Lenny, Vermaat and Leonard, a real
estate brokerage firm located in Haddonfield, New Jersey. Mr. Woods has been a
member of the Board of Directors since May, 1998.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
JANE E. BRODE joined the Association in 1972 and has served in various
positions since that time. In 1992, Ms. Brode became Senior Vice President. Ms.
Brode is responsible for the Association's retail savings department.
JOSEPH M. SIDEBOTHAM joined the Association in 1979 and has been Controller
since 1980. In 1992, Mr. Sidebotham was promoted to Senior Vice President. Mr.
Sidebotham is responsible for regulatory reporting, monitoring investments, MIS
and the accounting and internal auditing functions of the Association.
PAUL D. WAMPLER joined the Association in 1997 and is Senior Vice President.
Mr. Wampler is the Association's Chief Lending Officer and oversees all
mortgage and consumer lending activities.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE ASSOCIATION
The Association's Board of Directors meets 16 times per year and may have
additional special meetings called in the manner specified in the Bylaws.
The Board of Directors of the Association has established the following
committees:
The full Board of Directors serves as the Association's Audit Committee.
The purpose of this committee is to oversee both internal and external
audit activities. Meetings of the Audit Committee generally take place with
regularly scheduled Board of Directors meetings. The Association's Board
met 16 times during the year ended December 31, 1997.
The Financial Planning Committee consists of Messrs. Armitage, Colacicco,
Culbertson, DiPaolo and Rosner. The Financial Planning Committee generally
meets on a quarterly basis, and is responsible for financial planning and
budgeting for the Association and asset/liability management. The committee
met 4 times during the year ended December 31, 1997.
The Loan Committee, on a rotational basis, consists of any four members of
the Association's Board of Directors, except that Mr. Field does not serve
on this committee. The Loan Committee is responsible for reviewing certain
large loan applications that are within its delegated approval authority.
The committee generally meets on an as-needed basis, and met 12 times
during the year ended December 31, 1997.
The Compensation Committee consists of Messrs. Armitage, Culbertson,
Mohrfeld and Rosner. This committee is responsible for all matters
regarding compensation and fringe benefits. The Compensation Committee
meets on an as-needed basis and met 2 times during the year ended December
31, 1997.
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<PAGE>
DIRECTOR COMPENSATION
All non-employee directors of the Association receive an annual retainer of
$7,000 a year, except that the Chairman of the Board receives an annual
retainer of $8,000. All non-employee directors of the Association also receive
$450 for each Board meeting attended and $200 for each Committee meeting
attended.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Association for services rendered in all capacities
during the year ended December 31, 1997, to the Chief Executive Officer and to
executive officers of the Association who received salary and bonus in excess
of $100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(2)
-------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
-------------------------------- ----------------------- -------
OTHER RESTRICTED SECURITIES
NAME AND FISCAL ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION(2) AWARDS OPTIONS/SARS PAYOUTS COMPENSATION(3)
- ------------------- ------ -------- ------- --------------- ---------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert J. Colacicco..... 1997 $141,107 $29,529 -- -- -- -- $38,275
President and
Chief Executive Officer
Gregory M. DiPaolo...... 1997 $118,102 $24,733 -- -- -- -- $24,937
Executive Vice
President, Treasurer
and
Chief Operating Officer
</TABLE>
- --------
(1) Under Annual Compensation, the column titled "Bonus" consists of Board
approved discretionary bonus.
(2) For 1997, there were no (a) perquisites over the lesser of $50,000 or 10%
of the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock. For 1997, the Association had no restricted stock or
stock related plans in existence.
(3) Other compensation consists of employer contributions of $25,226 and
$24,283, to the Association's money purchase pension plan on behalf of
Messrs. Colacicco and DiPaolo, respectively, and $10,943 credited by the
Association on behalf of Mr. Colacicco to the Association's non-qualified
deferred compensation plan. See "--Other Benefit Plans--Pension Plan" and
"--Supplemental Executive Retirement Plan." Also includes the value of life
insurance premiums of $2,106 and $654 paid by the Association on behalf of
Messrs. Colacicco and DiPaolo, respectively.
EMPLOYMENT AGREEMENTS
Upon consummation of the Conversion, the Association intends to enter into
employment agreements (collectively, the "Association Employment Agreements")
with Messrs. Colacicco, DiPaolo, Sidebotham and Wampler and Ms. Brode, and the
Company intends to enter into employment agreements with Messrs. Colacicco,
DiPaolo and Sidebotham (collectively, the "Company Employment Agreements")
(individually, the "Executive" and, collectively, the "Executives"). The
employment agreements are subject to the review and approval of the OTS and may
be amended as a result of such OTS review. Review of the employment agreements
by the OTS does not indicate, and should not be construed to indicate, that the
OTS has passed upon the merits of such arrangements. The employment agreements
are intended to ensure that the Association and the Company will be able to
maintain a stable and competent management base after the Conversion. The
continued success of the Association and the Company depends to a significant
degree on the skills and competence of the Executives.
The Association Employment Agreements provide for a three-year term for Messrs.
Colacicco and DiPaolo and a two-year term for Messrs. Sidebotham and Wampler
and Ms. Brode. The Association Employment
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<PAGE>
Agreements provide that commencing on the first anniversary date and continuing
each anniversary date thereafter the Board of Directors may extend the
agreement for an additional year so that the remaining term shall be three
years, in the case of Messrs. Colacicco and DiPaolo, and two years, in the case
of Messrs. Sidebotham and Wampler and Ms. Brode, unless written notice of non-
renewal is given by the Board of Directors after conducting a performance
evaluation of the Executive. The Company Employment Agreements provide for a
three-year term for Messrs. Colacicco and DiPaolo and a two-year term for Mr.
Sidebotham. The terms of the Company Employment Agreements shall be extended on
a daily basis, unless written notice of non-renewal is given by the Board of
the Company. The Association Employment Agreements and Company Employment
Agreements provide that the Executive's base salary will be reviewed annually.
The base salaries which will be effective for such employment agreements for
Messrs. Colacicco, DiPaolo, Sidebotham and Wampler and Ms. Brode will be
$170,430, $142,731, $87,403, $86,256 and $94,316, respectively. In addition to
the base salary, the employment agreements provide for, among other things,
participation in various employee benefit plans and stock-based compensation
programs, as well as furnishing fringe benefits available to similarly situated
executive personnel. The employment agreements provide for termination by the
Association or the Company for cause (as defined in the agreements) at any
time. In the event the Association or the Company chooses to terminate the
Executive's employment for reasons other than for cause or, in the event of the
Executive's resignation from the Association and the Company upon: (i) failure
to re-elect the Executive to his current offices; (ii) a material change in the
Executive's functions, duties or responsibilities; (iii) a relocation of the
Executive's principal place of employment by more than 25 miles; (iv)
liquidation or dissolution of the Association or the Company; or (v) a breach
of the Employment Agreements by the Association or the Company, the Executive
or, in the event of death, the Executive's beneficiary would be entitled to
receive an amount generally equal to the remaining payments that would have
been paid to the Executive during the remaining term of the employment
agreements. In addition, the Executive would receive a payment attributable to
the contribution that would have been made on the Executive's behalf to any
employee benefit plans of the Association or the Company during the remaining
term of the employment agreements, together with the value of stock-based
incentives previously awarded to the Executive. The Association and the Company
would also continue and pay for the Executive's life, health and disability
coverage for the remaining term of the employment agreement. Upon any
termination of the Executive, the Executive is subject to a covenant not to
compete with the Company or the Association for one year.
Under the agreements, if involuntary termination or voluntary termination
follows a change in control of the Association or the Company, the Executive
or, in the event of the Executive's death, the Executive's beneficiary, would
receive a severance payment generally equal to the greater of: (i) the payments
due for the remaining terms of the agreement, including the value of stock-
based incentives previously awarded to the Executive; or (ii) up to three times
the average of the five preceding taxable years' annual compensation. The
Association and the Company would also continue the Executive's life, health,
and disability coverage for thirty-six months, in the case of Messrs. Colacicco
and DiPaolo, and twenty-four months in the case of Messrs. Sidebotham and
Wampler and Ms. Brode. Notwithstanding that both agreements provide for a
severance payment in the event of a change in control, the Executive may
receive a severance payment under only one agreement. In the event of a change
in control of the Association or Company, the total amount of payments due
under the Employment Agreements, based solely on the base salaries paid to the
Executives, and excluding any benefits under any employee benefit plan which
may otherwise become payable, would equal approximately $1.7 million.
Payments to the Executive under the Association Employment Agreements will be
guaranteed by the Company in the event that payments or benefits are not paid
by the Association. Payment under the Company Employment Agreements would be
made by the Company. All reasonable costs and legal fees paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating to
the employment agreements will be paid by the Company or Association,
respectively, if the Executive is successful on the merits pursuant to a legal
judgment, arbitration or settlement. The employment agreements also provide
that the Association and Company shall indemnify the Executive to the fullest
extent allowable under federal, New Jersey and Delaware law, respectively.
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CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Association intends to enter into two-year Change in
Control Agreements with six employees of the Association and a one-year Change
in Control Agreement with one employee of the Association (the "CIC
Agreements"), none of whom will be covered by an employment agreement.
Commencing on the first anniversary date and continuing on each anniversary
thereafter, the CIC Agreements may be renewed by the Board of Directors of the
Association for an additional year. The CIC Agreements will provide that in the
event involuntary termination or, under certain circumstances, voluntary
termination follows a change in control of the Association or the Company, the
covered employee would be entitled to receive a severance payment equal to
either one or two times the covered employee's average annual compensation for
the five most recent taxable years preceding termination, depending on the
particular agreement. The Association would also continue and pay for the
covered employee's life, health and disability coverage for 24 months under the
two-year CIC Agreements and 12 months under the one-year CIC Agreement
following termination. Payments to the covered employee under the CIC
Agreements will be guaranteed by the Company in the event that payments or
benefits are not paid by the Association. In the event of a change in control
of the Association or Company, the total payments that would be due under the
CIC Agreements, based solely on the current annual compensation paid to the
seven employees covered by the CIC Agreements and excluding any benefits under
any employee benefit plan which may be payable, would be approximately
$542,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
Upon consummation of the Conversion, the Association's Board of Directors
intends to establish the South Jersey Savings and Loan Association Employee
Severance Compensation Plan (the "Severance Plan") which will provide eligible
employees with severance pay benefits in the event of a change in control of
the Association or the Company. Management personnel with employment agreements
or change in control agreements will not participate in the Severance Plan.
Generally, all full-time employees are eligible to participate in the Severance
Plan if they have completed at least one year of service with the Association.
Under the Severance Plan, in the event of a change in control of the
Association or the Company, eligible employees who terminate employment within
one year of the change in control (for reasons specified under the Severance
Plan), will receive a severance payment equal to one-twelfth of their current
annual compensation for each year of service completed with the Association, up
to a maximum of 199% of their current annual compensation. In the event the
provisions of the Severance Plan were triggered, the total amount of payments
that would be due thereunder, based solely upon current salary levels, would
equal approximately $696,000.
INSURANCE PLANS
The Association makes available to all full-time employees medical plan
benefits, life and accidental death insurance, long term disability insurance
and travel insurance.
OTHER BENEFIT PLANS
PENSION PLAN. The Association sponsors the South Jersey Savings and Loan
Association Money Purchase Pension Plan (the "Pension Plan"). Generally,
employees of the Association become members of the Pension Plan upon the
completion of two years of service with the Association (as described in the
plan document) and the attainment of age twenty-one. The Association makes
annual contributions to the Association sufficient to fund retirement benefits
for participant's employees, as determined in accordance with a formula set
forth in the plan document. Specifically, the Pension Plan currently provides
that, subject to applicable limitations, the Association will make annual
contributions to the plan on behalf of each participant equal to 5.7% of the
participant's compensation in excess of the social security taxable wage base
(as described in the plan documents) and 13.5% of the participant's
compensation without regard to the social security taxable wage base.
Participants are always fully vested in benefits allocated to their accounts
under the Pension Plan. In general, benefits allocated to participant's
accounts under the Pension Plan, plus earnings thereon become distributable in
the event of the death, attainment of normal retirement age (as described in
the plan document), or termination of employment.
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EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Association intends to establish a
tax-qualified employee stock ownership plan (the "ESOP") in connection with the
Conversion. Generally, employees will become participants in the ESOP upon the
completion of two years of service with the Association (with credit given for
service with the Association prior to adoption of the plan) and attainment of
age 21. With the consent of the Association, an affiliate of the Association
may also adopt the ESOP for the benefit of its employees.
The Association expects a committee of the Board of Directors to serve as the
administrative committee of the ESOP (the "ESOP Committee"). The ESOP Committee
will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, subject to
the terms of the plan document and the trust agreement. The Association expects
the ESOP to purchase 8% of the common stock sold in the Conversion and issued
to the Foundation. As part of the Conversion, and in order to fund the ESOP's
purchase of the common stock issued in the Conversion, the ESOP will borrow
100% of the aggregate purchase price of the common stock from either the
Company or a third-party lender.
The trustee of the ESOP will repay the loan principally from the Association's
annual contributions to the ESOP over an expected period of 15 years. Subject
to receipt of any necessary regulatory approvals or opinions, the Association
may make contributions to the ESOP for repayment of the loan since participants
in the ESOP will be employees of the Association or, alternatively, the
Association may reimburse the Company for contributions made by the Company
with respect to employees of the Association. The Association expects the
initial interest rate (which may be fixed or variable) for the loan to be at or
near the prime rate on or about the date of Conversion.
The trustee of the ESOP will pledge the shares of common stock purchased by the
ESOP in connection with the Conversion as collateral for the loan and will hold
the shares in a suspense account under the plan. As the trustee repays the
loan, the trustee will release a portion of the shares from the suspense
account and allocate them to the accounts of active participants in the ESOP
based on each participant's compensation (as determined under the terms of the
plan) relative to all participants' compensation for the plan year. In the
event of a change in control of the Association or the Company prior to
complete repayment of the loan, the ESOP trustee, in accordance with the terms
of the plan document, will sell enough shares of common stock held in the
suspense account to repay the loan in full. Upon repayment of the loan, the
ESOP trustee will then allocate all remaining shares of common stock held in
the suspense account to the accounts of active participants based on each
participant's account balance as of a specific date or based on some other
method set forth in the plan document.
Participants will always be fully vested in amounts allocated to their accounts
under the ESOP. Benefits will generally become distributable under the ESOP,
and potentially become subject to income tax, upon a participant's death or
other separation from service.
The ESOP trustee will vote all allocated shares held in the ESOP in accordance
with the instructions of the plan participants. The ESOP trustee, subject to
its fiduciary duties under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), will vote the unallocated shares (i.e., those held in the
suspense account) and allocated shares for which it receives no proper voting
instructions in a manner calculated to most accurately reflect the instructions
it receives from participants regarding the allocated stock. In the event no
shares have been allocated under the ESOP at the time such shares are to be
voted, each participant shall be deemed to have one share allocated to his or
her account for voting purposes.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Association may consider in providing benefits under its tax-
qualified retirement plans, such as the Pension Plan and the ESOP. The Code
further limits the amount of contributions and benefit accruals under such
plans on behalf of any employee. To provide benefits to make up for the
reduction in benefits flowing from these limits in connection with the Pension
Plan, the Association has adopted a non-qualified deferred compensation
arrangement, sometimes referred to as a "Supplemental Executive Retirement
Plan" ("SERP"). In connection with the
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Conversion, the Association intends to amend the deferral compensation plan to
provide for benefits related to the ESOP. The SERP will generally provide
benefits to eligible individuals (designated by the Board of Directors of the
Association or its affiliates) that cannot be provided under the Pension Plan
and/or ESOP as a result of the limitations imposed by the Code, but that would
have been provided under the Pension Plan and/or ESOP but for such limitations.
In addition to providing for benefits lost under tax-qualified plans as a
result of limitations imposed by the Code, the SERP will also make up lost ESOP
benefits to designated individuals who retire, who terminate employment in
connection with a change in control, or whose participation in the ESOP ends
due to termination of the ESOP in connection with a change in control
(regardless of whether the individual terminates employment) prior to the
complete scheduled repayment of the ESOP loan. Generally, upon the retirement
of an eligible individual or upon a change in control of the Association or the
Company prior to complete repayment of the ESOP Loan, the SERP will provide the
individual with a benefit equal to what the individual would have received
under the ESOP had he remained employed throughout the term of the ESOP or had
the ESOP not been terminated prior to the scheduled repayment of the ESOP loan.
An individual's benefits under the SERP will become payable upon the
participant's retirement (in accordance with the standard retirement policies
of the Association), upon the change in control of the Association or the
Company, or as determined under the ESOP and Pension Plan.
The Association may establish a grantor trust in connection with the SERP to
satisfy the obligations of the Association with respect to the SERP. The assets
of the grantor trust would remain subject to the claims of the Association's
general creditors in the event of the Association's insolvency until paid to
the individual pursuant to the terms of the SERP.
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of Directors of
the Company intends to adopt a stock-based incentive plan (the "Stock-Based
Incentive Plan") which will provide for the granting of options to purchase
common stock ("Stock Options") and the award of restricted shares of common
stock ("Stock Awards") to eligible officers, employees, and directors of the
Company and Association. The plan may also provide for certain rights related
to the grant of Stock Options and Stock Awards. The Company may provide such
stock-based benefits under the Stock-Based Incentive Plan or may establish one
or more separate plans to provide for the benefits described in the following
paragraphs.
In the event the Company adopts the Stock-Based Incentive Plan (or any separate
plan(s)) within one year after the Conversion, OTS regulations require a
majority of the Company's stockholders to approve the plan at a meeting of
stockholders held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company intends to grant
Stock Options in an amount up to 10% of the shares of common stock sold in the
Conversion and issued to the Foundation (302,022, 355,320, 408,618 and 469,910
shares based upon the minimum, midpoint, maximum and 15% above the maximum,
respectively, of the Estimated Price Range) and intends to grant Stock Awards
in an amount up to 4% of the shares of common stock sold in the Conversion and
issued to the Foundation (120,808, 142,128, 163,447 and 187,964 shares based
upon the minimum, midpoint, maximum and 15% above the maximum, respectively, of
the Estimated Price Range). Any common stock awarded under the Stock-Based
Incentive Plan (Stock Awards) will be awarded at no cost to the recipients. The
Company may fund the plan through the purchase of common stock by a trust
established in connection with the Stock-Based Incentive Plan (or any separate
plan(s)) or from authorized but unissued shares. The Board of Directors of the
Company intends to appoint an independent fiduciary to serve as trustee of any
trust established in connection with the Stock-Based Incentive Plan. In the
event that additional authorized but unissued shares are acquired by the Stock-
Based Incentive Plan or its participants after the Conversion, the interests of
existing shareholders would be diluted. See "Pro Forma Data."
