<PAGE>
As filed with the Securities and Exchange Commission on December 2, 1998
Registration No. 333-65519
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SOUTH JERSEY FINANCIAL CORPORATION, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CERTIFICATE OF INCORPORATION)
<TABLE>
<S> <C> <C>
DELAWARE 6036 22-3615289
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
<TABLE>
<S> <C>
4651 ROUTE 42 SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
TURNERSVILLE, NEW JERSEY 08012 4651 ROUTE 42
(609) 629-6000 TURNERSVILLE, NEW JERSEY 08012
(609) 629-6000
(Address and Telephone Number of Principal Executive (Address of Principal Place of Business or Intended Principal Place of
Offices) Business)
</TABLE>
ROBERT J. COLACICCO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
4651 ROUTE 42
TURNERSVILLE, NEW JERSEY 08012
(609) 629-6000
(Name, Address and Telephone Number of Agent for Service)
Copies to:
JOSEPH A. MULDOON, JR., ESQUIRE
THOMAS J. HAGGERTY, ESQUIRE
KENT M. KRUDYS, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
Proposed
Maximum Proposed Maximum
Title of each Class of Amount to Offering Price Aggregate Offering Amount of
Securities to be Registered be Registered Per Unit Price (1) Registration Fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 4,699,107
$.01 par Value Shares(2) $10.00 $46,991,070 (3)
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes shares to be issued to South Jersey Savings Charitable Foundation,
a privately-formed charitable foundation.
(3) The Registration of $13,863 was previously paid upon the initial filing of
the Form SB-2 on October 9, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
[TO BE USED IN CONNECTION WITH SYNDICATED COMMUNITY OFFERING ONLY]
PROSPECTUS SUPPLEMENT FOR SYNDICATED COMMUNITY OFFERING
[LOGO] SOUTH JERSEY FINANCIAL CORPORATION, INC.
(Proposed Holding Company for South Jersey Savings and Loan Association)
4651 ROUTE 42
TURNERSVILLE, NEW JERSEY 08012
(609) 629-6000
================================================================================
_____________ shares of common stock are offered for sale in this
Syndicated Community Offering, in connection with South Jersey Savings and Loan
Association's conversion from the mutual to stock form of organization. As part
of such conversion, South Jersey Savings and Loan Association will become a
wholly owned subsidiary of South Jersey Financial Corporation, Inc. The
remaining _________ shares to be sold in the conversion have been subscribed for
in Subscription and Community Offerings. No common stock will be sold if
subscriptions are not received for at least the minimum number of shares.
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.
================================================================================
TERMS OF THE OFFERING
THIS SYNDICATED COMMUNITY OFFERING WILL EXPIRE NO LATER THAN 12:00 NOON,
EASTERN TIME, ON ____________, 1999, UNLESS EXTENDED.
. Price Per Share $10.00
. Number of Shares
Minimum/Maximum
. Underwriting Commissions and Other Expenses
Minimum/Maximum
. Net Proceeds to South Jersey Financial Corporation, Inc.
in Syndicated Community Offering
Minimum/Maximum
. Net Proceeds per Share to South Jersey Financial
Corporation, Inc. in Subscription, Community
and Syndicated Community Offerings
Minimum/Maximum
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE __ OF THIS DOCUMENT.
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 SUPPLEMENT IS _______________, 1999
<PAGE>
THE SYNDICATED COMMUNITY OFFERING
South Jersey Financial Corporation, Inc. is offering for sale in a
Syndicated Community Offering a minimum of ___________ shares and up to
__________ shares of common stock, at a per share price of $10.00. These share
are to be sold upon the conversion of South Jersey Savings and Loan Association,
Turnersville, New Jersey from a mutual to a stock association and the issuance
of the Association's outstanding capital stock to the Company. The remaining
__________ shares of common stock to be sold in connection with such conversion
have been subscribed for in Subscription and Community Offerings by holders of
deposit accounts with the Association with a balance of $50 or more as of June
30, 1997, by the South Jersey Savings and Loan Association Employee Stock
Ownership Plan, a tax-qualified employee benefit plan, and related trust, by
holders of deposit accounts with the Association with a balance of $50 or more
as of September 30, 1998, by certain other account holders and borrowers of the
Association and, by members of the general public. Following this Prospectus
Supplement is the Prospectus in the form used in the Subscription and Community
Offerings. The purchase price for all shares sold in the Syndicated Community
Offering will be the same as the price paid by subscribers in the Subscription
and Community Offerings.
Funds submitted to the Association with purchase orders will earn interest
at the Association's passbook rate of interest from the date of receipt until
completion or termination of the conversion. THIS SYNDICATED COMMUNITY OFFERING
WILL EXPIRE NO LATER THAN _______________, 1999, UNLESS EXTENDED BY THE
ASSOCIATION AND THE COMPANY WITH THE APPROVAL OF THE OFFICE OF THRIFT
SUPERVISION. Such extensions may not go beyond _______________, 2001. If the
Syndicated Community Offering is extended, all subscribers will be notified of
such extension, and of their rights to confirm their subscriptions, or to modify
or rescind their subscriptions and have their funds returned promptly with
interest, and of the time period within which the subscriber must notify the
Association of his intention to confirm, modify or rescind his subscription. If
an affirmative response to any resolicitation is not received by the Association
and the Company from subscribers, such orders will be rescinded and all funds
will be returned promptly with interest. The minimum number of shares which may
be purchased is 25 shares. Except for the ESOP, which may purchase up to 10% of
the total number of shares of Common Stock issued in the conversion, no person,
together with associates of and persons acting in concert with such person, may
purchase in the Community Offering or Syndicated Community Offering more than
the total number of shares offered that could be purchased for $200,000 at the
Purchase Price; provided however, that shares of common stock purchased in the
Community Offering by any persons, together with associates of and persons
acting in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of 1.0% of the shares offered. The Company reserves the right, in
its absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the Syndicated Community Offering.
The Company and the Association have engaged Sandler O'Neill & Partners,
L.P. as financial advisors to assist them in the sale of the common stock in the
Syndicated Community Offering. It is anticipated that Sandler O'Neill will use
the services of other registered broker-dealers and that fees to Sandler O'Neill
and such selected dealers will not exceed 7.0% of the aggregate purchase price
of the shares sold in the Syndicated Community Offering. Neither Sandler
O'Neill nor any selected dealer shall have any obligation to take or purchase
any shares of common stock in the Syndicated Community Offering.
The Company has received conditional approval to have its common stock
quoted on the Nasdaq National Market under the symbol "SJFC." Prior to this
offering, there has not been a public market for the common stock, and there can
be no assurance that an active and liquid trading market for the common stock
will develop. The absence or discontinuance of a market may have an adverse
impact on both the price and liquidity of the stock.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES __ TO __ OF THE PROSPECTUS.
2
<PAGE>
PROSPECTUS
[LOGO] SOUTH JERSEY FINANCIAL CORPORATION, INC.
(Proposed Holding Company for 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 in accordance with a plan of conversion which
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 and Loan Association. As part of such
conversion, South Jersey Savings and Loan Association will become a wholly owned
subsidiary of South Jersey Financial Corporation, Inc. South Jersey Financial
Corporation, Inc. is offering shares of its common stock for sale to the public.
No common stock will be sold if the conversion is not approved as required or if
subscriptions are not received for at least the minimum number of shares.
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.
================================================================================
TERMS OF THE OFFERING
The shares are offered first in a Subscription Offering to persons who have
specified priorities of subscription rights based on their relationship with the
Association. 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 THE ASSOCIATION PRIOR TO THE EXPIRATION DATE,
12:00 NOON, EASTERN TIME, ON ____________, 1999, UNLESS EXTENDED. Shares of
common stock not subscribed for in the Subscription Offering will be offered to
members of the general public in a Community Offering with a preference given to
natural persons residing in Gloucester and Camden Counties, New Jersey and, if
necessary, a Syndicated Community Offering or other offering.
An independent appraiser has estimated the aggregate pro forma market value
of the common stock to be sold in the conversion to be between $27,965,000 and
$37,835,000. If the aggregate estimated pro forma market value of such stock 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.
<TABLE>
<CAPTION>
<S> <C> <C>
. Price Per Share $10.00
. Number of Shares
Minimum/Maximum 2,796,500 to 3,783,500
. Underwriting Commissions and Other Expenses
Minimum/Maximum $1,157,000 to $1,269,000
. Net Proceeds to South Jersey Financial Corporation, Inc.
Minimum/Maximum $26,808,000 to $36,566,000
. Net Proceeds per Share
Minimum/Maximum $9.59 to $9.66
</TABLE>
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE __ OF THIS DOCUMENT.
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.
_______________, 1998
<PAGE>
[Map of the State of New Jersey, with enlarged inset of Camden and Gloucester
Counties located in Southwestern New Jersey, which contains the location of the
Association's three branch offices. The map also lists the name and address of
each branch office. The branch offices are located in Turnersville,
Collingswood and Glendora, New Jersey.]
2
<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. To understand the stock offering fully, you
should read carefully this entire Prospectus, including the financial
statements and the notes to the financial statements of South Jersey
Savings and Loan Association.
. References in this document to the "Association" refer to South Jersey
Savings and Loan Association, and references to the "Company" refer to
South Jersey Financial Corporation, Inc. References in this document to
"we," "us" and "our" refer to the Association. Where appropriate, "we,"
"us" or "our" refer collectively to the Association and the Company.
SOUTH JERSEY FINANCIAL
CORPORATION, INC. ........... South Jersey Financial Corporation, Inc. was
recently formed by the Association to become the
holding company of the Association upon
completion of the Association's conversion to
stock form. To date, the Company has not engaged
in any business.
The Company's office is located at 4651 Route
42, Turnersville, New Jersey 08012 and its
telephone number is (609) 629-6000. The
Association's executive office has the same
address and phone number.
SOUTH JERSEY SAVINGS AND LOAN
ASSOCIATION.................. The Association is a New Jersey mutual savings
and loan association. At July 31, 1998, the
Association had total assets of $259.7 million,
total deposits of $231.2 million and total
equity of $26.0 million.