The grants of Stock Options and Stock Awards will be designed to attract and
retain qualified personnel in key positions, provide officers and key employees
with a propriety interest in the Company as an incentive to contribute to the
success of the Company, and reward employees for outstanding performance. All
employees of the Company and its subsidiaries, including the Association, will
be eligible to participate in the Stock-Based Incentive Plan. The committee
administering the plan will determine the terms of awards granted to
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officers and employees. The committee will also determine whether Stock Options
will qualify as Incentive Stock Options or Non-Statutory Stock Options, as
described below, the number of shares subject to each Stock Option and Stock
Award, the exercise price of each Stock Option, the method of exercising Stock
Options, and the time when Stock Options become exercisable or Stock Awards
vest. Only employees may receive grants of Incentive Stock Options. Therefore,
under the Stock-Based Incentive Plan, outside directors may receive only grants
of Non-Statutory Stock Options. If the Company adopts the Stock-Based Incentive
Plan within one year after conversion, OTS regulations provide that no
individual officer or employee of the Association may receive more than 25% of
the Stock Options available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the Stock
Options available under the Stock-Based Incentive Plan (or any separate plan
for directors). OTS regulations also provide that no individual officer or
employee of the Association may receive more than 25% of the restricted stock
awards available under the Stock-Based Incentive Plan (or any separate plan for
officers and employees) and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate, of the restricted stock awards available
under the Stock-Based Incentive Plan (or any separate plan for outside
directors).
The Stock-Based Incentive Plan will provide for the grant of: (i) Stock Options
intended to qualify as Incentive Stock Options under Section 422 of the Code
("Incentive Stock Options") and (ii) Stock Options that do not so qualify
("Non-Statutory Stock Options"). The plan may also provide for certain limited
rights that become exercisable only upon a change in control of the Association
or the Company ("limited rights"). Unless sooner terminated, the Stock-Based
Incentive Plan will remain in effect for a period of ten years from the earlier
of adoption by the Board of Directors of the Company or approval by the
Company's stockholders. Subject to stockholder approval, the Company
anticipates granting Stock Options under the plan at an exercise price equal to
at least the fair market value of the underlying common stock on the date of
grant.
An individual generally will not recognize taxable income upon the grant of a
Non-Statutory Stock Option or Incentive Stock Option or upon the exercise of an
Incentive Stock Option, provided the individual does not dispose of the shares
received through the exercise of the Incentive Stock Option for at least one
year after the date the individual receives the shares in connection with the
option exercise and two years after the date of grant of the Stock Option (a
"disqualifying disposition"). No compensation deduction will generally be
available to the Company as a result of the exercise of Incentive Stock Options
unless there has been a disqualifying disposition. In the case of a Non-
Statutory Stock Option and in the case of a disqualifying disposition of shares
received in connection with the exercise of an Incentive Stock Option, an
individual will recognize ordinary income upon exercise of the Stock Option (or
upon the disqualifying disposition) in an amount equal to the amount by which
the fair market value of the common stock exceeds the exercise price of the
Stock Option. The amount of any ordinary income recognized by an optionee upon
the exercise of a Non-Statutory Stock Option or due to a disqualifying
disposition will be a deductible expense to the Company for tax purposes. In
the case of limited rights, the holder will recognize any amount paid to him or
her upon exercise in the year in which the payment is made and the Company will
be entitled to a deduction for federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock Awards
and, possibly, related limited rights. Limited rights would be exercisable only
in connection with a change in control of the Company or Association. Subject
to OTS regulations, upon the exercise of a limited right, the recipient would
receive a cash payment equal to the fair market value of Stock Awards in
exchange for any rights to such Stock Awards. Grants of Stock Awards may be
made in the form of base grants and/or performance grants (the vesting of which
would be contingent upon performance goals established by the committee
administering the plan). In establishing any performance goals, the committee
may utilize the annual financial results of the Company, actual performance of
the Company as compared to targeted goals such as the ratio of the
Association's net worth to total assets, the Company's return on average
assets, or such other performance standards as determined by the committee with
the approval of the Board of Directors of the Company.
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When a participant becomes vested with respect to Stock Award, the participant
will recognize ordinary income equal to the fair market value of the common
stock at the time of vesting (unless the participant made an election pursuant
to Section 83(b) of the Code). The amount of income recognized by the
participant will be a deductible expense for tax purposes for the Company. When
restricted Stock Awards become vested and shares of common stock are actually
distributed to participants, the participants receive amounts equal to any
accrued dividends with respect thereto, if not earlier received. Prior to
vesting, recipients of Stock Awards may direct the voting of the shares awarded
to them. Shares not subject to grants and shares allocated subject to the
achievement of performance goals will be voted by the trustee in proportion to
the directions provided with respect to shares subject to grants. Vested shares
will be distributed to recipients as soon as practicable following the day on
which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan will be
determined by the committee administering the Plan. If the Company adopts the
Stock-Based Incentive Plan (or any separate plans for employees and directors)
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which such regulations require that any
awards begin vesting no earlier than one year from the date of shareholder
approval of the plan and, thereafter, vest at a rate of no more than 20% per
year and may not be accelerated except in the case of death or disability.
Stock Options could be exercisable for a period of time (likely three months)
following the date on which the employee or director ceases to perform services
for the Association or the Company, except that in the event of death or
disability, options accelerate and become fully vested and could be exercisable
for up to one year thereafter or such other period of time as determined by the
Company. In the case of death or disability, Stock Options may be exercised for
a period of 12 months or such other period of time as determined by the
committee. However, any Incentive Stock Options exercised more than three
months following the date the employee ceases to perform services as an
employee would be treated essentially as a Non-Statutory Stock Option. In the
event of retirement, if the optionee continues to perform services as a
director or consultant on behalf of the Association, the Company or an
affiliate, unvested options and awards would continue to vest in accordance
with their original vesting schedule until the optionee ceases to serve as a
consultant or director. In the event of death, disability or normal retirement,
the Company, if requested by the optionee, or the optionee's beneficiary, could
elect, in exchange for vested options, to pay the optionee, or the optionee's
beneficiary in the event of death, the amount by which the fair market value of
the common stock exceeds the exercise price of the options on the date of the
employee's termination of employment.
Subject to any applicable regulatory requirements, the Stock-Based Incentive
Plan (or any separate plans for employees and outside directors) may be amended
subsequent to the expiration of the one-year period to provide for accelerated
vesting of previously granted Stock Options or Stock Awards in the event of a
change in control of the Company or the Association. A change in control would
generally be considered to occur when a person or group of persons acting in
concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Association or in the event of a tender or
exchange offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Association or contested
election of directors which resulted in the replacement of a majority of the
Board of Directors by persons not nominated by the directors in office prior to
the contested election.
TRANSACTIONS WITH RELATED PERSONS
Federal regulations require that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans
made to a director or executive officer in excess of the greater of $25,000 or
5% of the Association's capital and surplus (up to a maximum of $500,000) must
be approved in advance by a majority of the disinterested members of the Board
of Directors.
The Association currently makes loans to its executive officers and directors
on the same terms and conditions offered to the general public. The
Association's policy provides that all loans made by the Association to its
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executive officers and directors be made in the ordinary course of business, on
substantially the same terms, including collateral, as those prevailing at the
time for comparable transactions with other persons and may not involve more
than the normal risk of collectibility or present other unfavorable features.
As of July 31, 1998, one of the Association's directors had a loan with the
Association which had an outstanding balance totaling $212,000. Such loan was
made by the Association in the ordinary course of business, with no favorable
terms and such loan does not involve more than the normal risk of
collectibility or present unfavorable features.
The Company intends that all transactions in the future between the Company and
its executive officers, directors, holders of 10% or more of the shares of any
class of its common stock and affiliates thereof, will contain terms no less
favorable to the Company than could have been obtained by it in arm's length
negotiations with unaffiliated persons and will be approved by a majority of
independent outside directors of the Company not having any interest in the
transaction.
OTHER TRANSACTIONS WITH AFFILIATES
The Association utilizes the services of the law offices of John V. Field, PA,
of which Mr. Field, a director of the Association, is the sole shareholder, for
a variety of legal work relating to the ordinary course of the Association's
business.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of common stock that the
Association's officers and directors and their associates propose to purchase,
assuming shares of common stock are sold at the minimum and maximum of the
Estimated Price Range and that sufficient shares will be available to satisfy
their subscriptions. The table also sets forth the total expected beneficial
ownership of common stock as to all directors and officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM OF THE AT THE MAXIMUM OF THE
ESTIMATED PRICE RANGE ESTIMATED PRICE RANGE
---------------------- ----------------------
AS A PERCENT AS A PERCENT
NUMBER OF OF SHARES NUMBER OF OF SHARES
NAME AMOUNT(1) SHARES SOLD SHARES SOLD
---- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS:
Arthur E. Armitage, Jr...... $ 100,000 10,000 0.36% 10,000 0.26%
Robert J. Colacicco......... 100,000 10,000 0.36 10,000 0.26
Richard W. Culbertson, Jr... 50,000 5,000 0.18 5,000 0.13
Gregory M. DiPaolo.......... 200,000(2) 20,000 0.72 20,000 0.53
John V. Field............... 150,000 15,000 0.54 15,000 0.40
Richard G. Mohrfeld......... 50,000 5,000 0.18 5,000 0.13
Martin Rosner............... 40,000 4,000 0.14 4,000 0.11
Ronald L. Woods............. 200,000(2) 20,000 0.72 20,000 0.53
Jane E. Brode............... 65,000 6,500 0.23 6,500 0.17
Joseph M. Sidebotham........ 40,000 4,000 0.14 4,000 0.11
Paul D. Wampler............. 25,000 2,500 0.09 2,500 0.07
---------- ------- ---- ------- ----
All Directors and Executive
Officers as a Group (11
persons)(3)................ $1,020,000 102,000 3.65% 102,000 2.70%
========== ======= ==== ======= ====
</TABLE>
- --------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares sold in the Conversion and issued to the
Foundation.
(2) Such amount represents the maximum allowable purchase for such individual.
(3) Including the effect of shares issued to the Foundation, the aggregate
beneficial ownership of all directors and officers as a group would be
3.38% and 2.50% at the minimum and maximum of the Estimated Price Range,
respectively.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE OTS HAVE APPROVED AND IT IS
EXPECTED THAT THE COMMISSIONER WILL ISSUE AN INTENT TO APPROVE THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE ASSOCIATION ENTITLED TO
VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL AND THE COMMISSIONER'S INTENT TO APPROVE, HOWEVER, DO NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH AGENCIES. THE OTS AND THE
COMMISSIONER NEITHER APPROVED NOR DISAPPROVED THE ESTABLISHMENT OF THE
FOUNDATION.
GENERAL
On July 28, 1998, the Association's Board of Directors unanimously adopted, and
subsequently amended, a Plan of Conversion (the "Plan"), pursuant to which the
Association will be converted from a New Jersey chartered mutual savings and
loan association to a New Jersey chartered capital stock savings association.
It is currently intended that all of the outstanding capital stock of the
Association will be held by the Company, which is incorporated under Delaware
law. The Plan was approved by the OTS and the Association expects to receive
from the Commissioner a notice of intent to approve the Plan, subject to, among
other things, approval of the Plan by the Association's members. A special
meeting of members has been called for this purpose to be held on February 6,
1999 (the "Special Meeting").
The Company has received the approval of the OTS to become a savings and loan
holding company and to acquire all of the common stock of the Association to be
issued in the Conversion. The Company plans to purchase the shares of issued
and outstanding capital stock of the Association in exchange for 50% of the net
proceeds and retain the remaining net proceeds. The Conversion will be effected
only upon completion of the sale of all of the shares of common stock of the
Company or the Association, if the holding company form of organization is not
utilized, to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Association may, at any
time prior to the issuance of the common stock and for any reason, decide not
to use a holding company form. Such reasons may include possible delays
resulting from overlapping regulatory processing or policies which could
adversely affect the Association's or the Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Association's operating policies. In the event such a decision is
made, the Association will withdraw the Company's registration statement from
the SEC and take steps necessary to complete the Conversion without the
Company, including filing any necessary documents with the Commissioner and the
OTS. In such event, and provided there is no regulatory action, directive or
other consideration upon which basis the Association determines not to complete
the Conversion, if permitted by the Commissioner and the OTS, the Association
will issue and sell the common stock of the Association and subscribers will be
notified of the elimination of a holding company and resolicited (i.e., be
permitted to affirm their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their funds will be promptly refunded with interest at the
Association's passbook rate of interest; or be permitted to modify or rescind
their subscriptions), and notified of the time period within which the
subscriber must affirmatively notify the Association of his intention to
affirm, modify or rescind his subscription. The following description of the
Plan assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to
the conversion of the Association from the mutual to stock form of organization
and the sale of the Association's common stock.
The Plan provides generally that the Association will convert from a mutual
savings and loan association to a capital stock savings association and that
non-transferable rights to subscribe for the common stock in a subscription
offering (the "Subscription Offering") will be granted in the following order
of priority: (1) holders of deposit accounts in the Association which totalled
$50.00 or more on June 30, 1997 ("Eligible
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Account Holders"); (2) the Employee Plans, consisting of the ESOP which intends
to subscribe for up to 8% of the common stock issued in connection with the
Conversion, including shares issued to the Foundation; (3) holders of deposit
accounts in the Association which totalled $50.00 or more on September 30, 1998
("Supplemental Eligible Account Holders"); and (4) holders of deposit accounts
and borrowers of the Association as of June 30, 1997, the voting record date
("Voting Record Date") for the Special Meeting, who do not otherwise qualify as
Eligible Account Holders or Supplemental Eligible Account Holders ("Other
Members"). Subsequent to the Subscription Offering, and subject to the prior
rights of holders of subscription rights, the Company will offer any shares of
common stock not subscribed for in the Subscription Offering for sale in a
community offering to certain members of the general public with preference
given to natural persons residing in the New Jersey counties of Gloucester and
Camden (the Association's "Local Community") (the "Community Offering") (such
natural persons herein referred to as "Preferred Subscribers"). The Community
Offering may be commenced prior to completion of the Subscription Offering.
Shares not subscribed for in the Subscription and Community offerings will be
offered to certain members of the general public in a syndicated community
offering (the "Syndicated Community Offering") (the Subscription Offering,
Community Offering and the Syndicated Community Offering are referred to
collectively as the "Offerings"). The Association has the right to accept or
reject, in whole or in part, any orders to purchase shares of the common stock
received in the Community Offering or in the Syndicated Community Offering. See
"--Community Offering" and "--Syndicated Community Offering."
The aggregate price of the shares of common stock to be sold in the Conversion
within the Estimated Price Range, currently estimated to be between $28.0
million and $37.8 million, will be determined based upon an independent
appraisal, prepared by FinPro of the estimated pro forma market value of the
common stock of the Company. All shares of common stock to be issued and sold
in the Conversion, will be sold at the same price. The independent appraisal
will be affirmed or, if necessary, updated at the completion of the
Subscription and Community Offerings, if all shares are subscribed for, or at
the completion of the Syndicated Community Offering. The appraisal has been
performed by FinPro, a consulting firm experienced in the valuation and
appraisal of savings institutions. See "--Stock Pricing" for additional
information as to the determination of the estimated pro forma market value of
the common stock.
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL ASPECTS OF THE CONVERSION. THE
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PROVISIONS OF THE
PLAN. A COPY OF THE PLAN IS AVAILABLE FOR INSPECTION AT EACH BRANCH OF THE
ASSOCIATION AND AT THE NORTHEAST REGION AND WASHINGTON, D.C. OFFICES OF THE
OTS. THE PLAN IS ALSO FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF
WHICH THIS PROSPECTUS IS A PART, COPIES OF WHICH MAY BE OBTAINED FROM THE SEC.
SEE "ADDITIONAL INFORMATION."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Association's long-standing commitment to its
local community, the Association's Plan of Conversion provides for the
establishment of a charitable foundation in connection with the Association's
Conversion. The Plan provides that the Association and the Company will
establish the Foundation, which will be incorporated under Delaware law as a
non-stock corporation, and will fund the Foundation with common stock of the
Company, as further described below. The Company and the Association believe
that the funding of the Foundation with common stock of the Company is a means
of establishing a common bond between the Association and the communities in
which the Association operates and thereby enables such communities to share in
the potential growth and success of the Company and the Association over the
long term. By further enhancing the Association's visibility and reputation in
the communities in which it operates, the Association believes that the
Foundation will enhance the long-term value of the Association's community
banking franchise.
The Foundation would be dedicated to the promotion of charitable purposes
within the communities in which the Association operates, including, but not
limited to, providing grants or donations to support housing assistance, not-
for-profit medical facilities, community groups and other types of
organizations or projects.
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Establishment of the Foundation is subject to the approval of a majority of the
total outstanding votes of the Association's members eligible to be cast at the
Special Meeting. The Foundation will be considered as a separate matter from
approval of the Plan of Conversion. If the Association's members approve the
Plan of Conversion, but not the Foundation, the Association intends to complete
the Conversion without the establishment of the Foundation. Failure to approve
the establishment of the Foundation may materially affect the pro forma market
value of the common stock. In such an event, the Association may establish a
new Estimated Price Range and commence a resolicitation of subscribers. In the
event of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein. See "--Stock Pricing."
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide funding
to support charitable purposes within the communities in which the Association
operates. The Association has long emphasized community lending and community
development activities and currently has a "satisfactory" Community
Reinvestment Act ("CRA") rating. The Foundation is being formed as a complement
to the Association's existing community activities, not as a replacement for
such activities. Indeed, the Association intends to continue to emphasize
community lending and community development activities following the
Conversion. However, such activities are not the Association's sole corporate
purpose. The Foundation, conversely, will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not presently available to the Association.
Since the Association already engages in community development activities, the
Association believes that the Foundation will enable the Company and the
Association to assist their local community in areas beyond community
development and lending. In this regard, the Board of Directors believes the
establishment of a charitable foundation is consistent with the Association's
commitment to community service. The Boards of Directors of the Association and
Company also believe that the funding of the Foundation with common stock of
the Company is a means of enabling the communities in which the Association
operates to share in the potential growth and success of the Company long after
completion of the Conversion. The Foundation accomplishes that goal by
providing for continued ties between the Foundation and Association, thereby
forming a partnership with the Association's community. The establishment of
the Foundation would also enable the Company and the Association to develop a
unified charitable donation strategy and would centralize the responsibility
for administration and allocation of corporate charitable funds. The
Association, however, does not expect the contribution to the Foundation to
take the place of the Association's traditional community lending and
charitable activities. For the years 1997, 1996 and 1995, the Association made
cash charitable contributions to community organizations in the aggregate
amount of $22,875, $20,500 and $19,575, respectively. The Association expects
in future periods to continue making charitable contributions within its
communities. Upon Conversion, the Company intends to contribute to the
Foundation shares of its common stock equal to 8% of the common stock sold in
the Conversion, or stock valued at $3,026,800 based on the purchase price of
$10.00 per share, at the maximum of the Estimated Price Range. The Conversion
presents this Association and the Company with a unique opportunity to provide
a substantial and continuing benefit to the communities in which the
Association operates, and to receive the associated tax benefits, without any
significant cash cost to the Association, and without any significant adverse
impact to the mutual depositors who are the current owners of the Association.
Purchasers of the Company's stock make their investment decision with full
knowledge of the proposed contribution to the Foundation.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under Delaware
law as a non-stock corporation. It is currently anticipated that the
Foundation's board of directors will be comprised of four members. For a period
of five years, the Foundation will reserve one board seat for an individual who
is not an officer and/or director of the Company or the Bank and who is a civil
and community leader within the Bank's community and for the same period of
time will reserve one board seat for a director or officer of the Association.
Three of the four board seats will be filled by Messrs. Armitage, Colacicco and
Woods, who intend to purchase 10,000, 10,000 and 20,000 shares of common stock
in the Conversion, respectively. At the maximum of the Estimated Price Range,
such purchases equal 0.24%, 0.24%, and 0.49%, respectively, or 0.98% in the
aggregate of the total number of shares to be sold in the Conversion and issued
to the Foundation.
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The Association has not yet determined who will fill the independent board
position. On an on-going basis, a Nominating Committee of the board of
directors of the Foundation, will nominate individuals eligible for election to
the board of directors of the Foundation. The members of the Foundation, who
are comprised of its board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee.
Only persons serving as directors of the Foundation qualify as members of the
Foundation with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms. The certificate of
incorporation of the Foundation will provide that the Foundation is organized
exclusively for charitable purposes as set forth in Section 501(c)(3) of the
Code. The Foundation's certificate of incorporation further will provide that
no part of the net earnings of the Foundation will inure to the benefit of, or
be distributable to, its directors, officers or members. A person who is a
director, officer or employee of the Association, or has the power to direct
its management or policies, or otherwise owes a fiduciary duty to the
Association, and who will also serve as a director or employee of the
Foundation would be subject to the requirements of OTS Conflicts of Interest
Regulations.
The authority for the affairs of the Foundation will be vested in the board of
directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation is established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of common stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's common stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) would cause the Foundation to lose its tax-
exempt status or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) would cause the Foundation to be subject to an excise tax
under Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Company's or the Foundation's legal counsel must render an
opinion satisfactory to OTS that compliance with the voting restriction would
have the effect described in clauses (i), (ii) or (ii) above. Under those
circumstances, the OTS will grant a waiver of the voting restriction upon
submission of such legal opinion(s) by the Company or the Foundation. In the
event that the OTS waived the voting restriction, the directors would direct
the voting of the common stock held by the Foundation. However, a condition to
the OTS approval of the Conversion provides that in the event such restriction
is waived or becomes unenforceable, the Director of the OTS, or his designees,
at that time may impose conditions on the composition of the board of directors
of the Foundation or such other conditions or restrictions relating to the
control of the common stock held by the Foundation, any of which could limit
the ability of the board of directors of the Foundation to control the voting
of the common stock held by the Foundation. There will be no agreements or
understandings with directors of the Foundation regarding the exercise of
control, directly or indirectly, over the management or policies of the Company
or the Association, including agreements related to voting, acquisition or
disposition of the Company's stock. As directors of a nonprofit corporation,
directors of the Foundation will at all times be bound by their fiduciary duty
to advance the Foundation's charitable goals, to protect the assets of the
Foundation and to act in a manner consistent with the charitable purpose for
which the Foundation is established.
The Company will provide office space and administrative support services to
the Foundation. Initially, the Foundation is expected to have no employees. The
board of directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. It is anticipated that
initially such officers will be selected from the board of directors of the
Foundation. Any transaction between the Association and the Foundation will
comply with the affiliate transaction restrictions set forth in Sections 23A
and 23B of the Federal Reserve Act, as amended.
The Company proposes to capitalize the Foundation with Company common stock in
an amount equal to 8% of the total amount of common stock to be sold in
connection with the Conversion. At the minimum,
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midpoint, maximum and 15% above the maximum of the Estimated Price Range, the
contribution to the Foundation would equal 223,720, 263,200, 302,680 and
348,082 shares, respectively, which would have a market value of $2.2 million,
$2.6 million, $3.0 million and $3.5 million, respectively, based on the
purchase price of $10.00 per share. Such contribution, once made, will not be
recoverable by the Company or the Association. The Company and the Association
determined to fund the Foundation with common stock rather than cash because it
desired to form a bond with its community in a manner that would allow the
community to share in the potential growth and success of the Company and the
Association over the long term. The funding of the Foundation with stock
provides the Foundation with a potentially larger endowment than if the Company
contributed cash to the Foundation since, as a shareholder, the Foundation will
share in the potential growth and success of the Company. As such, the
contribution of stock to the Foundation has the potential to provide a self-
sustaining funding mechanism which reduces the amount of cash that the Company,
if it were not making the stock contribution, would have to contribute to the
Foundation in future years in order to maintain a level amount of charitable
grants and donations.
The Foundation would receive working capital from any dividends that may be
paid on the common stock in the future, and subject to applicable federal and
state laws, loans collateralized by the common stock or from the proceeds of
the sale of any of the common stock in the open market from time to time as may
be permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed
on the gift of common stock by the Company is that the amount of common stock
that may be sold by the Foundation in any one year shall not exceed 5% of the
average market value of the assets held by the Foundation, except where the
board of directors of the Foundation determines that the failure to sell an
amount of common stock greater than such amount would result in a long-term
reduction of the value of the Foundation's assets or would otherwise jeopardize
the Foundation's capacity to carry out its charitable purposes. While there may
be a greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Company believes any such risk is mitigated by the
ability of the Foundation's directors to sell more than 5% of its stock in such
circumstances. Upon completion of the Conversion and the contribution of shares
to the Foundation immediately following the Conversion, the Company would have
3,020,220, 3,553,200, 4,086,180 and 4,699,107 shares issued and outstanding at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range. Because the Company will have an increased number of shares outstanding,
the voting and ownership interests of shareholders in the Company's common
stock would be diluted by 7.4%, as compared to their interests in the Company
if the Foundation was not established. For additional discussion of the
dilutive effect, see "Comparison of Valuation and Pro Forma Information With No
Foundation" and "Pro Forma Data."
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The Company proposes to capitalize the
Foundation with common stock in an amount equal to 8% of the total amount of
common stock sold in connection with the Conversion. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, the
contribution to the Foundation would equal 223,720, 263,200, 302,680 and
348,082 shares, respectively, which would have a market value of $2.2 million,
$2.6 million, $3.0 million and $3.5 million, respectively, based on the
purchase price of $10.00 per share. Such contribution, once made, will not be
recoverable by the Company or the Association. As a result of the establishment
of the Foundation, the Estimated Price Range, as estimated by FinPro, has
decreased and the amount of stock available for sale in the Offerings has also
correspondingly decreased. The amount of the decrease is 433,500, 510,000,
586,500 and 674,500 shares, or $4.3 million, $5.1 million, $5.9 million and
$6.7 million at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively. See "Pro Forma Data" and "Comparison of
Valuation and Pro Forma Data Information with No Foundation."
TAX CONSIDERATIONS. The Foundation has been organized to qualify as a 501(c)(3)
exempt organization under the Code, and will be classified as a private
foundation rather than a public charity. A private foundation
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typically receives its support from one person or one corporation whereas a
public charity receives its support from the public. The Foundation will submit
a request to the IRS to be recognized as an exempt organization after approval
of the Foundation by the Association's members at the Special Meeting being
held to consider the Conversion. As long as the Foundation files its
application for tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective date
of the Foundation's status as a Section 501(c)(3) organization will be the date
of its organization.
The Company's independent accountants have not rendered any advice on the
condition of the gift which requires that all shares of common stock of the
Company held by the Foundation must be voted in the same ratio as all other
shares of the Company's common stock, on all proposals considered by
stockholders of the Company. In the event that the Company or the Foundation
receives an opinion of their tax counsel satisfactory to the OTS that
compliance with the voting restriction would cause the Foundation to lose its
tax-exempt status, otherwise have a material adverse tax consequence on the
Foundation or subject the Foundation to an excise tax under Section 4941 of the
Code, the OTS will waive such condition upon submission of such opinion(s) by
the Company or the Foundation. See "--Regulatory Conditions Imposed on the
Foundation."
Under Delaware law, the Company is authorized by statute to make charitable
contributions and case law has recognized the benefits of such contributions to
a Delaware corporation. In this regard, Delaware case law provides that a
charitable gift must merely be within reasonable limits as to amount and
purpose to be valid. Under the Code, the Company may deduct up to 10% of its
taxable income in any one year and any contributions made by the Company in
excess of the deductible amount will be deductible for federal tax purposes
over each of the five succeeding taxable years. The Association has the
authority under New Jersey law to make charitable contributions. The Company
and the Association believe that the Conversion presents a unique opportunity
to establish and fund a charitable foundation given the substantial amount of
additional capital being raised in the Conversion. In making such a
determination, the Company and the Association considered the dilutive impact
of the Foundation on the amount of common stock available to be offered for
sale in the Conversion. See "Comparison of Valuation and Pro Forma Information
with No Foundation." Based on such consideration, the Company and Association
believe that the contribution to the Foundation in excess of the 10% annual
limitation is justified given the Association's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the Association's community. In
this regard, assuming the sale of the common stock at the midpoint of the
Estimated Price Range, the Company would have pro forma consolidated capital of
$54.4 million, or 18.88% of consolidated assets and the Association's pro forma
tangible, core and risk-based capital ratios would be 13.86%, 13.86% and
38.00%, respectively. See "Regulatory Capital Compliance," "Capitalization,"
and "Comparison of Valuation and Pro Forma Information with No Foundation."
Thus, the amount of the contribution will not adversely impact the financial
condition of the Company and the Association and the Company and the
Association therefore believe that the amount of the charitable contribution is
reasonable given the Company and the Association's pro forma capital positions.
As such, the Company and the Association believe that the contribution does not
raise safety and soundness concerns.
The Company and the Association have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
will not constitute an act of self-dealing, and that, it is more likely than
not, the Company will be entitled to a deduction in the amount of the fair
market value of the stock at the time of the contribution less the nominal par
value that the Foundation is required to pay to the Company for such stock,
subject to a limitation based on 10% of the Company's annual taxable income.
The Company, however, would be able to carry forward any unused portion of the
deduction for five years following the year in which the contribution is made
for federal tax purposes. Thus, while the Company expects, based on the maximum
of the Estimated Price Range, to be able to utilize for federal income tax
purposes a charitable contribution deduction of approximately $460,000 in 1999,
the Company is permitted under the Code to carryover the excess of the total
contribution over such 1999 deduction over a five-year period for federal
income tax purposes. For State of New Jersey state income tax purposes, the
Company also
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would be able to deduct its contribution to the Foundation and to carry forward
any unused portion over a five-year period, subject to the limitation based on
10% of the Company's unconsolidated annual taxable income, and provided the
Company generates sufficient state taxable income on an unconsolidated basis.
Assuming the close of the Offerings at the midpoint of the Estimated Price
Range, the Company estimates that substantially all of the federal tax
deduction should be deductible over the six-year period. However, no assurances
can be made that the Company will have sufficient pre-tax income over the five
year period following the year in which the contribution was made to fully
utilize the carryover related to the excess contribution. Neither the Company
nor the Association expects to make any further contributions to the Foundation
within the first five years following the initial contribution. After that
time, the Company and the Association may consider future contributions to the
Foundation. Any such decisions would be based on an assessment of, among other
factors, the financial condition of the Company and the Association at that
time, the interests of shareholders and depositors of the Company and the
Association, and the financial condition and operations of the Foundation.
Although the Company and the Association have received an opinion of their
independent accountants that the Company will be entitled to a deduction for
the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, the Company's contribution to the
Foundation would be expensed without tax benefit, resulting in a reduction in
earnings in the year in which the IRS makes such a determination. In cases of
willful, flagrant or repeated acts or failures to act which result in
violations of the IRS rules governing private foundations, a private
foundation's status as a private foundation may be involuntarily terminated by
the IRS. In such event, the managers of a private foundation could be liable
for excise taxes based on such violations and the private foundation could be
liable for a termination tax under the Code. The Foundation's certificate of
incorporation provides that it shall have a perpetual existence. In the event,
however, the Foundation were subsequently dissolved as a result of a loss of
its tax exempt status, the Foundation would be required under the Code and its
certificate of incorporation to distribute any assets remaining in the
Foundation at that time for one or more exempt purposes within the meaning of
Section 501(c)(3) of the Code, or to distribute such assets to the federal
government, or to a state or local government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of common
stock or other assets are exempt from federal and state corporate taxation.
However, investment income, such as interest, dividends and capital gains, will
be subject to a federal excise tax of 2.0%. The Foundation will be required to
make an annual filing with the IRS within four and one-half months after the
close of the Foundation's fiscal year to maintain its tax-exempt status. The
Foundation will be required to publish a notice that the annual information
return will be available for public inspection for a period of 180 days after
the date of such public notice. The information return for a private foundation
must include, among other things, an itemized list of all grants made or
approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in
accordance with written policies adopted by the board of directors, including a
conflict of interest policy; (v) the Foundation will not engage in self-dealing
and will comply with all laws necessary to maintain its tax-exempt status; (vi)
any purchases of common stock by the Foundation following that Conversion will
be subject to OTS regulations on stock repurchases; and (vii) any shares of
common stock of the Company held by the Foundation must be voted in the same
ratio as all other shares of the Company's common stock on all proposals
considered by stockholders of the Company; provided, however, that the OTS will
waive this voting restriction if compliance with the voting restriction would:
(a) cause a violation of the law of the State of Delaware and the OTS
determines the federal law does not preempt the application of the laws of the
State of Delaware to the Foundation; (b) cause the Foundation to lose its tax-
exempt status or
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otherwise have a material and adverse tax consequence on the Foundation; or (c)
cause the Foundation to be subject to an excise tax under Section 4941 of the
Code. In order for the OTS to waive such voting restriction, the Company's or
the Foundation's legal counsel must render an opinion satisfactory to OTS that
compliance with the voting restriction would have the effect described in
clauses (a), (b) or (c) above. Under those circumstances, the OTS will grant a
waiver of the voting restriction upon submission of such opinion(s) by the
Company or the Foundation. There can be no assurances that either a legal or
tax opinion addressing these issues will be rendered, or if rendered, that the
OTS will grant an unconditional waiver of the voting restriction. In this
regard, a condition to the OTS approval of the Conversion provides that in the
event such voting restriction is waived or becomes unenforceable, the Director
of the OTS, or his designees, at that time may impose conditions on the
composition of the board of directors of the Foundation or such other
conditions or restrictions relating to the control of the common stock held by
the Foundation, any of which could limit the ability of the board of directors
of the Foundation to control the voting of common stock held by the Foundation.
In no event will the voting restriction survive the sale of shares of the
common stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Association's members eligible
to be cast at the special meeting being held to consider the Conversion. The
Foundation will be considered as a separate matter from approval of the Plan of
Conversion. If the Association's members approve the Plan of Conversion, but
not the Foundation, the Association intends to complete the Conversion without
the establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the common stock being
offered for sale in the Offering since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to the
Foundation. See "Comparison of Valuation and Pro Forma Information With No
Foundation."
PURPOSES OF CONVERSION
The Association, as a New Jersey chartered mutual savings and loan association,
does not have shareholders and has no authority to issue capital stock. By
converting to the capital stock form of organization, the Association will be
structured in the form used by commercial banks, other business entities and a
growing number of savings institutions. The Conversion will enhance the
Association's ability to access capital markets, expand its current operations,
acquire other financial institutions or branch offices, provide affordable home
financing opportunities to the communities it serves or diversify into other
financial services to the extent allowable by applicable law and regulation.
The Conversion would also position the Association for a conversion to a
commercial bank charter if the Board of the Association chooses to do so in the
future.
The holding company form of organization, if used, would provide additional
flexibility to diversify the Association's business activities through existing
or newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are
no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Association's capital base is
significant. The Conversion will significantly increase the Association's
capital position to a level whereby the Association will be better positioned
to take advantage of business opportunities and engage in activities which,
prior to Conversion, would have been more difficult for the Association to
engage in and still continue to meet its status as a "well capitalized"
institution. At July 31, 1998, the Association had total equity, determined in
accordance with GAAP, of $26.0 million, or 10.02% of total assets, which
equalled the Association's regulatory tangible capital at that date. An
institution with a ratio of tangible capital to total assets of greater than or
equal to 5.0% is considered to be "well-capitalized" pursuant to OTS
regulations. Assuming that the Company uses 50% of the net proceeds at the
maximum of the Estimated Price Range to purchase the stock of the Association,
the Association's GAAP capital will increase to $39.4 million or a ratio of
GAAP capital to adjusted assets, on a pro forma basis, of 14.43% after the
Conversion. In the event that the holding company form of organization is
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not utilized and all of the net Conversion proceeds, at the midpoint of the
Estimated Price Range, are retained by the Association, the Association's
ratios of tangible and core capital to adjusted assets, on a pro forma basis,
will both increase to 20.1% after Conversion. The investment of the net
proceeds from the sale of the common stock is expected to provide the
Association with additional income to increase further its capital position.
The additional capital may also assist the Association in offering new programs
and expanded services to its customers. See "Use of Proceeds."
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and any required regulatory approval of
an offering, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions.
At the present time, the Company has no plans with respect to additional
offerings of securities, other than the possible issuance of additional shares
upon exercise of Stock Options under the Stock-Based Incentive Plan or the
possible issuance of authorized but unissued shares to the Stock-Based
Incentive Plan for Stock Awards. Following the Conversion, the Company will
also be able to use stock-related incentive plans to attract and retain
executive and other personnel for itself and its subsidiaries. See "Management
of the Association--Executive Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth
of the institution based upon the balance in his or her account, which interest
may only be realized in the event of a liquidation of the institution or in the
event the institution declares a capital distribution to depositors, subject to
applicable regulations of the OTS. However, this ownership interest is tied to
the depositor's account and has no tangible market value separate from such
deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the institution, which is lost to
the extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings institution is liquidated or in
the event the institution declares a capital distribution to depositors,
subject to applicable regulations. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual surplus and reserves
after other claims, including claims of depositors to the amounts of their
deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal business of
the Association of accepting deposits and making loans will continue without
interruption. The Association will continue to be subject to regulation by the
Department, the OTS and the FDIC. After the Conversion, the Association will
continue to provide services for depositors and borrowers under current
policies by its present management and staff.
The Directors serving the Association at the time of Conversion will serve
initially as Directors of the Association after the Conversion. The Directors
of the Company will consist initially of individuals currently serving on the
Board of Directors of the Association. All officers of the Association at the
time of Conversion will retain their positions immediately after Conversion.
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EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Association
at the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Association will be affected by
the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and certain
borrowers of the Association are members of, and have voting rights in, the
Association as to all matters requiring membership action. Upon Conversion,
depositors and borrowers will cease to be members and will no longer be
entitled to vote at meetings of the Association. Upon Conversion, all voting
rights in the Association will be vested in the Company as the sole stockholder
of the Association. Exclusive voting rights with respect to the Company will be
vested in the holders of common stock. Depositors and borrowers of the
Association will not have voting rights after the Conversion except to the
extent that they become stockholders of the Company through the purchase of
common stock.