The Association operates three banking offices
in Gloucester and Camden Counties in Southwest
New Jersey. The Association historically has
operated as a community-oriented banking
institution primarily offering one- to four-
family residential mortgage loans and consumer
loans and a variety of retail deposit products.
TERMS OF THE OFFERING.......... The Company is offering shares of common stock
at a fixed price of $10.00 per share in the
Subscription Offering pursuant to subscription
rights in the following order of priority:
(1) Eligible Account Holders in the Association
as of June 30, 1997;
(2) the South Jersey Savings and Loan
Association Employee Stock Ownership Plan
(the "ESOP");
(3) Supplemental Eligible Account Holders in the
Association as of September 30, 1998 who are
not entitled to a first priority
subscription right; and
(4) Other Members in the Association as of June
30, 1997 who are not entitled to a higher
priority subscription right. See "The
Conversion-- Subscription Offering and
Subscription Rights" for the complete
qualifications of each of the subscription
priorities.
3
<PAGE>
Shares of common stock not subscribed for in the
Subscription Offering will be offered to members
of the general public in a Community Offering
with a preference given to natural persons
residing in Gloucester and Camden Counties, New
Jersey and, if necessary, a Syndicated Community
Offering or other offering.
THE CONVERSION................. The Company is offering its common stock for
sale as part of the conversion of the
Association from mutual to stock form. Such
conversion is being effected pursuant to a Plan
of Conversion, as amended, adopted by the
Association. The conversion is subject to
requirements of the Office of Thrift Supervision
and the New Jersey Department of Banking and
Insurance. This conversion, which is referred to
as the "Conversion," is governed by the Plan of
Conversion and has three major components:
(1) The conversion of the Association to stock
form;
(2) The acquisition by the Company of all of the
outstanding capital stock of the
Association; and
(3) The sale by the Company of shares of its
common stock.
Currently, members of the Association possess
all voting rights in the Association. After the
Conversion, members of the Association will no
longer have voting rights in the Association.
The Company, as sole stockholder of the
Association, will possess all voting rights of
the Association. Voting rights of the Company
will be vested in the holders of the Company's
common stock.
The Conversion will occur only if members of the
Association approve the Plan of Conversion at a
meeting of members called for that purpose. The
Association is required to send to its members
of record as of the voting record date for such
meeting a proxy statement which describes the
Conversion. This Prospectus also is being
delivered to all such members entitled to vote
at such meeting and contains information
incorporated by reference in the Association's
proxy statement for the meeting, as specified in
such proxy statement.
EXPIRATION DATE OF
SUBSCRIPTION OFFERING......... Subscription rights will expire if not
exercised. All orders to purchase common stock
in the Subscription Offering must be received by
12:00 noon, Eastern time, on ________, 1999,
unless extended, which is the "Expiration Date."
We will not accept any subscription orders until
all shares of common stock to be sold in the
Conversion 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 Office of Thrift Supervision, all
funds delivered to us pursuant to the
Subscription Offering will be returned promptly
to you with interest and all withdrawal
authorizations will be cancelled. If an
extension beyond the 45 day period following the
Expiration Date is granted, we will notify you
of the extension of time and of your rights to
modify or rescind your subscriptions and have
your funds returned promptly with interest, and
of the time period within which you must
affirmatively notify us of your intention to
confirm, modify, or rescind your subscription.
If an affirmative response to such
resolicitation is not received by us from you,
your order will be rescinded and all
subscription funds will be promptly returned
with interest. Such extensions may not go beyond
______________, 2001.
4
<PAGE>
NONTRANSFERABILITY OF
SUBSCRIPTION RIGHTS........... Subscription rights are not transferable.
Certificates representing shares of common stock
purchased in the Subscription Offering must be
registered in the name of the Eligible Account
Holder, the Supplemental Eligible Account Holder
or the Other Member, as the case may be. Joint
stock registration will be allowed only if the
qualifying deposit account is in the name of
both parties.
NUMBER OF SHARES OFFERED....... The Company is offering between a minimum of
2,796,500 shares and a maximum of 3,783,500
shares of common stock, or up to an adjusted
maximum of 4,351,025 shares if the maximum
number of shares is increased.
The number of shares offered is based upon an
independent appraisal prepared by FinPro, Inc.
("FinPro") dated as of October 7, 1998, which
estimates that the aggregate pro forma market
value of the common stock to be sold in the
Conversion ranges from $28.0 million to $37.8
million. (This range is referred to as the
"Estimated Price Range".) FinPro is an
independent appraisal firm experienced in
appraisals of savings institutions.
FinPro will update the appraisal before the
completion of the Conversion. The final
aggregate estimated pro forma market value of
the common stock to be sold in the Conversion
will be determined at the close of the
Subscription Offering, or if all shares are not
sold in the Subscription Offering, the close of
the Community Offering or other subsequent
offering. The estimated aggregate pro forma
market value may change due to changes in market
and general financial and economic conditions.
For its services, FinPro will receive a fee of
$31,000.
If the aggregate estimated pro forma market
value of the common stock to be sold in the
Conversion is increased, then the maximum number
of shares to be sold may also be increased up to
the adjusted maximum.