TAX EFFECTS. The Association has received an opinion from Muldoon, Murphy &
Faucette with regard to federal income taxation and an opinion from Deloitte &
Touche, LLP with regard to New Jersey income taxation which provide that the
adoption and implementation of the Plan of Conversion set forth herein will not
be taxable for federal or New Jersey income tax purposes to the Association,
its Eligible Account Holders, or its Supplemental Eligible Account Holders or
the Company, except as discussed below. See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were any
assets remaining, depositors would be entitled to such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Association were to
liquidate after Conversion, all claims of creditors (including those of
depositors, to the extent of their deposit balances) would also be paid first,
followed by distribution of the "liquidation account" to certain depositors
(see "--Liquidation Rights"), with any assets remaining thereafter distributed
to the Company as the holder of the Association's capital stock. Pursuant to
the rules and regulations of the OTS, a post-Conversion merger, consolidation,
sale of bulk assets or similar combination or transaction with another insured
savings institution would not be considered a liquidation and, in such a
transaction, the liquidation account would be assumed by the surviving
institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of the common
stock must be based on the appraised pro forma market value of the common
stock, as determined on the basis of an independent valuation. The Association
and the Company have retained FinPro to make such valuation. For its services
in making such appraisal, FinPro will receive a fee of $31,000 plus reasonable
expenses not to exceed $1,500. The Association and the Company have agreed to
indemnify FinPro and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where FinPro's liability
results from its negligence or willful misconduct.
An appraisal has been made by FinPro in reliance upon the information contained
in this Prospectus, including the Financial Statements. FinPro also considered
the following factors, among others: the present and projected operating
results and financial condition of the Company and the Association and the
economic and demographic conditions in the Association's existing marketing
area; historical, financial and other information relating to the Association;
a comparative evaluation of the operating and financial statistics of the
Association with those of other similarly situated publicly-traded savings
banks and savings institutions located in the
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Association's market area and the Midatlantic, Southeast and New England areas
of the United States; the aggregate size of the offering of the common stock;
the impact of Conversion on the Association's net worth and earnings potential;
the proposed dividend policy of the Company and the Association; and the
trading market for securities of comparable institutions and general conditions
in the market for such securities.
On the basis of the foregoing, FinPro has advised the Company and the
Association that, in its opinion, dated October 7, 1998, the estimated pro
forma market value of the common stock, being offered for sale ranged from a
minimum of $28.0 million to a maximum of $37.8 million with a midpoint of $32.9
million. Based upon the Valuation Range and the purchase price of $10.00 per
share for the common stock established by the Board of Directors, the Board of
Directors has established the Estimated Price Range of $28.0 million to $37.8
million, with a midpoint of $32.9 million, and the Company expects to issue
between 3,020,220 and 4,086,180 shares of common stock, including shares issued
to the Foundation. The Board of Directors of the Company and the Association
have reviewed the appraisal of FinPro and in determining the reasonableness and
adequacy of such appraisal consistent with OTS regulations and policies, have
reviewed the methodology and reasonableness of the assumptions utilized by
FinPro in the preparation of such appraisal. The Estimated Price Range may be
amended with the approval of the OTS (if required), if necessitated by
subsequent developments in the financial condition of the Company or the
Association or market conditions generally. The $10.00 per share price for the
common stock was based on the consideration of a number of factors, including
the potential after market liquidity of the stock, Nasdaq listing requirements
and other marketing conditions.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN
THE OFFERINGS. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE ASSOCIATION, NOR DID FINPRO VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE ASSOCIATION. THE APPRAISAL
CONSIDERS THE ASSOCIATION AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE ASSOCIATION. MOREOVER, BECAUSE SUCH
APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE CONVERSION WILL THEREAFTER
BE ABLE TO SELL COMMON STOCK AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE
RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE THEREOF.
Following commencement of the Subscription Offering, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
common stock to be issued in the Conversion may be increased to 4,699,107
shares, including shares issued to the Foundation, due to regulatory
considerations, changes in the market and general financial and economic
conditions, without the resolicitation of subscribers. See "--Limitations on
Common Stock Purchases" as to the method of distribution and allocation of
additional shares that may be issued in the event of an increase in the
Estimated Price Range to fill unfilled orders in the Subscription Offering.
No sale of shares of common stock may be consummated unless, prior to such
consummation, FinPro confirms to the Association and the OTS that, to the best
of its knowledge, nothing of a material nature has occurred which, taking into
account all relevant factors, would cause FinPro to conclude that the value of
the common stock at the price so determined is incompatible with its estimate
of the pro forma market value of the common stock at the conclusion of the
Subscription Offering.
If the pro forma market value of the common stock is either more than 15% above
the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Association and the Company, after consulting with
the OTS, may terminate the Plan and return all funds promptly with interest at
the Association's passbook rate of interest on payments made by check, bank
draft or money order, extend or hold a new Subscription Offering and/or
Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by the
OTS in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable
period of time, all funds will be promptly returned to investors as described
above.
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A resolicitation, if any, following the conclusion of the Subscription Offering
would not exceed 45 days unless further extended by the OTS for periods of up
to 90 days not to extend beyond February 6, 2001.
If all shares of common stock are not sold through the Subscription Offering or
Community Offering, then the Association and the Company expect to offer the
remaining shares in a Syndicated Community Offering which would occur as soon
as practicable following the close of the Subscription Offering but may
commence during the Subscription Offering subject to prior rights of
subscribers. All shares of common stock will be sold at the same price per
share in the Syndicated Community Offering as in the Subscription Offering and
Community Offering. See "--Syndicated Community Offering."
No sale of shares of common stock may be consummated unless, prior to such
consummation, FinPro confirms to the Association, the Company and the OTS that,
to the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
FinPro to conclude that the aggregate value of the common stock at the purchase
price is incompatible with its estimate of the pro forma market value of the
common stock of the Company at the time of the Syndicated Community Offering.
Any change which would result in an aggregate purchase price which is below or
more than 15% above the Estimated Price Range would be subject to OTS approval.
If such confirmation is not received, the Association may extend the
Conversion, extend, reopen or commence a new Subscription Offering, Community
Offering or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of the
OTS or take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Price Range or more than 15%
above the maximum of such range, and the Company and the Association determine
to continue the Conversion, subscribers will be resolicited (i.e., be permitted
to continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their subscription funds will be promptly refunded with interest at
the Association's passbook rate of interest, or be permitted to decrease or
cancel their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. A resolicitation, if any, following the conclusion of the
Subscription Offering would not exceed 45 days unless further extended by the
OTS for periods up to 90 days not to extend beyond February 6, 2001. If such
resolicitation is not effected, the Association will return all funds promptly
with interest at the Association's passbook rate of interest on payments made
by check, bank draft or money order.
Copies of the appraisal report of FinPro, including any amendments thereto, and
the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Association and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of the
Subscription Offering, the total number of shares to be issued in the
Conversion may be increased or decreased without a resolicitation of
subscribers, provided that the product of the total number of shares times the
price per share is not below the minimum of the Estimated Price Range or more
than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and FinPro's estimate of the pro forma
market value of the common stock ranging from a minimum of $28.0 million to a
maximum, as increased by 15%, of $43.5 million, the number of shares of common
stock expected to be sold in the Conversion is between a minimum of 2,796,500
shares and a maximum, as adjusted by 15%, of 4,351,025 shares. The actual
number of shares sold between this range will depend on a number of factors and
shall be determined by the Association and Company subject to OTS approval, if
necessary.
In the event market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the Estimated Price
Range or more than 15% above the maximum of the Estimated
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Price Range, if the Plan is not terminated by the Company and the Association
after consultation with the OTS, purchasers will be resolicited (i.e.,
permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded,
or be permitted to modify or rescind their subscriptions). Any change in the
Estimated Price Range must be approved by the OTS. If the number of shares
issued in the Conversion is increased due to an increase of up to 15% in the
Estimated Price Range to reflect changes in market or financial condition,
persons who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an adjusted maximum number of shares, except for
the ESOP which will be able to subscribe for such adjusted amount. See "--
Limitations on Common Stock Purchases."
In the event the members of the Association approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares equal to 8% of the common
stock sold in the Conversion. Assuming the sale of shares in the Offerings at
the minimum, midpoint, maximum, or 15% above the maximum of the Estimated Price
Range, the Company will issue 223,720, 263,200, 302,680 or 348,082 shares of
its common stock from authorized but unissued shares to the Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of common stock outstanding of 3,020,220,
3,553,200, 4,086,180 or 4,699,107 shares, respectively. Of that amount, the
Foundation will own 7.4%. Funding the Foundation with authorized but unissued
shares will have the effect of diluting the ownership and voting interests of
persons purchasing shares in the Conversion by 7.4% since a greater number of
shares will be outstanding upon completion of the Conversion than would be if
the Foundation were not established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion as a result
of an increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the purchase
of common stock have been granted under the Plan of Conversion to the following
persons in the following order of descending priority: (1) Eligible Account
Holders, who are the holders of deposit accounts with balances of $50.00 or
more as of June 30, 1997; (2) the ESOP; (3) Supplemental Eligible Account
Holders, who are holders of deposit accounts with balances of $50.00 or more as
of September 30, 1998; and (4) members of the Association, consisting of
depositors and borrowers of the Association as of June 30, 1997 (the Voting
Record Date), who do not otherwise qualify as Eligible Account Holders or
Supplemental Eligible Account Holders (Other Members). All subscriptions
received will be subject to the availability of common stock after satisfaction
of all subscriptions of all persons having prior rights in the subscription
offering and to the maximum and minimum purchase limitations set forth in the
Plan of Conversion and as described below under "--Limitations on Common Stock
Purchases." Accounts which will provide subscription rights to holders thereof
consist of any withdrawable deposit account at the Association.
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (1)
the amount permitted to be purchased in the Community Offering, currently
$200,000 of common stock; (2) one-tenth of one percent (.10%) of the total
offering of shares of common stock; or (3) fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of common stock to be issued by a fraction of which the numerator is the
amount of the Eligible Account Holder's Qualifying Deposit (defined by the Plan
as any deposit account in the Association with a balance of $50.00 or more as
of June 30, 1997) and the denominator is the total amount of Qualifying
Deposits of all
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Eligible Account Holders ($219,980,710), in each case on the Eligibility Record
Date, subject to the overall purchase limitation and exclusive of an increase
in the shares issued pursuant to an increase in the Estimated Price Range of up
to 15%. See "--Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for a
number of shares of common stock in excess of the total number of such shares
eligible for subscription, the shares of common stock shall be allocated among
the subscribing Eligible Account Holders so as to permit each subscribing
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation of common stock equal to the
lesser of 100 shares or the number of shares subscribed for by the Eligible
Account Holder. Any shares remaining after that allocation will be allocated
among the subscribing Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Eligible Account Holder whose subscription remains unsatisfied bears to the
total amount of the Qualifying Deposits of all Eligible Account Holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more Eligible Account Holders, the excess shall be
reallocated (one or more times as necessary) among those Eligible Account
Holders whose subscriptions are still not fully satisfied on the same principle
until all available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must list on
his subscription order form all accounts in which he has an ownership interest.
Failure to list an account could result in less shares being allocated than if
all accounts had been disclosed. The subscription rights of Eligible Account
Holders who are also Directors or Officers of the Association or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the 12
months preceding June 30, 1997.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of the common stock issued in the Conversion, including shares issued to
the Foundation, and any increase in the number of shares of common stock to be
issued in the Conversion after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range. The ESOP intends to
purchase 8% of the shares to be issued in the Conversion, including shares
issued to the Foundation, or 241,617, 284,256, 326,894 and 375,928 shares,
based on the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively. Subscriptions by the ESOP will not be
aggregated with shares of common stock purchased directly by or which are
otherwise attributable to any other participants in the Subscription Offering,
including subscriptions of any of the Association's directors, officers,
employees or associates thereof. See "Management of the Association--Other
Benefit Plans--Employee Stock Ownership Plan and Trust."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental Eligible
Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $200,000 of common stock, one-tenth of one
percent (.10%) of the total offering of shares of common stock or fifteen times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of common stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's
Qualifying Deposit and the denominator is the total amount of Qualifying
Deposits of all Supplemental Eligible Account Holders ($234,252,396), in each
case on the Supplemental Eligibility Record Date, subject to the overall
purchase limitation and exclusive of an increase in the shares issued pursuant
to an increase in the Estimated Price Range of up to 15%. See "--Limitations on
Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise subscription
rights for a number of shares of common stock in excess of the total number of
such shares eligible for subscription, the shares of common stock shall be
allocated among the subscribing Supplemental Eligible Account Holders so as to
permit each
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subscribing Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his or her total allocation of
common stock equal to the lesser of 100 shares or the number of shares
subscribed for by the Supplemental Eligible Account Holder. Any shares
remaining after that allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion that the amount of the Qualifying Deposit of each Supplemental
Eligible Account Holder whose subscription remains unsatisfied bears to the
total amount of the Qualifying Deposits of all Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more Supplemental Eligible
Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account Holder
must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable subscription
rights to subscribe for common stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $200,000 of common stock, or one-tenth of one percent (.10%) of the
total offering of shares of common stock, subject to the overall purchase
limitation and exclusive of an increase in shares issued pursuant to an
increase in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of common
stock which, when added to the shares of common stock subscribed for by the
Eligible Account Holders, the Employee Plans and the Supplemental Eligible
Account Holders is in excess of the total number of shares of common stock
being issued, the subscriptions of such Other Members will be allocated among
the subscribing Other Members so as to permit each subscribing Other Member, to
the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of common stock equal to the lesser of 100 shares or the
number of shares subscribed for by the Other Member. Any shares remaining after
that allocation will be allocated among the subscribing Other Members whose
subscriptions remain unsatisfied pro rata in the same proportion that the
number of votes of a subscribing Other Member on the Voting Record Date bears
to the total votes on the Voting Record Date of all subscribing Other Members
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more remaining Other Members, the excess
shall be reallocated (one or more times as necessary) among those remaining
Other Members whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The offering by sale of the
common stock to persons having subscription rights (the "Subscription
Offering") will expire at 12:00 noon, Eastern time on January 19, 1999 (the
"Expiration Date"), unless extended for up to 45 days by the Association or
such additional periods with the approval of the OTS. Subscription rights which
have not been exercised prior to the Expiration Date will become void.
The Association will not execute orders until all shares of common stock have
been subscribed for or otherwise sold. If all shares have not been subscribed
for or sold within 45 days after the Expiration Date, unless such period is
extended with the consent of the OTS, all funds delivered to the Association
pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be canceled.
If an extension beyond the 45 day period following the Expiration Date is
granted, the Association will notify subscribers of the extension of time and
of any rights of subscribers to
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modify or rescind their subscriptions and have their funds returned promptly
with interest, and of the time period within which subscribers must
affirmatively notify the Association of their intention to confirm, modify, or
rescind their subscription. If an affirmative response to any resolicitation is
not received by the Company from a subscriber, such order will be rescinded and
all subscription funds will be promptly returned with interest. Such extensions
may not go beyond February 6, 2001.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction of
all subscriptions of the Eligible Account Holders, the ESOP, the Supplemental
Eligible Account Holders and Other Members, the Association intends to offer
shares pursuant to the Plan to members of the general public in a community
offering (the "Community Offering"). The Community Offering may be commenced
prior to the expiration of the Subscription Offering. In the event a Community
Offering is held, a preference will be given to Preferred Subscribers, subject
to the right of the Company to accept or reject any such orders, in whole or in
part, in their sole discretion. Persons purchasing stock in the Community
Offering, together with associates of and persons acting in concert with such
persons, may purchase up to $200,000 of common stock subject to the maximum
purchase limitation and exclusive of shares issued pursuant to an increase in
the Estimated Price Range by up to 15%. See "--Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% or decreased
to less than $200,000 at the sole discretion of the Company and the
Association. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE ASSOCIATION AND THE
COMPANY, IN ITS SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE
OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE
FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient to
fill the orders of subscribers after completion of the Subscription Offering,
such stock will be allocated first to each subscriber whose order is accepted
by the Association, in an amount equal to the lesser of 100 shares or the
number of shares subscribed for by each such subscriber, if possible.
Thereafter, unallocated shares will be allocated among the subscribers whose
order remains unsatisfied on a 100 shares per order basis until all such orders
have been filled or the remaining shares have been allocated. If there are any
shares remaining, shares will be allocated to other persons of the general
public who purchase in the Community Offering applying the same allocation
described above for Preferred Subscribers.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Association will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Plan provides
that the Association and the Company are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which both of the following
apply: (i) a small number of persons otherwise eligible to subscribe for shares
of common stock reside in such state; and (ii) the Company or the Association
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request that the Company and the Association or their officers, directors or
trustees register as a broker, dealer, salesman or selling agent, under the
securities laws of such state, or a request to register or otherwise qualify
the subscription rights or common stock for sale or submit any filing with
respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Association and the Company
will base their decision as to whether or not to offer the common stock in such
state on a number of factors, including the size of accounts held by account
holders in the state, the cost of registering or qualifying the shares or the
need to register the Company, its officers, directors or employees as brokers,
dealers or salesmen.
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MARKETING AND UNDERWRITING ARRANGEMENTS
The Association and the Company have engaged Sandler O'Neill as a consultant
and financial advisor in connection with the offering of the common stock, and
Sandler O'Neill has agreed to use its best efforts to solicit subscriptions and
purchase orders for shares of common stock in the Offerings. Based upon
negotiations between the Association and the Company concerning fee structure,
Sandler O'Neill will receive a fee equal to 1.25% of the aggregate Purchase
Price of the shares sold in the Subscription and Community Offerings, excluding
shares purchased by directors, officers, employees, and any immediate family
member thereof, and any employee benefit plan of the Company or Association,
including the ESOP for which Sandler O'Neill will not receive a fee. In the
event that a selected dealers agreement is entered into in connection with a
Syndicated Community Offering, the Association will pay a fee (to be negotiated
at such time under such agreement) to such selected dealers, any sponsoring
dealers fees, and a management fee to Sandler O'Neill of 1.25% for shares sold
by a National Association of Securities Dealers, Inc. member firms pursuant to
a selected dealers agreement; provided, however, that any fees payable to
Sandler O'Neill for common stock sold by them pursuant to such a selected
dealers agreement shall not exceed 1.25% of the Purchase Price and provided,
further, however, that the aggregate fees payable to Sandler O'Neill and the
selected dealers will not exceed 7% of the aggregate purchase price of the
common stock sold by selected dealers. Fees to Sandler O'Neill and to any other
broker-dealer may be deemed to be underwriting fees, and Sandler O'Neill and
such broker-dealers may be deemed to be underwriters. The Company and the
Association have agreed to indemnify Sandler O'Neill for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act. Sandler O'Neill has received advances
towards its fees totaling $50,000. Total marketing fees to Sandler O'Neill are
expected to be $307,000 and $419,000 at the minimum and the maximum of the
Estimated Price Range, respectively. See "Pro Forma Data" for the assumptions
used to arrive at these estimates.
Sandler O'Neill will perform proxy solicitation services, conversion agent
services and records management services for the Association in the Conversion
and will receive a fee for these services of $25,000. Finally, Sandler O'Neill
shall be reimbursed for reasonable out-of-pocket expenses not to exceed
$65,000.
Directors and executive officers of the Company and Association may participate
in the solicitation of offers to purchase common stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Association may participate in the
Offering in ministerial capacities or providing clerical work in effecting a
sales transaction. Such other employees have been instructed not to solicit
offers to purchase common stock or provide advice regarding the purchase of
common stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and
sales of common stock will be conducted within the requirements of Rule 3a4-1,
so as to permit officers, directors and employees to participate in the sale of
common stock. No officer, director or employee of the Company or the
Association will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or
indirectly on the transactions in the common stock.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours before
the Expiration Date, in the case of the Subscription Offering or the
termination of the Community Offering, in accordance with Rule 15c2-8 of the
Exchange Act, no prospectus will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the stock order form and certification form will confirm receipt
or delivery in accordance with Rule 15c2-8. Stock order and certification forms
will only be distributed with a prospectus.