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, or the "Foundation." The
Foundation will be dedicated to the support and
promotion of charitable purposes in the
communities in which we operate. The Company
intends to contribute to the Foundation shares
of its common stock equal to 8% of the common
stock sold in the Conversion. The Board of
Directors of the Foundation will have authority
for the affairs of the Foundation. All shares
held by the Foundation are expected to be voted
on a pro rata basis in accordance with all other
shares of outstanding common stock. Because the
Company is funding the Foundation with
authorized but unissued common stock, the
Company will have an increased number of shares
outstanding following the Conversion and the
voting and ownership interests of shareholders
of the Company's common stock will be diluted by
7.4%. Establishing the Foundation in connection
with the Conversion results in a lower aggregate
estimated pro forma market value than if the
Conversion were completed without the
Foundation.
HOW DO I ORDER STOCK?.......... If you are entitled to a subscription right, you
may order shares in the Subscription Offering by
delivering to us a properly executed stock order
and certification form along with full payment
for the shares ordered. Your stock order and
certification
5
<PAGE>
form must be received by us on or before the
Expiration Date, which is _________, 1999. ONCE
WE RECEIVE YOUR SUBSCRIPTION ORDER, IT CANNOT BE
REVOKED OR MODIFIED WITHOUT OUR CONSENT. All
funds received by us to purchase common stock
will be placed in a deposit account at the
Association. Please make sure that you review
the Prospectus carefully prior to submitting an
order. All stock order and certification forms
must be accompanied or preceded by a Prospectus.
To ensure that each purchaser receives a
Prospectus at least 48 hours prior to the
Expiration Date, in accordance with the rules
and regulations of the Securities and Exchange
Commission, we will not mail a Prospectus any
later than five days before the Expiration Date
or hand deliver a Prospectus any later than two
days before the Expiration Date. We are not
obligated to accept subscription orders
submitted without an original stock order and
certification form.
If you want to order shares offered in the
Community Offering, you must submit a properly
executed stock order and certification form
before the expiration date to be set for the
Community Offering.
FORM OF PAYMENT FOR SHARES..... Payment for your subscriptions may be made:
(1) in cash (if delivered in person at any
branch office of the Association);
(2) by check, bank draft or money order; or
(3) by authorization of withdrawal from your
deposit accounts maintained at the
Association.
NUMBER OF SHARES THAT YOU MAY
ORDER......................... Minimum: 25 shares ($250).
Maximum:
. No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member may
purchase in the Subscription Offering more
than $200,000 of common stock.
. No person, together with associates or persons
acting in concert with such person, may
purchase in the Community Offering more than
$200,000 of common stock.
. No person, together with associates or persons
acting in concert with such person, may
purchase in the aggregate more than 1% of the
common stock sold in the Conversion, exclusive
of any increase in the maximum of the
Estimated Price Range. However, a 10% limit is
applicable to purchases in the Conversion by
tax-qualified employee benefit plans, such as
the ESOP.
USE OF PROCEEDS................ The Company will use 50% of the net proceeds
from the sale of the common stock to purchase
all of the Association's common stock issued in
the Conversion. The Company will use the rest of
the net proceeds for general business
activities, including lending money to the ESOP
(to the extent that such loan is not made by a
third party) to enable the ESOP to purchase up
to 8% of the common stock sold in the Conversion
and issued to the Foundation. The Company will
initially invest the remaining net proceeds in
federal funds and securities, primarily
mortgage-backed securities and U.S. government
and agency obligations. The Association
6
<PAGE>
will use the net proceeds that it receives
from the sale of its common stock to the
Company for general business purposes,
including investment in loans and mortgage-
backed and investment securities, and a
planned expansion of its operations
facilities. The Association may also use such
funds to expand its facilities or operations.
DIVIDEND POLICY.................. While the Company has not made any decision
concerning the payment of dividends, it
intends to consider whether to pay cash or
stock dividends on the common stock.
Additionally, the Company has committed to the
OTS that during the one-year period following
the Conversion, the Company will not make,
without the approval of the OTS, any
distribution to stockholders that, for federal
tax purposes, would be treated as a return of
capital.
BENEFITS OF THE CONVERSION TO
MANAGEMENT...................... One of the advantages anticipated from the
Conversion will be the ability to attract and
retain quality personnel through the use of
stock related benefit programs. We intend to
establish the ESOP, which it is contemplated
would purchase common stock equal to 8% of the
shares sold in the Conversion and issued to
the Foundation. The ESOP will be a tax
qualified retirement benefit for all eligible
employees. It is anticipated that the common
stock purchased by the ESOP in the Conversion
will be allocated as required under Internal
Revenue Code standards to eligible employees
over an approximate 15 year period.
Second, after the Conversion, the Company
intends to adopt a stock-based incentive plan
for the benefit of directors, officers and
employees. If the stock-based incentive plan
is adopted within one year after the
Conversion, it will be required to be approved
by stockholders at a meeting which may not be
held earlier than six months after the
Conversion, and any awards or options granted
under the plan would have to vest at least on
a pro rata basis over a five year period.
The following table presents information
regarding the aggregate of the shares of
common stock, at the maximum of the Estimated
Price Range, which would be acquired by the
ESOP and allocated over an anticipated 15 year
period to all eligible employees and the
aggregate of all shares available for award
and issuance upon the exercise of options
granted under the stock-based incentive plan:
<TABLE>
<CAPTION>
Percentage of Shares
Estimated Sold in Conversion and
Value of Shares(1) Issued to the Foundation
------------------ -------------------------
<S> <C> <C>
Employee Stock Ownership Plan... $3,268,940 8.0%
Stock-Based Incentive Plan:
Stock Awards(2)............... 1,634,470 4.0
Stock Options(3).............. -- 10.0
---------- ----
Total....................... $4,903,410 22.0%
========== ====
___________________
(1) Assumes that shares are valued at $10.00 per share.
(2) Common stock awarded under the stock-based incentive plan will be awarded
at no cost to the recipients.
(3) 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 of stock options
realize value only in the event of an increase in the price of the common
stock following the date of grant of the stock options.
</TABLE>
7
<PAGE>
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 the Company or the Association.
The stock-based incentive plan may also
provide participants with benefits upon a
change in control.
VOTING CONTROL OF OFFICERS
AND DIRECTORS................... Our directors and executive officers intend to
purchase an aggregate of approximately 2.7% of
the shares of common stock sold in the
Conversion assuming that shares are sold at
the maximum of the Estimated Price Range. If
the ESOP is implemented and the stock-based
incentive plan and all stock awards and stock
options available under the stock-based
incentive plan are granted and all such
options are exercised, then the Company's
directors, officers and employees, in the
aggregate, could vote shares of common stock
equal to 23.6% of the shares sold in the
Conversion and issued to the Foundation. Such
vote percentage could defeat stockholder
proposals requiring 80% approval of
stockholders. As a result, this potential
voting control may preclude takeover attempts
that some stockholders determine to be in
their best interests and may tend to
perpetuate existing management.
NO BOARD RECOMMENDATIONS......... Our Boards of Directors make no recommendation
to you regarding whether you should purchase
the common stock. An investment in the common
stock must be made pursuant to an evaluation
of your best interests and financial
capabilities.
CONVERSION CENTER................ If you have any questions regarding the
Conversion, please call the Conversion Center
at (609) ___-____.
8
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The selected financial and other data of the Association set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Association and Notes thereto presented elsewhere in this
Prospectus. The data presented for the seven months 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 months ended July 31, 1998, are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1998. All operating results presented for selected
financial ratios and other data for the seven month periods ended July 31, 1998
and 1997 are presented on an annualized basis.
<TABLE>
<CAPTION>
AT
JULY 31, AT DECEMBER 31,
-------- ------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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>
9
<PAGE>
<TABLE>
<CAPTION>
FOR THE SEVEN
MONTHS ENDED
JULY 31, FOR THE YEAR ENDED DECEMBER 31,
---------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<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
10
<PAGE>
<TABLE>
<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>
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 order to
recapitalize the Savings Association Insurance Fund (the "SAIF") in 1996.
(2) The efficiency ratio represents the ratio of noninterest expenses divided by
the sum of the net interest income and noninterest income.
11
<PAGE>
RECENT DEVELOPMENTS
The following table sets forth certain consolidated financial and other
data of the Association at and for the periods indicated. Consolidated
financial and operating data and financial ratios and other data at and for the
year ended December 31, 1997 have been derived and should be read in conjunction
with the audited Consolidated Financial Statements of the Association and Notes
thereto presented elsewhere in this Prospectus. The data presented for the nine
months ended September 30, 1998 and 1997 were derived from unaudited
consolidated 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 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. All
operating results presented for selected financial ratios and other data for the
nine month periods ended September 30, 1998 and September 30, 1997 are presented
on an annualized basis.
<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>
12
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Total interest income..................................... $13,648 $13,136
Total interest expense.................................... 7,348 6,940
------- -------
Net interest income...................................... 6,300 6,196
Provision for loan losses................................. 225 300
------- -------
Net interest income after provision
for loan losses........................................ 6,075 5,896
Noninterest income........................................ 463 466
Noninterest expense....................................... 3,886 3,719
------- -------
Income before income taxes................................ 2,652 2,643
Income taxes.............................................. 954 951
------- -------
Net income............................................... $ 1,698 $ 1,692
======= =======
<CAPTION>
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Average yield on interest earning assets.................. 7.33% 7.43%
Average rate paid on interest-bearing liabilities......... 4.30 4.26
Average interest rate spread.............................. 3.03 3.17
Net interest margin....................................... 3.37 3.49
Ratio of average interest-earning assets to
average interest-bearing liabilities..................... 108.82 108.28
Net interest income after provision for loan
losses to noninterest expense............................ 156.33 158.54
Efficiency Ratio (1)...................................... 57.46 55.82
Noninterest expense as a percent of
average assets........................................... 2.03 2.04
Return on average assets.................................. 0.89 0.93
Return on average equity.................................. 8.86 9.70
Ratio of average equity to average assets................. 10.00 9.58
</TABLE>
See note on following page
13
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1997
------------ ----------
<S> <C> <C>
REGULATORY CAPITAL RATIOS:
Tangible capital ratio.............................................. 10.09 9.88
Core capital ratio.................................................. 10.09 9.88
Risk-based capital ratio............................................ 28.34 27.27
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans......................... 0.38 1.17
Nonperforming assets and troubled debt
restructurings as a percent of total assets........................ 0.14 0.48
Allowance for loan losses as a percent
of total loans, net.............................................. 0.86 1.43
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings................................................... 227.44 122.23
Net loans charged-off to average interest-earning loans............. 0.03 0.03
FULL SERVICE OFFICES AT END OF PERIOD................................ 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.