To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Association's deposit
account (which may be given by completing the appropriate blanks in the stock
order form), must be received by the Association at any of its offices by 12:00
noon, Eastern time, on the Expiration Date, in the
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case of the Subscription Offering or the termination of the Community Offering.
Stock order forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. In addition, the Association and
Company are not obligated to accept orders submitted on photocopied or
facsimilied stock order forms and will not accept stock order forms
unaccompanied by an executed certification form. Notwithstanding the foregoing,
the Company shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of common
stock for which they subscribe in the Community Offering at any time prior to
48 hours before the completion of the Conversion. The Company and the
Association have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that they will do so. Once
received, an executed stock order form may not be modified, amended or
rescinded without the consent of the Association unless the Conversion has not
been completed within 45 days after the end of the Subscription Offering,
unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members are properly identified as to their stock purchase
priorities, depositors as of the Eligibility Record Date (June 30, 1997) and/or
the Supplemental Eligibility Record Date (September 30, 1998) and/or the Voting
Record Date (June 30, 1997) must list all accounts on the stock order form
giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in person at any
branch office of the Association, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Association. No wire transfers will be accepted. Interest will be paid on
payments made by cash, check, bank draft or money order at the Association's
passbook rate of interest from the date payment is received until the
completion or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion, but a hold
will be placed on such funds, thereby making them unavailable to the depositor
until completion or termination of the Conversion.
If a subscriber authorizes the Association to withdraw the amount of the
purchase price from his deposit account, the Association will do so as of the
effective date of the Conversion. The Association will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum
balance requirement at the time that the funds actually are transferred under
the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Association's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the ESOP
will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of common stock subscribed for
at the purchase price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided,
that there is in force from the time of its subscription until such time, a
loan commitment from an unrelated financial institution or the Company to lend
to the ESOP, at such time, the aggregate purchase price of the shares for which
it subscribed.
Owners of self-directed IRAs and Qualified Plans may use the assets of such
IRAs and Qualified Plans to purchase shares of common stock in the Subscription
Offering and/or Community Offering, provided that such IRAs are not maintained
at the Association. Persons with self-directed IRAs and Qualified Plans
maintained at the Association must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of common stock in the
Subscription Offering and/or Community Offering. In addition, the provisions of
ERISA and IRS regulations require that officers, directors and ten percent
shareholders who use self-directed
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IRA funds and Qualified Plans to purchase shares of common stock in the
Subscription Offering and/or Community Offering, make such purchases for the
exclusive benefit of the IRAs and Qualified Plans.
Certificates representing shares of common stock purchased will be mailed to
purchasers at the address specified in properly completed stock order forms, as
soon as practicable following consummation of the sale of all shares of common
stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Association, 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 account. Stock purchased in the Subscription
Offering must be registered in the name(s) of the registered account holder(s)
and failure to do so will result in the rejection of the order. Each person
exercising such subscription rights will be required to certify that he is
purchasing shares solely for his own account and that he has no agreement or
understanding regarding the sale or transfer of such shares. Joint Stock
registration will be allowed only if the qualifying deposit account is in the
name of both parties. 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
Conversion.
THE ASSOCIATION AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of common stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Association in the sale of the common stock. The
Company and the Association have the right to reject orders in whole or in part
in their sole discretion in the Syndicated Community Offering. Neither Sandler
O'Neill nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the common stock in the Syndicated Community Offering,
however, Sandler O'Neill has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering.
The price at which common stock is sold in the Syndicated Community Offering
will be determined as described above under "--Stock Pricing." Subject to
overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $200,000 of the common stock, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
of up to 15%; provided, however, that shares of common stock purchased in the
Community Offering by any persons, together with associates of or persons
acting in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of the greater of (i) $200,000 or (ii) 1.0% of the shares offered,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash will
earn interest at the Association's passbook rate of interest from the date such
payment is actually received by the Association until completion or termination
of the Conversion.
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In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Association for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest
and seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the
"debit date") and on or before noon of the next business day following the
debit date will send order forms and funds to the Association for deposit in a
segregated account. Although purchasers' funds are not required to be in their
accounts with selected dealers until the debit date in the event that such
alternative procedure is employed once a confirmation of an intent to purchase
has been received by the selected dealer, the purchaser has no right to rescind
his order.
Certificates representing shares of common stock purchased, together with any
refund due, will be mailed to purchasers at the address specified in the order
form, as soon as practicable following consummation of the sale of the common
stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days following
the Expiration Date, unless extended by the Company with the approval of the
OTS. Such extensions may not be beyond February 6, 2001. See "--Stock Pricing"
above for a discussion of rights of subscribers, if any, in the event an
extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of common
stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount permitted to be
purchased in the Community Offering, currently $200,000 of common stock; 2)
one-tenth of one percent (.10%) of the total offering of shares of common
stock; or 3) fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of common stock
to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the denominator is
the total amount of Qualifying Deposits of all Eligible Account Holders, in
each case on the Eligibility Record Date subject to the overall maximum
purchase limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price Range of
up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of common stock issued in the Conversion, including shares issued to
the Foundation, including shares issued in the event of an increase in the
Estimated Price Range of 15%, and intends to purchase 8% of the shares of
common stock issued in the Conversion, including shares issued to the
Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently $200,000 of
common stock; 2) one-tenth of one percent (.10%) of the total offering of
shares of common stock; or 3) fifteen times the product (rounded down to
the next whole number) obtained by multiplying the total number of shares
of common stock to be issued by a fraction of which the numerator
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is the amount of the Qualifying Deposit of the Supplemental Eligible
Account Holder and the denominator is the total amount of Qualifying
Deposits of all Supplemental Eligible Account Holders, in such case on the
Supplemental Eligibility Record Date subject to the overall maximum
purchase limitation in (8) below and exclusive of an increase in the total
number of shares issued due to an increase in the Estimated Price Range of
up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of: 1) the amount permitted to be purchased in
the Community Offering, currently $200,000 of common stock; or 2) one-tenth
of one percent (.10%) of the total offering of shares of common stock, in
each case subject to the overall maximum purchase limitation in (8) below
and exclusive of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of common stock in the Community Offering,
together with associates of and groups of persons acting in concert with
such persons, may purchase in the Community Offering up to $200,000 of
common stock, subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of common stock in the Syndicated Community
Offering, together with associates of and persons acting in concert with
such persons, may purchase in the Syndicated Offering up to $200,000 of
common stock, subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15% and, provided
further that shares of common stock purchased in the Community Offering by
any persons, together with associates of or persons acting in concert with
such persons, will be aggregated with purchases in the Syndicated Community
Offering in applying the $200,000 purchase limitation;
(8) Except for the ESOP, the overall maximum number of shares of common
stock subscribed for or purchased in all categories of the Conversion by
any person, together with associates of or persons acting in concert with
such persons, shall not exceed 1.0% of the shares of common stock offered
in the Conversion and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%;
and
(9) No more than 30% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the
Association and their associates in the aggregate, excluding purchases by
the ESOP.
Subject to any required regulatory approval and the requirements of applicable
laws and regulations, but without further approval of the members of the
Association, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5%
at the sole discretion of the Company and the Association. If such amount is
increased, subscribers for the maximum amount will be, and other large
subscribers in the sole discretion of the Association may be, given the
opportunity to increase their subscriptions up to the then applicable limit. In
addition, the Boards of Directors of the Company and the Association may, in
their sole discretion, increase the maximum purchase limitation referred to
above up to 9.99%, provided that orders for shares exceeding 5% of the shares
being offering in the Subscription and Community Offerings shall not exceed, in
the aggregate, 10% of the shares being offered in the Subscription and
Community Offerings. Requests to purchase additional shares of common stock
under this provision will be determined by the Boards of Directors and, if
approved, allocated on a pro rata basis giving priority in accordance with the
priority rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than 1% but
the individual amount permitted to be subscribed for may be reduced by the
Association to less than $200,000 subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also
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purchasing in other available categories of the Conversion, subject to
availability of shares and the overall maximum purchase limit for purchases in
the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of common stock issued in the Conversion,
including shares issued to the Foundation, at the Adjusted Maximum number of
shares; (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unsatisfied subscriptions of Eligible Account Holders,
exclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unsatisfied
subscriptions of Supplemental Eligible Account Holders, exclusive of the
Adjusted Maximum; (iv) in the event that there is an oversubscription by Other
Members, to fill unsatisfied subscriptions of Other Members exclusive of the
Adjusted Maximum; and (v) to fill unsatisfied subscriptions in the Community
Offering to the extent possible, exclusive of the Adjusted Maximum, with
preference to institutional investors.
The term "associate" of a person is defined to mean: (i) any corporation,
partnership (other than the Association or a majority-owned subsidiary of the
Association) of which such person is an officer, partner or 10% stockholder;
(ii) any trust or other estate in which such person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary capacity;
provided, however, such term shall not include any employee stock benefit plan
of the Association in which such person has a substantial beneficial interest
or serves as a trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such person, or any relative of such spouse, who either
has the same home as such person or who is a director or officer of the
Association. Directors are not treated as associates of each other solely
because of their Board membership. For a further discussion of limitations on
purchases of a converting institution's stock at the time of Conversion and
subsequent to Conversion, see "Management of the Association--Subscriptions by
Executive Officers and Directors," "--Restrictions on Purchase or Transfer of
Shares After Conversion" and "Restrictions on Acquisition of the Company and
the Association."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Association in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Association remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his deposit account was to the total value
of all deposit accounts in the Association at the time of liquidation. After
the Conversion, each depositor, in the event of a complete liquidation, would
have a claim as a creditor of the same general priority as the claims of all
other general creditors of the Association. However, except as described below,
his claim would be solely in the amount of the balance in his deposit account
plus accrued interest. He would not have an interest in the value or assets of
the Association above that amount.
The Plan provides for the establishment, upon the completion of the Conversion,
of a special "liquidation account" for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders in an amount equal to the surplus and
reserves of the Association as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Association, would be entitled,
on a complete liquidation of the Association after the Conversion, to an
interest in the liquidation account prior to any payment to the stockholders of
the Association. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account, including regular accounts, transaction accounts such as NOW
accounts, money market deposit accounts, and certificates of deposit, with a
balance of $50.00 or more held in the Association on June 30, 1997 and
September 30, 1998, respectively. Each Eligible Account Holder and Supplemental
Eligible Account Holder will have a pro rata interest in the total liquidation
account based on the proportion that the balance of his Qualifying Deposits on
the Eligibility Record Date or Supplemental Eligibility Record Date,
respectively,
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bore to the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Association. For
deposit accounts in existence at both dates separate subaccounts shall be
determined on the basis of the Qualifying Deposits in such deposit accounts on
such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, the amount of the Qualifying
Deposit of an Eligible Account Holder or Supplemental Eligible Account Holder
is less than the amount of the Qualifying Deposit of such Eligible Account
Holder or Supplemental Eligible Account Holder as of the Eligibility Record
Date or Supplemental Eligibility Record Date, respectively, or less than the
amount of the Qualifying Deposits as of the previous annual closing date, then
the interest in the liquidation account relating to such Qualifying Deposit
would be reduced from time to time by the proportion of any such reduction, and
such interest will cease to exist if such Qualifying Deposit accounts are
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related Qualifying Deposit.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Association.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by the
Association of either a favorable ruling from the IRS or an opinion with
respect to federal income taxation, and an opinion with respect to New Jersey
income taxation, to the effect that the Conversion will not be a taxable
transaction to the Company, the Association, Eligible Account Holders, or
Supplemental Eligible Account Holders except as noted below. The federal and
New Jersey income tax consequences will remain unchanged in the event that a
holding company form of organization is not utilized.
No private ruling will be received from the IRS with respect to the proposed
Conversion. Instead, the Association has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Association's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Association nor the Company will recognize any gain or
loss as a result of the Conversion; (ii) no gain or loss will be recognized to
the Association or the Company upon the purchase of the Association's capital
stock by the Company or to the Company upon the purchase of its Common Stock in
the Conversion; (iii) no gain or loss will be recognized by Eligible Account
Holders or Supplemental Eligible Account Holders upon the issuance to them of
Deposit Accounts in the Association in its stock form plus their interests in
the liquidation account in exchange for their deposit accounts in the
Association; (iv) the tax basis of the depositors' accounts in the Association
immediately after the Conversion will be the same as the basis of their deposit
accounts immediately prior to the Conversion; (v) the tax basis of each
Eligible Account Holder's and Supplemental Eligible Account Holder's interest
in the liquidation account will be zero; (vi) no gain or loss will be
recognized by Eligible Account Holders or Supplemental Eligible Account Holders
upon the distribution to them of nontransferable subscription rights to
purchase shares of the common stock, provided that the amount to be paid for
the common stock is equal to the fair market value of such stock; and (vii) the
tax basis to the stockholders of the common stock of the Company purchased in
the Conversion will be the amount paid therefor and the holding period for the
shares of common stock purchased by such persons will begin on the date on
which their subscription rights are exercised. Deloitte & Touche, LLP has
opined that the Conversion will not be a taxable transaction to the Company,
the Association, Eligible Account Holders or Supplemental Eligible Account
Holders for New Jersey income tax purposes. Certain portions of both the
federal and the state income tax opinions are based upon the assumption that
the subscription rights issued in connection with the Conversion will have no
value.
Unlike private rulings, an opinion of counsel or an opinion of an independent
accountant is not binding on the IRS and the IRS could disagree with
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding. The Association has agreed to a limitation on the liability of
Deloitte & Touche, LLP to it solely as a result of, and to indemnify
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Deloitte & Touche, LLP solely in connection with, certain claims or liabilities
relating to its New Jersey income tax opinion, except to the extent determined
to have resulted from intentional or deliberate misconduct.
FinPro has issued an opinion stating that, pursuant to its valuation, FinPro is
of the opinion that the subscription rights do not have any value, based on the
fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the common stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
common stock sold in the Community Offering. Such valuation is not binding on
the IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could be taxable to those Eligible Account
Holders or Supplemental Eligible Account Holders who receive and/or exercise
the subscription rights in an amount equal to such value and the Association
could recognize gain on such distribution. Eligible Account Holders and
Supplemental Eligible Account Holders are encouraged to consult with their own
tax advisor as to the tax consequences in the event that such subscription
rights are deemed to have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the Board of
Directors of the Association will be final. The Plan provides that the
Association's Board of Directors shall have the discretion to interpret and
apply the provisions of the Plan to particular circumstances and that such
interpretation or application shall be final. This includes any and all
interpretations, applications and determinations made by the Board of Directors
on the basis of such information and assistance as was then reasonably
available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote
of the Association's Board of Directors. After submission of the proxy
materials to the members, the Plan may be amended by a two-thirds vote of the
Association's Board of Directors at any time prior to the Special Meeting with
the concurrence of the OTS. The Plan may be amended at any time after the
approval of members with the approval of the OTS and no further approval of the
members will be necessary unless otherwise required by the OTS. By adoption of
the Plan, the Association's members will be deemed to have authorized amendment
of the Plan under the circumstances described above.
The establishment of the Foundation will be considered as a separate matter
from approval of the Plan of Conversion. If the Association's members approve
the Plan of Conversion, but not the creation of the Foundation, the Association
intends to complete the Conversion without the Foundation. Failure to approve
the establishment of the Foundation may materially increase the pro forma
market value of the common stock since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to the
Foundation. In such an event, the Association may establish a new Estimated
Price Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing."
RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of common stock purchased in connection with the Conversion by a
director or an officer of the Association will be subject to a restriction that
the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or officer. Each certificate
for restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer
within such time period of any certificate or record ownership of such shares
other than as provided above is a violation of the restriction. Any shares of
common stock issued at a later date as a stock dividend, stock split, or
otherwise, with respect to such restricted stock will be subject to the same
restrictions. The directors and officers of the Association will also be
subject to the insider trading rules promulgated pursuant to the Exchange Act
and any other applicable requirements of the federal securities laws.
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Purchases of outstanding shares of common stock of the Company by directors,
officers (or any person who was an officer or director of the Association after
adoption of the Plan of Conversion) and their associates during the three-year
period following Conversion may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS.
This restriction does not apply, however, to negotiated transactions involving
more than 1.0% of the Company's outstanding common stock or to the purchase of
stock pursuant to any stock option plan to be established after the Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations, will be
prohibited from repurchasing any shares of the common stock for three years
after the Conversion except: (i) for an offer to all stockholders on a pro rata
basis; or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing, beginning one year following completion of the
Conversion the Company may repurchase its common stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a twelve-
month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of
the OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken
and such program is not disapproved by the Regional Director. In addition,
under current OTS policies, repurchases may be allowed in the first year
following Conversion and in amounts greater than 5% in the second and third
years following Conversion, provided there are valid and compelling business
reasons for such repurchases and the OTS approves such repurchases.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE ASSOCIATION
GENERAL
The Association's Plan of Conversion provides for the Conversion of the
Association from the mutual to the stock form of organization and, in
connection therewith, a new Stock Certificate of Incorporation and Bylaws to be
adopted by members of the Association. The Plan also provides for the
concurrent formation of a holding company, which form of organization may or
may not be utilized at the option of the Board of Directors of the Association.
See "The Conversion--General." In the event that the holding company form of
organization is utilized, as described below, provisions in the Company's
Certificate of Incorporation and Bylaws and in its management remuneration
entered into in connection with the Conversion, together with provisions of
Delaware corporate law, may have anti-takeover effects. In the event that the
holding company form of organization is not utilized, the Association's Stock
Certificate of Incorporation and Bylaws and management remuneration entered
into in connection with the Conversion may have anti-takeover effects as
described below. In addition, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the
Association.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and Bylaws
deal with matters of corporate governance and rights of stockholders. The
following discussion is a general summary of the material provisions of the
Company's Certificate of Incorporation and Bylaws and other statutory and
regulatory provisions relating to stock ownership and transfers, the Board of
Directors and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the Board of Directors but
which individual Company stockholders may deem to be in their best interests or
in which shareholders may receive a substantial premium for their shares over
then current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult. The following description of the
provisions of the Certificate of Incorporation and Bylaws of the Company is
necessarily general and reference should be made in each case to such
Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the Company
provides that in no event shall any record owner of any outstanding common
stock which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of common
stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Association or Company or shares that are subject to a revocable proxy and
that are not otherwise beneficially owned, or deemed by the Company to be
beneficially owned, by such person and his affiliates. The Certificate of
Incorporation of the Company further provides that this provision limiting
voting rights may only be amended upon the vote of 80% of the outstanding
shares of voting stock (after giving effect to the limitation on voting
rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into three
classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The
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Company's Certificate of Incorporation and Bylaws provide that the size of the
Board shall be determined by a majority of the directors. The Certificate of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Company. The Certificate of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon the
vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace it
with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the issuance of
14,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an amount greater
than that to be issued in the Conversion to provide the Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee Stock Options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of preferred
stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of preferred
stock, the Board has the power, to the extent consistent with its fiduciary
duty, to issue a series of preferred stock to persons friendly to management in
order to attempt to block a post-tender offer merger or other transaction by
which a third party seeks control, and thereby assist management to retain its
position. The Company's Board of Directors currently has no plans for the
issuance of additional shares, other than the issuance of additional shares
pursuant to the terms of the Stock-Based Incentive Plan, which is to be
established and presented to stockholders at the first annual meeting after the
Conversion.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve "Business Combinations," as defined therein, and related transactions.