14
<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. The Association's 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 growth
in the mortgage-backed security portfolio.
The Association's 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. One- to four-
family 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 such 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 such 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 $11.3 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.
Non-interest-bearing demand accounts increased by $248,000, or 5.8%. FHLB
Advances 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
GENERAL. Net income for the nine months ended September 30, 1998 totalled
$1.7 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 10 basis points to 7.33% for the nine 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 4 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 6 basis
point decrease in the yield on such 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
15
<PAGE>
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 such securities to $101.4 million, and an increase in the weighted
average yield of 8 basis points. Interest income on mortgage-backed securities
remained stable at $2.6 million due to a higher average balance of such
securities, offset by a decrease in the weighted average yield of such portfolio
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 such accounts 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 such accounts 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 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 nine moths 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 the Association's 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, the
Association 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. The Company expects increased noninterest expense in the
future as a result of the establishment of the ESOP, Stock-based Incentive Plan,
and Supplemental Executive Retirement Program, as well as increased costs
associated with being a public company (e.g., periodic reports, annual meeting
costs 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.
16
<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.
LIKELY ADVERSE EFFECT OF SIGNIFICANT INCREASES IN INTEREST RATES
Our profitability, like that of most financial institutions, is dependent
to a large extent upon our net interest income. Net interest income is the
difference between interest income on interest-earning assets, such as loans and
investments, and interest expense on interest-bearing liabilities, such as
deposits and borrowings. Accordingly, our results of operations and financial
condition are largely dependent on movements in market interest rates and our
ability to manage our assets in response to such movements.
At July 31, 1998, substantially all of our one- to four-family mortgage
loans, or 71.9% of total loans and 28.9% of total interest-earning assets, had
rates of interest which were fixed for the term of the loan. These loans were
originated with terms of up to 30 years. However, deposit accounts (which are
interest-bearing liabilities) have significantly shorter terms to maturity. The
Association primarily monitors its interest rate sensitivity through the use of
a model prepared by the OTS which estimates 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. As of July 31, 1998, based on assumptions utilized by the
model, it is estimated that a 200 basis point increase in market interest rates
would result in a 3% decrease in NPV, compared to a 1% estimated increase in NPV
as a result of a 200 basis point decrease in market interest rates. NPV
estimated changes do not provide a precise forecast of the effect of changes in
market interest rates on the Association's net interest income. For a further
discussion of how changes in interest rates could impact the Company, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Management of Interest Rate Risk and Market Risk Analysis." Because
a substantial portion of our interest-earning assets generally have fixed rates
of interest and have longer effective maturities than our interest-bearing
liabilities, the yield on our interest-earning assets generally will adjust more
slowly to changes in interest rates than the cost of our interest-bearing
liabilities. As a result, material and prolonged increases in interest rates
likely would have a material adverse effect on our net interest income.
THE POSSIBILITY THAT THE COMPANY'S NET INCOME FOLLOWING THE CONVERSION COMPARED
TO ITS EQUITY WILL BE LOW COMPARED TO OTHER COMPANIES MAY NEGATIVELY INFLUENCE
THE MARKET PRICE AND LIQUIDITY OF OUR COMMON STOCK
At July 31, 1998, our ratio of equity to total assets was 10.02%. Our
equity position will be significantly increased as a result of the Conversion.
On a pro forma basis as of July 31, 1998, assuming the sale of common stock at
the midpoint of the Estimated Price Range of $28.0 million to $37.8 million,
our consolidated ratio of equity to assets would approximate 18.88%. Our
ability to invest this new capital in interest-earning assets, such as loans and
securities, which bear rates of return comparable to our current loans and
securities investments, will be significantly affected by available market rates
of interest, loan demand and industry competition. We currently anticipate that
it will take time to prudently deploy such capital. As a result, our return on
equity initially is expected to be below our historical return on equity and may
be below peer group institutions after the Conversion. No assurances can be
made as to when or if we will achieve returns on equity that are comparable to
industry peers or our historical levels. Additionally, the implementation of
stock-based benefit plans will increase our future compensation expense, which
will adversely affect our net income and return on equity. For further
information regarding the risks involved with the implementation of stock-based
benefit plans, see "--Implementation of Stock-Based Benefits to Management and
Directors, Employment Contracts and Change in Control Provisions.
17
<PAGE>
LOW DEMAND FOR MORTGAGE LOANS AND DIMINISHED LOAN GROWTH IN OUR PRIMARY MARKET
AREA
The demographics of our primary market area have continued to adversely
affect our ability to generate loans. In particular, two of our three branch
offices are located in Camden County, New Jersey. Camden County generally
consists of mature, fully-developed and densely populated communities. The
population of Camden County has remained stable in recent years and new housing
starts in the county are generally lower than those in other parts of New
Jersey. These factors, along with the highly competitive industry in which we
operate, have resulted in a reduction in the demand for mortgage loans in our
primary market area which meet our underwriting criteria.
In addition, historically lower interest rates in recent years have caused
us to experience a significant amount of repayments and prepayments of our
existing loan portfolio as borrowers have refinanced their mortgages in order to
reduce their borrowing cost. Such repayments and prepayments have outpaced our
loan originations. For example, repayments and prepayments were $12.3 million,
$22.0 million, $17.2 million and $16.5 million for the seven months ended July
31, 1998 and the years ended December 31, 1997, 1996, and 1995, respectively.
Meanwhile, due to a low demand for loans in our primary market area which meet
our general underwriting criteria, total loan originations by us during these
same periods were $13.1 million, $16.0 million, $16.2 million and $12.5 million,
respectively. This has resulted in a decline in our total loans, net, from a
year-end high of $110.6 million at December 31, 1994, representing 49.7% of
total assets, to a year-end low of $99.0 million at December 31, 1997,
representing 39.6% of total assets. This has also made us susceptible to
reinvestment risk to the extent that we are unable to reinvest such prepayments
at rates which are comparable to the rates on the prepaid loans.
RISK OF COMPUTER PROBLEMS REGARDING YEAR 2000
While we maintain an internal computer system for many operating functions,
the substantial majority of our data processing is out-sourced to a third party
vendor. We have implemented a plan designated to ensure that all software used
in connection with our 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. However, we recognize that
our ability to be Year 2000 compliant is dependent upon the cooperation of our
outside vendors. There can be no assurances that our plan or the performances
by any of our suppliers and vendors will be effective to remedy all potential
problems. To the extent that our computer systems and those of our outside
vendors are not fully Year 2000 compliant, any potential systems interruptions
or the cost necessary to remedy such problems could have a materially adverse
effect on our business, financial condition, results of operations, cash flows
or business prospects. If our progress towards becoming Year 2000 complaint is
inadequate, then we may be subjected to adverse regulatory action. For a
discussion concerning our Year 2000 compliance, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Year 2000 Compliance."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION WILL HAVE A NEGATIVE IMPACT ON
EARNINGS
The Company intends to contribute to the Foundation shares of common stock
equal to 8% of the shares sold in the Conversion. Such contribution to the
Foundation is subject to the approval of our members at a special meeting of
members. If approved by members, the contribution to the Foundation
18
<PAGE>
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. The
Company's contributions of stock to the Foundation also will mean that the
voting ownership interests in the Company purchased by other stockholders would
be diluted compared to what it would have been with no such contribution.
NEGATIVE IMPACT ON EARNINGS. The Company will recognize an expense in the
amount of the contribution to the Foundation in the quarter in which it occurs,
which we expect to be the first quarter of 1999. Such expense will reduce
earnings and have a material adverse impact on our earnings for the year. The
amount of the contribution will range from $2.2 million to $3.5 million,
depending on the amount of common stock sold in the Conversion. The
contribution expense will be partially offset by a tax deduction for the
contribution. Assuming a contribution of $3.0 million in common stock, based on
the maximum of the Estimated Price Range, we estimate a net tax effected expense
of $1.9 million. If the Foundation had been established at December 31, 1997,
we would have reported net income of $366,000 for 1997 rather than reporting net
income of $2.3 million.
DILUTION OF STOCKHOLDERS' INTERESTS. At the maximum of the Estimated Price
Range, the contribution to the Foundation would be 302,680 shares, with a value
of $3.0 million based on the public offering price of $10.00 per share (the
"Purchase Price"). Upon completion of the Conversion, based on the maximum of
the Estimated Price Range and issuance of shares to the Foundation, we will have
4,086,180 shares issued and outstanding, of which the Foundation will own
302,680 shares, or 7.4%. AS A RESULT, IF YOU PURCHASE SHARES IN THE CONVERSION,
THEN YOUR OWNERSHIP AND VOTING INTERESTS IN THE COMPANY WILL BE DILUTED BY 7.4%
COMPARED TO WHAT IT WOULD HAVE BEEN IF THERE WERE NO CONTRIBUTION TO THE
FOUNDATION.
POSSIBLE NONDEDUCTIBILITY OF THE CONTRIBUTION. While we have been advised
that the contribution will be deductible as a charitable contribution, there is
no assurance or guarantee that this will be the case. Assuming the contribution
is tax deductible, we estimate that substantially all of the contribution to the
Foundation should be deductible for federal tax purposes over the permissible
six-year period. However, no assurance can be made that we will have sufficient
pre-tax income over the five-year period following the year in which the
contribution is initially made to fully utilize the carryover related to the
excess contribution. Furthermore, although we have received an opinion of our
independent accountants that we more likely than not will be entitled to the
deduction for the contribution to the Foundation, there can be no assurance that
the IRS will recognize the Foundation as a tax exempt organization or that the
deduction will be permitted. In such event, there would be no tax benefit
related to the Foundation.