Under Delaware law, absent this provision, Business Combinations, including
mergers, consolidations and sales of all or substantially all of the assets of
a corporation must, subject to exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of common stock of the
Company and any other affected class of stock. Under the Certificate of
Incorporation, at least 80% approval of shareholders is required in connection
with any transaction involving an Interested Stockholder (as defined below)
except (i) in cases where the proposed transaction has been approved in advance
by a majority of those members of the Company's Board of Directors who are
unaffiliated with the Interested Stockholder and were directors prior to the
time when the Interested Stockholder became an Interested Stockholder or (ii)
if the proposed transaction meets conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The
term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than the Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Company. This provision
of the Certificate of Incorporation applies to any "Business Combination,"
which is
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defined to include (i) any merger or consolidation of the Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined
in the Certificate of Incorporation) of an Interested Stockholder; (ii) any
sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or
with any Interested Stockholder or Affiliate of 25% or more of the assets of
the Company or combined assets of the Company and its subsidiary; (iii) the
issuance or transfer to any Interested Stockholder or its Affiliate by the
Company (or any subsidiary) of any securities of the Company in exchange for
any assets, cash or securities the value of which equals or exceeds 25% of the
fair market value of the common stock of the Company; (iv) the adoption of any
plan for the liquidation or dissolution of the Company proposed by or on behalf
of any Interested Stockholder or Affiliate thereof; and (v) any
reclassification of securities, recapitalization, merger or consolidation of
the Company which has the effect of increasing the proportionate share of
common stock or any class of equity or convertible securities of the Company
owned directly or indirectly by an Interested Stockholder or Affiliate thereof.
The directors and executive officers of the Association are purchasing in the
aggregate approximately 3.4%, 2.9%, 2.5% or 2.2% of the shares of the common
stock to be sold in the Conversion and issued to the Foundation, based on the
estimated minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively. In addition, the ESOP intends to purchase 8% of the
common stock sold in the Conversion and issued to the Foundation. Additionally,
if at a meeting of stockholders following the Conversion stockholder approval
of the proposed Stock-Based Incentive Plan is received, the Company expects to
acquire 4% of the common stock sold in the Conversion and issued to the
Foundation, on behalf of the Stock-Based Incentive Plan and expects to issue
options to purchase up to 10% of the common stock sold in connection with the
Conversion and issued to the Foundation, under the Stock-Based Incentive Plan
to directors and executive officers. As a result, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, assuming the
Stock-Based Incentive Plan is approved by Stockholders, directors, executive
officers and employees have the potential to control the voting of
approximately 24.4%, 23.9%, 23.6% or 23.2% of the Company's common stock,
respectively, if the shares held by the Foundation and the ESOP are aggregated
with the shares purchased in the Conversion by management and acquired for
award under the Stock-Based Incentive Plan (without giving effect to any
exercise of options granted under the Stock-Based Incentive Plan), thereby
enabling them to prevent the approval of the transactions requiring the
approval of at least 80% of the Company's outstanding shares of voting stock
described hereinabove.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company further
provides that the Board of Directors of the Company, when evaluating any offer
of another "Person" (as defined therein) to (i) make a tender or exchange offer
for any equity security of the Company, (ii) merge or consolidate the Company
with another corporation or entity, or (iii) purchase or otherwise acquire all
or substantially all of the properties and assets of the Company, may, in
connection with the exercise of its judgment in determining what is in the best
interest of the Company, the Association and the stockholders of the Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Company's
customers and the Association's present and future account holders, borrowers
and employees; on the communities in which the Company and the Association
operate or are located; and on the ability of the Company to fulfill its
corporate objectives as a savings and loan holding company and on the ability
of the Association to fulfill the objectives of a state-chartered stock savings
association under applicable statutes and regulations. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal provisions of
the Certificate of Incorporation, including the provision limiting voting
rights, the provisions relating to approval of certain business combinations,
calling special meetings, the number and classification of directors, director
and officer indemnification by the Company and amendment of the
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Company's Bylaws and Certificate of Incorporation. The Company's Bylaws may be
amended by its Board of Directors, or by a vote of 80% of the total votes
eligible to be voted at a duly constituted meeting of stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a stockholder
who intends to nominate a candidate for election to the Board of Directors, or
to raise new business at a stockholder meeting to give at least 90 days advance
notice to the Secretary of the Company. The notice provision requires a
stockholder who desires to raise new business to provide information to the
Company concerning the nature of the new business, the stockholder and the
stockholder's interest in the business matter. Similarly, a stockholder wishing
to nominate any person for election as a director must provide the Company with
information concerning the nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and other transactions which have not been
negotiated with and approved by members of its Board of Directors. The
provisions of the Company's and Association's Employment Agreements, CIC
Agreements, Employee Severance Compensation Plan or Stock-Based Incentive Plan
to be established may also discourage takeover attempts by increasing the costs
to be incurred by the Association and the Company in the event of a takeover.
See "Management of the Association."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a
merger or other transaction at a price that reflects the true value of the
Company and that otherwise is in the best interest of all stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware corporations
with additional protection against hostile takeovers. The takeover statute,
which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who owns
15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of Section
203: (i) any business combination if, prior to the date a person became an
Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares
outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by employee stock plans;
(iii) any business combination with an Interested Stockholder that is approved
by
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the Board of Directors and by a two-thirds vote of the outstanding voting stock
not owned by the Interested Stockholder; and (iv) certain business combinations
that are proposed after the corporation had received other acquisition
proposals and which are approved or not opposed by a majority of continuing
members of the Board of Directors. A corporation may exempt itself from the
requirements of the statute by adopting an amendment to its Certificate of
Incorporation or Bylaws electing not to be governed by Section 203. At the
present time, the Board of Directors does not intend to propose any such
amendment.
RESTRICTIONS IN THE ASSOCIATION'S NEW STOCK CERTIFICATE OF INCORPORATION AND
BYLAWS
Although the Board of Directors of the Association is not aware of any effort
that might be made to obtain control of the Association after the Conversion,
the Board of Directors believes that it is appropriate to adopt provisions
permitted by applicable regulations to protect the interests of the converted
Association and its stockholders from any hostile takeover. Such provisions
may, indirectly, inhibit a change in control of the Company, as the
Association's sole stockholder. See "Risk Factors--Anti-Takeover Provisions in
Our Governing Instruments and Voting Control of Management May Discourage
Takeover Attempts."
The Association's Stock Certificate of Incorporation will contain a provision
whereby the acquisition of or offer to acquire beneficial ownership of more
than 10% of the issued and outstanding shares of any class of equity securities
of the Association by any person (i.e., any individual, corporation, group
acting in concert, trust, partnership, joint stock company or similar
organization), either directly or through an affiliate thereof, will be
prohibited for a period of five years following the date of completion of the
Conversion. Any stock in excess of 10% acquired in violation of the Stock
Certificate of Incorporation provision will not be counted as outstanding for
voting purposes. This limitation shall not apply to any transaction in which
the Association forms a holding company without a change in the respective
beneficial ownership interests of its stockholders other than pursuant to the
exercise of any dissenter or appraisal rights. In the event that holders of
revocable proxies for more than 10% of the shares of the common stock of the
Company seek, among other things, to elect one-third or more of the Company's
Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company or to exert a continuing
influence on a material aspect of the business operations of the Company, which
actions could indirectly result in a change in control of the Association, the
Board of Directors of the Association will be able to assert this provision of
the Association's Stock Certificate of Incorporation against such holders.
Although the Board of Directors of the Association is not currently able to
determine when and if it would assert this provision of the Association's Stock
Certificate of Incorporation, the Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Association, the Company and its stockholders. It is unclear,
however, whether this provision, if asserted, would be successful against such
persons in a proxy contest which could result in a change in control of the
Association indirectly through a change in control of the Company. For five
years, stockholders will not be permitted to call a special meeting of
stockholders relating to a change of control of the Association or a charter
amendment. Finally, stockholders will not be permitted to cumulate their votes
in the election of directors. The staggered terms of the Board of Directors
could have an anti-takeover effect by making it more difficult for a majority
of shares to force an immediate change in the Board of Directors since only
one-third of the Board is elected each year. The purpose of these provisions is
to assure stability and continuity of management of the Association in the
years immediately following the Conversion.
Although the Association has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of
undesignated preferred stock proposed to be authorized, the Board of Directors
believes that the availability of such shares will provide the Association with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs which may arise. In the event
of a proposed merger, tender offer or other attempt to gain control of the
Association of which management does not approve, the Board of Directors can
authorize the issuance of one or more series of preferred stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of such preferred stock, therefore, may be to deter a
future takeover attempt. The Board of Directors does not intend to issue any
preferred stock except on terms which the Board deems to be in the best
interest of the Association and its then existing stockholders.
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REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the common stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of
an offer or intent to make an offer, to purchase such subscription rights or
common stock.
For three years following the Conversion, OTS regulations prohibit any person
from acquiring or making an offer to acquire more than 10% of the stock of any
converted savings institution, except for: (i) offers that, if consummated,
would not result in the acquisition by such person during the preceding 12-
month period of more than 1% of such stock; (ii) offers for up to 25% in the
aggregate by the ESOP or other tax qualified plans of the Association or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Association and which receive the prior approval of the OTS. Such prohibition
is also applicable to the acquisition of the stock of the Company. Such
acquisition may be disapproved by the OTS if it is found, among other things,
that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the
savings institution's conversion proceeds. In the event that any person,
directly or indirectly, violates this regulation, the securities beneficially
owned by such person in excess of 10% shall not be counted as shares entitled
to vote and shall not be voted by any person or counted as voting shares in
connection with any matters submitted to a vote of stockholders. The definition
of beneficial ownership for this regulation extends to persons holding
revocable or irrevocable proxies for the Company's stock under circumstances
that give rise to a conclusive or rebuttable determination of control under the
OTS regulations.
In addition, any proposal to acquire 10% of any class of equity security of the
Company generally would be subject to approval by the OTS under the Change in
Bank Control Act. The Change in Bank Control Act provides that no person,
acting directly or indirectly or through or in concert with one or more other
persons, may acquire control of a savings and loan holding company unless the
OTS has been given 60 days' prior written notice and has not objected to the
transaction. The HOLA provides that no company may acquire "control of a
savings and loan holding company without the prior approval of the OTS." Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination, and regulation by the OTS. Pursuant to
federal regulations, "control" of a savings and loan holding company is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of the company or
irrevocable proxies representing more than 25% of any class of voting stock of
the company or the ability to control the election of a majority of the
directors. The regulations also establish a rebuttable presumption of "control"
upon the acquisition of more than 10% of any class of voting stock, or of more
than 25% of any class of stock, of a savings and loan holding company, where
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition by a person 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 the
public to permit the acquisition of control by such person or (iv) the proposed
acquisition would have an adverse effect on the deposit insurance funds.
Applications by a company to acquire "control" of a savings and loan holding
company are evaluated by OTS based upon factors such as the financial and
managerial resources and future prospects of the acquirer and the institution
involved, competitive factors and the convenience and needs of the community
involved. The foregoing restrictions do not apply to the acquisition of the
Company's capital 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% of any class of equity security of the Company.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 14,000,000 shares of common stock having a
par value of $0.01 per share and 1,000,000 shares of preferred stock having a
par value of $0.01 per share. Based on the sale of common stock in connection
with the Conversion and issuance of authorized but unissued common stock in an
amount equal to 8.0% of the common stock sold in the Conversion, the Company
currently expects to issue up to 4,086,180 shares of common stock (or 4,699,107
in the event of an increase of 15% in the Estimated Price Range) and no shares
of preferred stock in the Conversion. Except as discussed above in "Restriction
on Acquisition of the Company and the Association," each share of the Company's
common stock will have the same relative rights as, and will be identical in
all respects with, each other share of common stock. Upon payment of the
Purchase Price for the common stock, in accordance with the Plan, all such
stock will be duly authorized, fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL
NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from net
profits if, as and when declared by its Board of Directors. The payment of
dividends by the Company is subject to limitations which are imposed by law and
applicable regulation. See "Dividend Policy" and "Regulation." The holders of
common stock of the Company will be entitled to receive and share equally in
such dividends as may be declared by the Board of Directors of the Company out
of funds legally available therefor. If the Company issues preferred stock, the
holders thereof may have a priority over the holders of the common stock with
respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of common stock of the Company will
possess exclusive voting rights in the Company. They will elect the Company's
Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Association," each holder of common stock will be entitled to one vote per
share and will not have any right to cumulate votes in the election of
directors. If the Company issues preferred stock, holders of the preferred
stock may also possess voting rights. Certain matters require an 80%
shareholder vote. See "Restrictions on Acquisition of the Company and the
Association."
As a mutual savings and loan association, corporate powers and control of the
Association are vested in its Board of Directors, who elect the officers of the
Association and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Association,
which will be the Company, and voted at the direction of the Company's Board of
Directors. Consequently, the holders of the common stock will not have direct
control of the Association.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of the
Association, the Company, as holder of the Association's capital stock, would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of the Association (including all deposit accounts and accrued
interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Conversion--Liquidation Rights"), all assets of the
Association available for distribution. In the event of liquidation,
dissolution or winding up of the Company, the holders of its common stock would
be entitled to receive, after payment or provision for payment of all its debts
and liabilities, all of the assets of the Company available for distribution.
If preferred stock is issued, the holders thereof may have a priority over the
holders of the common stock in the event of liquidation or dissolution.
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PREEMPTIVE RIGHTS. Holders of the common stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The common stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized preferred stock will be issued
in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock
with voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE ASSOCIATION
GENERAL
The Stock Certificate of Incorporation of the Association, to be effective upon
the Conversion, authorizes the issuance of capital stock consisting of
14,000,000 shares of common stock, par value $1.00 per share and 1,000,000
shares of preferred stock, par value $1.00 per share, which preferred stock may
be issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common
stock of the Association will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. After the
Conversion, the Board of Directors will be authorized to approve the issuance
of common stock up to the amount authorized by the Stock Certificate of
Incorporation without the approval of the Association's stockholders. Assuming
that the holding company form of organization is utilized, all of the issued
and outstanding common stock of the Association will be held by the Company as
the Association's sole stockholder. THE CAPITAL STOCK OF THE ASSOCIATION WILL
REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE
TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Association's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Association out of funds legally available therefor. See
"Dividend Policy" for restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the
Association's common stock will possess exclusive voting rights in the
Association. Each holder of shares of common stock will be entitled to one vote
for each share held, subject to the right of shareholders to cumulate their
votes for the election of directors. During the five-year period after the
effective date of the Conversion, cumulation of votes will not be permitted.
See "Restrictions on Acquisition of the Company and the Association--Anti-
Takeover Effects of the Company's Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding up of the
Association, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Association (including all deposit
accounts and accrued interest thereon), and distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Association available for
distribution in cash or in kind. If preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
common stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Association
will not be entitled to preemptive rights with respect to any shares of the
Association which may be issued. The common stock will not be subject to
redemption. Upon receipt by the Association of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Registrar and Transfer
Company, Cranford, New Jersey.
EXPERTS
The financial statements of the Association as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 included
in this Prospectus have been audited by Deloitte & Touche, LLP, independent
auditors, as stated in their report, appearing elsewhere herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
FinPro has consented to the publication herein of the summary of its report to
the Association and Company setting forth its opinion as to the estimated pro
forma market value of the common stock upon Conversion and its valuation with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences of the
Conversion will be passed upon for the Association and the Company by Muldoon,
Murphy & Faucette, Washington, D.C., special counsel to the Association and the
Company. Muldoon, Murphy & Faucette will rely as to certain matters of Delaware
law on the opinion of Morris, Nichols, Arsht & Tunnel. The State of New Jersey
income tax consequences of the Conversion and certain matters related to the
Foundation will be passed upon for the Association and the Company by Deloitte
& Touche, LLP. Certain legal matters will be passed upon for Sandler O'Neill by
Malizia, Spidi, Sloane & Fisch, P.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the common stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located
at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material
can be obtained from the SEC at prescribed rates. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-
0330. In addition, the SEC maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC including the
Company. This Prospectus and all exhibits to the Registration Statement
electronically filed with the SEC are available at the SEC's web site. This
Prospectus contains a description of the material terms and features of all
material contracts, reports or exhibits to the Registration Statement required
to be disclosed in the Prospectus. You should obtain and review any exhibit for
full information regarding such exhibit.
The Association has filed an application for conversion with the OTS and the
Commissioner with respect to the Conversion. Pursuant to the rules and
regulations of the OTS, this Prospectus omits certain information contained in
that application. The application may be examined at the principal office of
the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the Office of the
Regional Director of the OTS located at 10 Exchange Place, 18th Floor, Jersey
City, New Jersey 07302 and at the office of the Commissioner at 20 West State
Street, Trenton, New Jersey 07625.
In connection with the Conversion, the Company will register its common stock
with the SEC under Section 12(g) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become
122
<PAGE>
subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and other requirements
of the Exchange Act. Under the Plan, the Company has undertaken that it will
not terminate such registration for a period of at least three years following
the Conversion. In the event that the Association amends the Plan to eliminate
the concurrent formation of the Company as part of the Conversion, the
Association will register its stock with the OTS under Section 12(g) of the
Exchange Act and, upon such registration, the Association and the holders of
its stock will become subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company and
the proposed Stock Certificate of Incorporation and Bylaws of the Association
and the proposed Certificate of Incorporation and Bylaws of the Foundation are
available without charge from the Association.
123
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report...................................... F-2
Statements of Financial Condition as of July 31, 1998 (unaudited)
and December 31, 1997 and 1996................................... F-3
Statements of Income for the Seven-Month Periods Ended July 31,
1998 and 1997 (unaudited) and for the Years Ended December 31,
1997, 1996 and 1995.............................................. 34
Statements of Retained Earnings for the Seven-Month Period Ended
July 31, 1998 (unaudited) and for the Years Ended December 31,
1997, 1996 and 1995.............................................. F-4
Statements of Cash Flows for the Seven-Month Periods Ended July
31, 1998 and 1997 (unaudited) and for the Years Ended December
31, 1997, 1996 and 1995.......................................... F-5 to F-6
Notes to Financial Statements..................................... F-7 to F-19
</TABLE>
All schedules are omitted because they are not required or applicable, or the
required information is shown in the financial statements or notes thereto.
The financial statements of South Jersey Financial Corporation, Inc. have been
omitted because South Jersey Financial Corporation, Inc. has not yet issued any
stock, has no assets and no liabilities, and has not conducted any business
other than of an organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
South Jersey Savings and Loan Association:
We have audited the accompanying statements of financial condition of South
Jersey Savings and Loan Association (the "Association") as of December 31, 1997
and 1996, and the related statements of income, retained earnings, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Association's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of South Jersey Savings and Loan Association
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 20, 1998
F-2
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
JULY 31, -------------------------
1998 1997 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and amounts due from depository
institutions........................... $ 4,413,973 $ 3,704,631 $ 4,099,515
Interest-bearing deposits with banks.... 396,000 495,000 594,000
Federal funds sold...................... 12,400,000 15,000,000 6,200,000
------------ ------------ ------------
Cash and cash equivalents........... 17,209,973 19,199,631 10,893,515
Investment securities held to maturity
(approximate fair values--1998,
$87,393,400 (unaudited); 1997,
$79,601,903; 1996, $77,128,001)........ 87,055,568 79,034,160 77,109,792
Mortgage-backed securities held to
maturity (approximate fair values--
1998, $49,395,739 (unaudited); 1997,
$45,662,774; 1996, $41,174,237)........ 48,352,110 45,231,329 41,398,301
Loans receivable, net................... 99,562,554 98,966,195 104,262,855
Accrued interest receivable............. 2,498,431 2,258,869 2,450,067
Federal Home Loan Bank stock--at cost... 1,249,100 1,232,700 1,150,300
Real estate owned....................... 49,937
Office properties and equipment, net.... 3,247,736 3,323,854 3,427,084
Deferred income taxes................... 70,673 16,470 144,943
Prepaid income taxes.................... 21,078 252,394 111,507
Prepaid expenses and other assets....... 391,902 289,426 263,559
------------ ------------ ------------
Total Assets........................ $259,709,062 $249,805,028 $241,211,923
============ ============ ============
LIABILITIES AND RETAINED EARNINGS
Liabilities:
Deposits.............................. $231,155,709 $223,205,518 $216,834,216
Advances from Federal Home Loan Bank.. 176,000 176,000 176,000
Advances from borrowers for taxes and
insurance............................ 1,087,255 729,410 787,788
Accounts payable and accrued
expenses............................. 1,221,556 960,091 990,109
Income taxes payable.................. 42,380 44,694
------------ ------------ ------------
Total liabilities................... 233,682,900 225,115,713 218,788,113
Commitments and contingencies (Note 5)
Retained earnings....................... 26,026,162 24,689,315 22,423,810
------------ ------------ ------------
Total Liabilities And Retained
Earnings........................... $259,709,062 $249,805,028 $241,211,923
============ ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1995........................................... $19,143,728
Net income....................................................... 2,123,672
-----------
BALANCE, DECEMBER 31, 1995......................................... 21,267,400
Net income....................................................... 1,156,410
-----------
BALANCE, DECEMBER 31, 1996......................................... 22,423,810
Net income....................................................... 2,265,505
-----------
BALANCE, DECEMBER 31, 1997......................................... 24,689,315
Net income for the seven-month period ended July 31, 1998
(unaudited)..................................................... 1,336,847
-----------
BALANCE, JULY 31, 1998 (unaudited)................................. $26,026,162
===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN-MONTH PERIOD ENDED
JULY 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............ $ 1,336,847 $ 1,299,115 $ 2,265,505 $ 1,156,410 $ 2,023,672
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Provision for:
Loan losses.......... 175,000 233,333 400,000 180,000 180,000
Depreciation......... 172,771 168,238 296,823 252,324 220,985
Amortization of:
Premiums, discounts
on mortgage-backed
securities, net..... 10,499 32,250 29,574 85,964 22,440
Premiums, discounts
on investments,
net................. 89,674 212,346 290,333 619,601 805,965
Deferred and prepaid
loan fees........... (68,848) (40,421) (80,608) (85,669) (77,521)
Changes in assets and
liabilities which
provided (used) cash:
Real estate acquired
through
foreclosure......... (49,937) 23,342 (23,342)
Accrued interest
receivable.......... (239,562) (2,953) 191,198 (7,140) (96,157)
Prepaid expenses and
other assets........ (102,476) (122,920) (25,867) 23,315 28,427
Prepaid income
taxes............... 231,316 36,564 (140,887) (111,507)
Deferred income
taxes............... (54,203) 74,943 128,473 (74,287) 37,251
Deferred and prepaid
loan fees........... 11,753 41,990 (117,251) 60,858 5,261
Accounts payable and
accrued expenses.... 261,465 147,899 (30,018) 4,846 (7,078)
Income taxes
payable............. (2,314) 23,593 44,694 (19,989) (54,610)
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating
activities......... 1,771,985 2,103,977 3,251,969 2,108,068 3,065,293
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of:
Mortgage-backed
securities........... (10,993,716) (8,030,001) (10,030,001) (16,029,193) (6,023,302)
Investment
securities........... (29,611,082) (17,044,768) (36,214,701) (30,549,223) (26,827,597)
Federal Home Loan Bank
stock................ (16,400) (82,400) (82,400) (31,600)
Office properties and
equipment............ (96,653) (86,414) (193,593) (357,161) (229,791)
Proceeds from:
Maturing investment
securities........... 21,500,000 18,500,000 34,000,000 25,000,000 19,745,000
Maturing mortgage-
backed securities.... 7,862,436 3,380,882 6,167,399 6,216,799 4,252,274
Sale of loans......... 90,379 932,539
Sale of Federal Home
Loan Bank stock...... 31,700
Principal collected on
long-term loans...... 12,280,927 10,522,759 21,119,160 17,155,774 16,678,723
Long-term loans
originated........... (13,085,570) (7,714,494) (16,024,641) (16,221,483) (12,453,390)
------------ ------------ ------------ ------------ ------------
Net cash used in
investing
activities......... (12,069,679) (554,436) (1,258,777) (14,752,787) (3,957,144)
------------ ------------ ------------ ------------ ------------
</TABLE>
(continued)
F-5
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
SEVEN-MONTH PERIOD ENDED
JULY 31, YEAR ENDED DECEMBER 31,
-------------------------- ------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in
deposits............. 7,950,191 2,356,413 6,371,302 5,714,418 9,610,348
Increase (decrease) in
advances from
borrowers for taxes
and insurance........ 357,845 (452,937) 58,378 (17,807) 26,595
------------ ------------ ----------- ----------- -----------
Net cash provided by
financing
activities......... 8,308,036 1,903,476 6,312,924 5,696,611 9,636,943
------------ ------------ ----------- ----------- -----------
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS........... (1,989,658) 3,453,017 8,306,116 (6,948,108) 8,745,092
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 19,199,631 10,893,515 10,893,515 17,841,623 9,096,531
------------ ------------ ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 17,209,973 $ 14,346,532 $19,199,631 $10,893,515 $17,841,623
============ ============ =========== =========== ===========
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during
period for:
Interest.............. $ 5,172,523 $ 4,950,767 $ 9,342,618 $ 9,113,654 $ 8,557,720
============ ============ =========== =========== ===========
Income taxes.......... $ 577,000 $ 595,000 $ 1,245,000 $ 870,000 $ 1,141,991
============ ============ =========== =========== ===========
SUPPLEMENTAL SCHEDULE
OF NONCASH INVESTING
AND FINANCING
ACTIVITIES:
Loans transferred to
REO.................. $ 49,937 $ 27,714 $ 269,754
============ =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND (UNAUDITED) FOR THE
SEVEN-MONTH PERIODS ENDED JULY 31, 1998 AND 1997
1. NATURE OF OPERATIONS
South Jersey Savings and Loan Association (the "Association") is a state-
chartered mutual savings and loan established in 1950 which is principally in
the business of attracting customer deposits to provide mortgage and consumer
loan funds to the community. The main branch is located in Turnersville, New
Jersey, with other branches in Collingswood and Glendora, New Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements--The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
Interim Unaudited Financial Statements--The financial statements as of July 31,
1998 and for the seven-month periods ended July 31, 1998 and 1997 are
unaudited, but in management's option, reflect only normal and recurring
adjustments necessary for a fair presentation. Results at and for the seven-
months ended July 31, 1998 are not indicative of the results that may be
expected for the fiscal year ending December 31, 1998.
Accounting for Certain Debt and Equity Securities--The Association classifies
investments as follows:
Securities that the Association has the positive intent and ability to hold
to maturity are classified as "held-to-maturity" and reported at amortized
cost.
Securities not classified as held-to-maturity are classified as "available-
for-sale" and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of retained
earnings, net of applicable income taxes. The Association did not classify
any security as available for sale at July 31, 1998, December 31, 1997 and
1996.
Provision for Loan Losses--Provision for loan losses includes charges to reduce
the recorded balances of loans receivable and real estate acquired by
foreclosure to their estimated net realizable value or fair value, as
applicable. Recovery of the carrying value of such loans and real estate
acquired by foreclosure is dependent to a great extent on economic, operating
and other conditions that may be beyond the Association's control.
Real Estate Acquired Through Foreclosure--Real estate acquired through
foreclosure is carried at the lower of fair value less estimated cost to sell
or balance of the loan on the property at date of acquisition. Costs relating
to the development and improvement of property are capitalized, and those
relating to holding the property are charged to expense.
Accrued Interest Receivable--Interest income is recognized as earned. Accrual
of loan interest is discontinued and a reserve established on existing accruals
if management believes, that after considering economic and business conditions
and collection efforts, that the borrowers' financial condition is such that
collection of interest is doubtful.
Office Properties and Equipment--Office properties and equipment are recorded
at cost. Depreciation is computed using the straight-line method over the
expected useful lives of the assets, ranging from 3 to 50 years. The costs of
maintenance and repairs are expensed as they are incurred and renewals and
betterments are capitalized.
F-7
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred Loan Fees--The Association defers all loan fees, net of certain direct
loan origination costs. The balance is accreted into income as a yield
adjustment over the contractual life of the loan using the interest method.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and cash
equivalents include cash, interest-bearing deposits (with original maturities
of 90 days or less), and federal funds sold. Generally, federal funds sold are
repurchased the following day.
Income Taxes--Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
Interest Rate Risk--The Association is principally engaged in the business of
attracting deposits from the general public and using these deposits, together
with borrowings and other funds, to make loans secured by real estate and other
consumer loans and to purchase certain investments. The potential for interest
rate risk exists as a result of the shorter repricing period of the
Association's interest-sensitive liabilities compared to the generally longer
repricing period of interest-sensitive assets. In a rising rate environment
liabilities will reprice faster than assets, thereby reducing the market value
of long-term assets and net interest income. For this reason, management
regularly monitors the maturity structure of the Association's assets and
liabilities in order to measure this risk and enacts measures to manage
volatility of future interest rate movements.
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and in
December 1996, SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.
These statements were effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, with
certain provisions deferred until January 1, 1998. The Association has
determined that the adoption of these standards did not have a significant
effect on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. This statement is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
For the seven-month periods ended July 31, 1998 and 1997, and for the years
ended December 31, 1997, 1996 and 1995, the Association was not required to
recognize any item as "other comprehensive income", therefore comprehensive
income equals net income for each period.
Reclassifications--Certain amounts in the 1997, 1996 and 1995 financial
statements have been reclassified to conform with the 1998 financial statement
presentation.
F-8
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
JULY 31, 1998
---------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and government
agencies................... $40,654,771 $388,667 $ 29,834 $41,013,604
FHLB notes.................. 46,300,797 163,159 184,160 46,279,796
State and municipal issues.. 100,000 100,000
----------- -------- -------- -----------
Total..................... $87,055,568 $551,826 $213,994 $87,393,400
=========== ======== ======== ===========
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and government
agencies................... $42,111,414 $413,458 $ 21,377 $45,503,495
FHLB notes.................. 36,822,746 205,492 29,830 36,998,408
State and municipal issues.. 100,000 100,000
----------- -------- -------- -----------
Total..................... $79,034,160 $618,950 $ 51,207 $79,601,903
=========== ======== ======== ===========
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and government
agencies................... $48,162,908 $278,985 $174,749 $48,267,144
FHLB notes.................. 28,846,884 112,354 198,381 28,760,857
State and municipal issues.. 100,000 100,000
----------- -------- -------- -----------
Total..................... $77,109,792 $391,339 $373,130 $77,128,001
=========== ======== ======== ===========
</TABLE>
At December 31, 1996, investment securities included structured notes with the
Federal Home Loan Bank of New York. Par value of these structured notes is
$1,000,000. These securities are designated as held to maturity. At July 31,
1998 and December 31, 1997, the Association did not have structured notes.
The amortized cost and approximate fair value of debt securities at July 31,
1998 by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less............................. $12,590,911 $12,686,497
Due after one year through five years............... 34,355,578 34,630,928
Due after five years................................ 40,109,079 40,075,975
----------- -----------
Total............................................. $87,055,568 $87,393,400
=========== ===========
</TABLE>
F-9
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
JULY 31, 1998
---------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
GNMA pass-through
certificates................ $ 769,902 $ 68,911 $ 838,813
FNMA pass-through
certificates................ 25,680,798 370,282 $ 15,958 26,035,122
FHLMC pass-through
certificates................ 21,901,410 620,394 22,521,804
----------- ---------- -------- -----------
Total...................... $48,352,110 $1,059,587 $ 15,958 $49,395,739
=========== ========== ======== ===========
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
GNMA pass-through
certificates................ $ 924,818 $ 52,694 $ 433 $ 977,079
FNMA pass-through
certificates................ 17,627,059 160,544 114,882 17,672,721
FHLMC pass-through
certificates................ 26,679,452 385,449 51,927 27,012,974
----------- ---------- -------- -----------
Total...................... $45,231,329 $ 598,687 $167,242 $45,662,774
=========== ========== ======== ===========
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
GNMA pass-through
certificates................ $ 1,116,727 $ 36,662 $ 1,175 $ 1,152,214
FNMA pass-through
certificates................ 16,752,026 61,334 317,320 16,496,040
FHLMC pass-through
certificates................ 23,529,548 260,551 264,116 23,525,983
----------- ---------- -------- -----------
Total...................... $41,398,301 $ 358,547 $582,611 $41,174,237
=========== ========== ======== ===========
</TABLE>
At July 31, 1998 mortgage-backed securities pledged for public deposits were
$1,007,170.
5. LOANS RECEIVABLE
Loans receivable at July 31, 1998, December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
JULY 31, -------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Residential mortgage loans
(primarily single-family)........ $81,156,011 $79,562,947 $ 81,782,438
Nonresidential mortgage loans..... 2,043,787 2,104,430 5,605,752
Education loans................... 2,291,720 2,426,467 2,513,753
Loans on savings accounts......... 180,077 147,743 182,880
Consumer loans.................... 15,091,467 15,805,447 15,884,941
Commercial loans.................. 8,792 33,000 124,500
----------- ----------- ------------
Total......................... 100,771,854 100,080,034 106,094,264
Less:
Allowance for loan losses....... (819,080) (666,524) (1,186,235)
Deferred fees and other
credits........................ (390,220) (447,315) (645,174)
----------- ----------- ------------
Net............................... $99,562,554 $98,966,195 $104,262,855
=========== =========== ============
</TABLE>
F-10
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Association lends to borrowers primarily in its local market area. The
ultimate repayment of these loans is dependent to a certain degree on the local
economy and real estate market.
Nonaccrual loans amounted to $414,769, $901,128, and $631,469, $842,959,
$524,623 at July 31, 1998 and 1997, and December 31, 1997, 1996 and 1995,
respectively. Interest income which should have been earned on these loans
during the seven-month periods ended July 31, 1998 and 1997 and the three years
ended December 31, 1997, 1996 and 1995, was $20,519, $47,242 and $54,087,
$50,301, $64,602, respectively. Interest income recognized on these loans
during the seven-month periods ended July 31, 1998 and 1997 and the three years
ended December 31, 1997, 1996 and 1995, was $20,078, $5,301 and $26,376,
$28,231, $62,010, respectively.
The Association originates and purchases both adjustable and fixed interest
rate loans and mortgage-backed securities. At July 31, 1998, the composition of
these loans and mortgage-backed securities was as follows:
<TABLE>
<CAPTION>
FIXED-RATE ADJUSTABLE-RATE
-----------------------------------------------------------------------------
TERM TO RATE
TERM TO MATURITY BOOK VALUE ADJUSTMENT BOOK VALUE
-------------------------- ------------ -------------------------- ----------
<S> <C> <C> <C>
1 month to 1 year......... $ 4,639,000 1 month to 1 year......... $5,716,000
1 year to 3 years......... 2,873,000 1 year to 3 years......... 3,649,000
3 years to 5 years........ 4,786,000
5 years to 10 years....... 28,513,000
10 years to 20 years...... 53,055,000
Over 20 years............. 46,018,000
------------ ----------
$139,884,000 $9,365,000
============ ==========
</TABLE>
The adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to prime rate or U.S. Treasury rates. Future market factors
may affect the correlation of the interest rate adjustment with the rates the
Association pays on the short-term deposits that have been primarily utilized
to fund these loans.
At July 31, 1998, December 31, 1997 and 1996, the Association had loan
commitments outstanding totaling $1,998,467, $661,303 and $1,067,350,
respectively, of which $1,732,500, $530,700 and $892,350, respectively, were
fixed rate commitments with interest rates ranging from 6.125% to 8.25%, 7.00%
to 14.00% and 7.375% to 8.00%, respectively. These loans are expected to be
funded within three months. At July 31, 1998, the Association had approximately
$1,884,000 and $31,000 in unfunded consumer and commercial lines of credit,
respectively.
The total amount of loans being serviced for the benefit of others was
approximately $1,629,000, $3,116,600, $2,947,000, $3,478,000 and $4,009,000 at
July 31, 1998 and 1997, December 31, 1997, 1996 and 1995, respectively.
An analysis of activity in allowance for loan losses at July 31, 1998 and 1997,
December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
SEVEN-MONTH PERIOD ENDED YEAR ENDED
JULY 31, DECEMBER 31,
-------------------------- ----------------------------------
1998 1997 1997 1996 1995
------------ ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period................. $ 666,524 $ 1,186,235 $1,186,235 $1,068,271 $ 967,629
Provision for loan
losses................. 175,000 233,333 400,000 180,000 180,000
Charge-offs............. (25,633) (28,066) (923,642) (64,934) (79,871)
Recoveries.............. 3,189 1,169 3,931 2,898 513
----------- ------------- ---------- ---------- ----------
Balance, end of period.. $ 819,080 $ 1,392,671 $ 666,524 $1,186,235 $1,068,271
=========== ============= ========== ========== ==========
</TABLE>
F-11
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for loan losses charged to expense is based upon past loan and
loss experiences and an evaluation of estimated losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118. A loan is considered to be impaired when, based upon current information
and events, it is probable that the Association will be unable to collect all
amounts due according to the contractual terms of the loan. An insignificant
delay or insignificant shortfall in amount of payments does not necessarily
result in the loan being identified as impaired. For this purpose, delays less
than 90 days are considered to be insignificant. As of July 31, 1998, 100% of
the impaired loan balance was measured for impairment based on the fair value
of the loans' collateral. Impairment losses are included in the provision for
loan losses. SFAS Nos. 114 and 118 do not apply to large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment,
except for those loans restructured under a troubled debt restructuring.
The following table summarizes impaired loan information:
<TABLE>
<CAPTION>
SEVEN-MONTH YEAR ENDED
PERIOD ENDED DECEMBER 31,
JULY 31, ----------------
1998 1997 1996
------------ ------- --------
<S> <C> <C> <C>
Total recorded investment in impaired loans
with allowance for loan losses in accordance
with SFAS No. 114............................ $81,079 $76,740 $411,413
Total recorded investment in impaired loans
without related allowance for loan losses in
accordance with SFAS No. 114................. 142,000
------- ------- --------
Total recorded investment in impaired loans... $81,079 $76,740 $553,413
======= ======= ========
Total allowance related to impaired loans in
accordance with SFAS No. 114................. $11,545 $ 9,540 $160,000
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD ENDED YEAR ENDED
JULY 31, DECEMBER 31,
---------------- -----------------
1998 1997 1997 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
Average investment in impaired loans.... $76,574 $469,376 $362,430 $530,590
======= ======== ======== ========
Interest income recognized on impaired
loans.................................. $ 2,144 $ 1,824 $ 4,375 $ 11,188
======= ======== ======== ========
Cash basis interest income recognized on
impaired loans......................... $ 2,144 $ 1,824 $ 4,375 $ 11,188
======= ======== ======== ========
</TABLE>
Interest payments on impaired loans are typically applied to principal unless
collectibility of the principal amount is fully assured, in which case interest
is recognized on the cash basis.
For the year ended December 31, 1995, the Association did not have any
investments in impaired loans, as all of the Association's loans were within
large groups of smaller balance homogeneous loans and did not represent
troubled debt restructurings.
Commercial loans are placed on nonaccrual at the time the loan is 60 days
delinquent unless the credit is well secured and in the process of collection.
Generally, commercial loans are charged off no later than after they become 120
days delinquent unless the loan is well secured and in the process of
collection, or other extenuating circumstances support collection. Real estate
loans are typically placed on nonaccrual at the time
F-12
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the loan is 90 days delinquent. Other consumer loans are typically charged off
at 120 days delinquent. In all cases, loans must be placed on nonaccrual or
charged off at an earlier date if collection of principal or interest is
considered doubtful.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at July 31, 1998, December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JULY 31, ---------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Investments and interest-bearing
deposits................................ $1,600,304 $1,339,058 $1,307,557
Mortgage-backed securities............... 324,575 322,874 317,088
Loans receivable......................... 573,552 596,937 825,422
---------- ---------- ----------
Total.................................. $2,498,431 $2,258,869 $2,450,067
========== ========== ==========
</TABLE>
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at July 31, 1998, December 31, 1997 and 1996
are summarized by major classifications as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JULY 31, ------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Land and buildings................... $ 3,354,188 $ 3,330,992 $ 3,316,760
Furniture and equipment.............. 2,289,902 2,237,654 2,364,895
----------- ----------- -----------
Total.............................. 5,644,090 5,568,646 5,681,655
Accumulated depreciation............. (2,396,354) (2,244,792) (2,254,571)
----------- ----------- -----------
Net.................................. $ 3,247,736 $ 3,323,854 $ 3,427,084
=========== =========== ===========
</TABLE>
8. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
DECEMBER 31,
JULY 31, -----------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Passbook and clubs...... $ 36,291,584 15.7% $ 34,492,761 15.4% $ 37,675,443 17.4%
Checking accounts....... 32,973,007 14.3 33,771,748 15.1 31,147,153 14.4
Money market demand..... 43,446,763 18.8 43,656,674 19.6 40,684,107 18.7
------------ ----- ------------ ----- ------------ -----
Subtotal............... 112,711,354 48.8 111,921,183 50.1 109,506,703 50.5
Certificates:
Less than $100,000..... 108,782,308 47.1 102,514,226 46.0 99,391,004 45.8
$100,000 or more....... 9,662,047 4.1 8,770,109 3.9 7,936,509 3.7
------------ ----- ------------ ----- ------------ -----
Subtotal............... 118,444,355 51.2 111,284,335 49.9 107,327,513 49.5
------------ ----- ------------ ----- ------------ -----
Total................... $231,155,709 100.0% $223,205,518 100.0% $216,834,216 100.0%
============ ===== ============ ===== ============ =====
</TABLE>
The weighted average cost of funds was 4.3% at July 31, 1998, December 31, 1997
and 1996. The Association had no brokered deposits at July 31, 1998, December
31, 1997 and 1996.
F-13
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of certificates by maturities is as follows:
<TABLE>
<CAPTION>
JULY 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
One year or less.................. $ 54,681,145 46.2% $ 49,928,359 44.9%
One through three years........... 30,100,636 25.4 30,979,921 27.8
Three through five years.......... 22,849,147 19.3 20,635,169 18.5
Over five years................... 10,813,427 9.1 9,740,886 8.8
------------ ------ ------------ ------
Total.......................... $118,444,355 100.00% $111,284,335 100.00%
============ ====== ============ ======
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
SEVEN-
MONTH PERIOD ENDED
JULY 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Passbook and clubs...... $ 562,601 $ 570,925 $ 978,191 $1,091,380 $1,232,440
Checking accounts....... 371,010 377,106 645,550 580,675 549,020
Money market demand..... 881,369 877,125 1,527,429 1,363,913 1,191,128
Certificates............ 3,869,538 3,560,663 6,202,950 6,110,038 5,630,799
Early withdrawal
penalties.............. (19,170) (17,695) (35,447) (28,453) (23,607)
---------- ---------- ---------- ---------- ----------
Total................ $5,665,348 $5,368,124 $9,318,673 $9,117,553 $8,579,780
========== ========== ========== ========== ==========
</TABLE>
Deposit in amounts in excess of $100,000 are not federally insured.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
At July 31, 1998, December 31, 1997 and 1996, the Association had outstanding
advances from the Federal Home Loan Bank of $176,000 at a rate of 6.615%. The
advances are collateralized by Federal Home Loan Bank stock and substantially
all first mortgage loans.
<TABLE>
<CAPTION>
INTEREST RATE AMOUNT MATURITY
------------- -------- -------------
<S> <C> <C>
6.615% $ 44,000 February 2001
6.615 44,000 April 2001
6.615 44,000 June 2001
6.615 44,000 October 2002
--------
$176,000
========
</TABLE>
10. INCOME TAXES
Income taxes consists of the following:
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD ENDED
JULY 31, YEAR ENDED DECEMBER 31,
------------------ -------------------------------
1998 1997 1997 1996 1995
-------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Current:
Federal............... $743,303 $594,257 $1,038,627 $673,487 $ 990,200
State................. 62,700 60,900 106,200 54,600 92,949
-------- -------- ---------- -------- ----------
Total current....... 806,003 655,157 1,144,827 728,087 1,083,149
Deferred federal income
taxes (benefit)........ (54,203) 74,943 128,473 (74,287) 37,251
-------- -------- ---------- -------- ----------
Total income taxes.. $751,800 $730,100 $1,273,300 $653,800 $1,120,400
======== ======== ========== ======== ==========
</TABLE>
F-14
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Association's provision for income taxes differs from the amounts
determined by applying the statutory federal income tax rate to income taxes
for the following reasons:
<TABLE>
<CAPTION>
SEVEN-MONTH PERIOD ENDED JULY 31,
-----------------------------------
1998 1997
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
At statutory rate...................... $731,026 35.0% $710,225 35.0%
Surtax exemption....................... (20,886) (1.0) (20,292) (1.0)
Adjustments resulting in:
State tax--net of federal tax provi-
sion................................ 41,382 2.0 40,194 2.0
Other, net........................... 278 (27)
-------- ---- -------- ----
Total.............................. $751,800 36.0% $730,100 36.0%
======== ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
------------------- ----------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
At statutory rate....... $1,238,582 35.0% $633,574 35.0% $1,100,425 35.0%
Surtax exemption........ (35,388) (1.0) (18,102) (1.0) (31,441) (1.0)
Adjustments resulting
in:
State tax--net of
federal tax
provision............ 69,030 2.0 35,490 2.0 57,505 1.8
Tax exempt interest... (5,593) (0.2)
Other, net............ 1,076 2,838 0.2 (496)
---------- ---- -------- ---- ---------- ----
Total............... $1,273,300 36.0% $653,800 36.2% $1,120,400 35.6%
========== ==== ======== ==== ========== ====
</TABLE>
Items that gave rise to significant portions of the deferred tax accounts at
July 31, 1998, December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JULY 31, -------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Deferred tax assets:
Deferred loan costs........................ $ 56,794 $ 58,289 $ 69,068
Deferred loan fees......................... 100,581 121,020 127,248
Other...................................... 7,976
Allowance for loan loss.................... 22,186 26,459
--------- --------- --------
Total.................................... 179,561 179,309 230,751
--------- --------- --------
Deferred tax liabilities:
Property................................... (108,888) (83,608) (85,808)
Allowance for loan loss.................... (79,231)
--------- --------- --------
Total.................................... (108,888) (162,839) (85,808)
--------- --------- --------
Total.................................... $ 70,673 $ 16,470 $144,943
========= ========= ========
</TABLE>
The Association is permitted under the Internal Revenue Code (the "Code") to
deduct an annual addition to the reserve for bad debts in determining taxable
income, subject to certain limitations. The Association's deduction is based
upon the percentage of taxable income method as defined by the Code. The bad
debt deduction allowable under this method equals 8% of taxable income
determined without regard to that
F-15
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
deduction and with certain adjustments. This addition differs from the bad debt
experience used for financing accounting purposes.
In August 1996, the Small Business Job Protection Act (the "Act") was signed
into law. The Act repealed the percentage of taxable income method of
accounting for bad debts for thrift institutions effective for years beginning
after December 31, 1995. The Act required the Association as of January 1, 1996
to change its method of computing reserves for bad debts to the experience
method. The bad debt deduction allowable under this method is available to
small banks with assets less than $500 million. Generally, this method allows
the Association to deduct an annual addition to the reserve for bad debts equal
to the increase in the balance of the Association's reserve for bad debts at
the end of the year to an amount equal to the percentage of total loans at the
end of the year, computed using the ratio of the previous six years' net
charge-offs divided by the sum of the previous six years' total outstanding
loans at year-end.
A thrift institution required to change its method of computing reserves for
bad debts will treat such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first
taxable year beginning after December 31, 1995. The timing of this recapture
may be delayed for a two-year period provided certain residential loan
requirements are met. For financial reporting purposes, the Association has not
incurred any additional tax expense. Amounts which had previously been deferred
will be reversed for financial reporting purposes and will be included in the
income tax return of the Association, increasing income tax payable. At July
31, 1998, under SFAS No. 109, deferred taxes were provided on the difference
between the book reserve at July 31, 1998 and the applicable excess reserve in
the amount equal to the Association's increase in the tax reserve from December
31, 1988 to July 31, 1998. Retained earnings at July 31, 1998, December 31,
1997, 1996 and 1995 include approximately $3,100,000 representing bad debt
deductions for which no deferred income taxes need to be provided.
11. DEFINED CONTRIBUTION PLAN
The Association has a noncontributory, defined contribution plan for all
regular full-time employees meeting certain eligibility requirements. Expense
related to the plan, which is based on a percentage of the participants'
salaries as provided by the plan, was $164,500, $157,500, and $266,234,
$280,350, $241,759 for the seven-month periods ended July 31, 1998 and 1997 and
the three years ended December 31, 1997, 1996 and 1995, respectively.
12. REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) of tangible and core capital (as defined in the regulations)
to total adjusted assets (as defined), and tier 1 risk-based and risk-based
capital (as defined) to risk-weighted assets (as defined). Management believes,
as of July 31, 1998, that the Association meets all capital adequacy
requirements to which it is subject.
F-16
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision (OTS) categorized the Association as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Association must maintain minimum core and risk-based ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Association's category.
The Association's actual tangible, core and tier 1 risk-based capital equals
its retained earnings as of July 31, 1998, December 31, 1997 and 1996. Included
in the Association's actual risk-based capital are permitted amounts of the
allowance for loan losses of $807,535, $653,278 and $1,026,235 as of July 31,
1998, December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
REQUIRED FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ------------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
As of July 31, 1998:
Tangible Capital...... $26,026,162 10.02% $ 3,896,000 1.50% N/A N/A
Core Capital.......... 26,026,162 10.02 7,791,000 3.00 $12,985,000 5.00%
Tier 1 Risk-Based
Capital.............. 26,026,162 26.56 N/A N/A 15,583,000 6.00
Risk-Based Capital.... 26,833,697 28.16 7,624,000 8.00 9,530,000 10.00
As of December 31, 1997:
Tangible Capital...... $24,689,315 9.88% $ 3,747,067 1.50% N/A N/A
Core Capital.......... 24,689,315 9.88 7,494,135 3.00 $12,490,224 5.00%
Tier 1 Risk-Based
Capital.............. 24,689,315 26.56 N/A N/A 5,576,940 6.00
Risk-Based Capital.... 25,342,593 27.27 7,435,920 8.00 9,294,900 10.00
As of December 31, 1996:
Tangible Capital...... $22,423,810 9.30% $ 3,618,179 1.50% N/A N/A
Core Capital.......... 22,423,810 9.30 7,236,358 3.00 $12,060,596 5.00%
Tier 1 Risk-Based
Capital.............. 22,423,810 23.81 N/A N/A 5,649,900 6.00
Risk-Based Capital.... 23,450,045 24.90 7,533,200 8.00 9,416,500 10.00
</TABLE>
F-17
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures about
Fair Value of Financial Instruments. The estimated fair value amounts have been
determined by the Association using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Association could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
JULY 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------ ------------------
ESTIMATED ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- --------- -------- ---------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents.......... $ 17,210 $ 17,210 $ 19,200 $ 19,200 $ 10,894 $ 10,894
Investment
securities........... 87,056 87,393 79,034 79,602 77,110 77,128
Mortgage-backed
securities........... 48,352 49,396 45,231 45,663 41,398 41,174
Loans receivable,
net.................. 99,563 101,013 98,966 100,694 104,263 105,521
Liabilities:
Deposits.............. 231,155 232,666 223,206 224,372 216,834 217,551
Advances from Federal
Home Loan Bank....... 176 176 176 176 176 176
</TABLE>
The estimated fair value of marketable securities is based on quoted market
prices, dealer quotes and prices obtained from independent pricing services.
For July 31, 1998, the fair value of mortgage-backed securities is based on
dealer quotes and for December 31, 1997 and 1996 the fair value of mortgage-
backed securities is estimated based on the pricing tables published by the
OTS. For July 31, 1998 and December 31, 1997 and 1996, the fair value of loans
is based on the pricing tables published by the OTS.
The fair value of demand deposits, savings accounts and advances is the amount
reported in the financial statements. The fair value of time deposits is based
on the pricing tables published by the OTS as of July 31, 1998, December 31,
1997 and 1996.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The deferred income amounts of approximately $3,800, $1,300 and
$2,300 at July 31, 1998, December 31, 1997 and 1996, respectively, on such off-
balance sheet financial instruments approximate their fair values.
The fair value estimates presented herein are based on pertinent information
available to management as of July 31, 1998, December 31, 1997 and 1996.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since July 31, 1998,
December 31, 1997 and 1996 and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
F-18
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. SAVINGS ASSOCIATION INSURANCE FUND
On September 30, 1996, an omnibus appropriations bill was enacted which
included the recapitalization of the Savings Association Insurance Fund (SAIF).
Accordingly, all SAIF insured depository institutions were charged a one-time
special assessment on the SAIF-assessable deposits as of March 31, 1995 at a
rate of 65.7 basis points. As such, the Association incurred a pre-tax expense
of $1,313,798 in 1996.
15. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP (UNAUDITED)
On July 28, 1998, the Board of Directors of the Association adopted a Plan of
Conversion (the "Plan") to convert from a state chartered mutual savings and
loan association to a state chartered capital stock savings and loan
association with the concurrent formation of a holding company (the "Company"),
subject to approval by regulatory authorities and members of the Association.
Pursuant to the Plan, all of the Association's outstanding capital stock will
be issued to the Company. A subscription offering of the shares of common stock
of the Company will be offered initially to eligible account holders, employee
benefit plans of the Association, supplemental eligible account holders, other
members, directors, officers and employees of the Association. Any shares of
common stock not sold in the subscription offering are expected to be sold by
the marketing agent to the general public.
The Association plans to establish an ESOP for the benefit of eligible
employees, to become effective upon the conversion. The ESOP intends to
purchase up to 8% of the common stock issued in the conversion utilizing
proceeds of a loan from the Company or a third-party lender. The loan will be
repaid over a period of 15 years and the collateral for the loan will be the
common stock purchased by the ESOP.
Pursuant to the Plan, the Company intends to establish a charitable foundation
("Foundation") in connection with the conversion. The Plan provides that the
Association and the Company will create the Foundation and donate an amount of
the Company's common stock equal to 8% of the common stock to be sold in the
conversion. The Foundation will be dedicated to charitable purposes within the
communities in which the Association operates and to complement the
Association's existing community activities.
At the time of the conversion, the Association will establish a liquidation
account in an amount equal to its equity as reflected in the latest balance
sheet used in the final conversion prospectus. The liquidation account will be
maintained for the benefit of eligible account holders and supplemental
eligible account holders who continue to maintain their accounts at the
Association after the conversion. In the event of a complete liquidation of the
Association, each eligible account holder and supplemental eligible account
holder will be entitled to receive a distribution from the liquidation account
in an amount proportionate to the current adjusted qualifying balances for
accounts then held.
The costs associated with conversion will be deferred and will be deducted from
the proceeds upon the sale and issuance of stock. In the event the conversion
is not consummated, costs incurred will be charged to expense. At July 31,
1998, no conversion costs have been incurred or capitalized.
Subsequent to the conversion, the Association may not declare or pay cash
dividends on, or repurchase any, of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
F-19
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY SOUTH JERSEY FINANCIAL CORPORATION, INC., THE ASSOCIATION OR SANDLER O'NEILL
& PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO-
LICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PER-
SON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF SOUTH JERSEY FINANCIAL CORPORATION, INC. OR
THE ASSOCIATION SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED
HEREIN OR SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Questions and Answers About the Stock Offering........................... 3
Summary.................................................................. 4
Risk Factors............................................................. 7
Selected Financial and Other Data of the Association..................... 10
Recent Developments...................................................... 13
South Jersey Financial Corporation, Inc.................................. 19
South Jersey Savings and Loan Association................................ 20
Regulatory Capital Compliance............................................ 21
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 24
Market for the Common Stock.............................................. 24
Capitalization........................................................... 25
Pro Forma Data........................................................... 27
Comparison of Valuation and Pro Forma Information With No Foundation..... 33
South Jersey Savings and Loan Association Statements of Income........... 34
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
Business of the Association.............................................. 49
Federal and State Taxation............................................... 68
Regulation............................................................... 70
Management of the Company................................................ 78
Management of the Association............................................ 79
The Conversion........................................................... 89
Restrictions on Acquisition of the Company and the Association........... 114
Description of Capital Stock of the Company.............................. 120
Description of Capital Stock of the Association.......................... 121
Transfer Agent and Registrar............................................. 122
Experts.................................................................. 122
Legal and Tax Opinions................................................... 122
Additional Information................................................... 122
Index of Financial Statements............................................ F-1
</TABLE>
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UNTIL JANUARY 22, 1999 OR 25 DAYS AFTER COMMENCEMENT OF THE COMMUNITY OFFERING
AND/OR SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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3,783,500 SHARES
South Jersey Financial
Corporation, Inc.
Proposed Holding Company for
[LOGO] South Jersey Savings
and Loan Association
COMMON STOCK
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PROSPECTUS
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DECEMBER 16, 1998
Sandler O'Neill & Partners, L.P.
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