POTENTIAL ANTI-TAKEOVER EFFECT. If approved by our members, upon
completion of the Conversion, the Foundation will own 7.4% of the total shares
of common stock outstanding. However, pursuant to the terms of the contribution
as mandated by the OTS, the shares of common stock held by the Foundation must
be voted in the same ratio as all other shares of our common stock on all
proposals considered by our stockholders. In the event, however, that the OTS
were to waive this voting restriction and not impose other restrictions and
requirements with respect to the Foundation, the Foundation's board of directors
would exercise sole voting power over such shares. If the Foundation's shares
are combined with shares purchased directly by our officers and directors,
shares held by proposed stock-based benefit plans, if approved by stockholders,
and shares held in the ESOP, the total of such shares could exceed 20% of
outstanding common stock. This could allow management to defeat stockholder
proposals requiring an 80% approval. Consequently, if the voting restriction
were waived, this potential voting control might preclude takeover attempts that
some stockholders may deem to be in their best interest, and might tend to
perpetuate existing management.
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<PAGE>
THE ASSOCIATION IS SUBJECTED TO EXTENSIVE REGULATORY OVERSIGHT AND CAN BE
MATERIALLY AND ADVERSELY AFFECTED BY REGULATORY AND LEGISLATIVE CHANGES
As a state savings and loan association, the Association is subject to
extensive federal and state regulation and supervision. In addition, the
Company, as a savings and loan holding company, is subject to extensive
regulation and supervision. Such regulations, which affect the Association and
the Company on a daily basis, may be changed at any time, and the interpretation
of the relevant law and regulations is also subject to change by the examining
authorities who interpret those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
New Jersey Department of Banking and Insurance (the "Department") or its
Commissioner (the "Commissioner"), the Office of Thrift Supervision (the "OTS"),
the Federal Deposit Insurance Corporation (the "FDIC") or the Congress, could
have a material impact on us, our operations or the Conversion.
POSSIBLE ELIMINATION OF THE THRIFT CHARTER
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the Bank Insurance Fund ("BIF") (the
deposit insurance fund that covers most commercial bank deposits) and the SAIF
will merge on January 1, 1999, if there are no more savings associations as of
that date. Furthermore, over the past few years, several bills have been
introduced in Congress that would eliminate the federal thrift charter and the
OTS or limit the powers of unitary thrift holding companies.
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<PAGE>
We are unable to predict whether any legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect our business. We are also unable to predict whether the SAIF and BIF will
eventually be merged or the federal thrift charter eliminated, or changes made
to the federal regulation of state associations, and what effect, if any, such
legislation would have on us.
IMPLEMENTATION OF STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS, EMPLOYMENT
CONTRACTS AND CHANGE IN CONTROL PROVISIONS
STOCK-BASED INCENTIVE AND EMPLOYEE STOCK OWNERSHIP PLANS. We intend to
adopt a stock-based incentive plan which will provide for the granting of
options to purchase common stock ("Stock Options"), awards of common stock
("Stock Awards"), and other related rights to our eligible officers, employees
and directors. While we currently anticipate granting Stock Options and Stock
Awards under a single plan, we may establish separate plans to provide for such
awards. In the event that the plan is adopted within one year after Conversion,
OTS regulations require the plan to be approved by stockholders at a meeting of
stockholders which may not be held earlier than six months after completion of
the Conversion. It is anticipated that the stock-based incentive plan will
provide for the granting of options to purchase shares of common stock equal to
10% of the shares of common stock sold in the Conversion and issued to the
Foundation (408,618 shares based on the maximum of the Estimated Price Range)
and the granting of Stock Awards in an amount equal to 4% of the shares of
common stock sold in the Conversion and issued to the Foundation (163,447 shares
based on the maximum of the Estimated Price Range).
The stock-based incentive plan will acquire an amount of shares equal to 4%
of the shares of common stock sold in the Conversion and issued to the
Foundation, either through open market purchases or the issuance of authorized
but unissued shares of common stock. If the Stock Awards are funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. The exercise of the Stock
Options may also be satisfied by the issuance of authorized but unissued shares.
If all of the Stock Options were exercised using authorized but unissued common
stock and the Stock Awards granted under the stock-based incentive plan were
funded with authorized but unissued shares, the voting interests of existing
stockholders at that time would be diluted by 12.3%.
We intend to establish the ESOP, which it is contemplated would purchase
common stock equal to 8% of the shares sold in the Conversion and issued to the
Foundation (326,894 shares based on the maximum of the Estimated Price Range).
The ESOP will be a tax qualified retirement benefit for all eligible employees.
It is anticipated that the common stock purchased by the ESOP in the Conversion
will be allocated to eligible employees in accordance with Internal Revenue Code
standards and over an approximate 15 year period.
The implementation of stock-based benefit plans will increase future
compensation expense during the allocation period of the ESOP and during the
vesting period of the stock-based incentive plan. Compensation expense will be
computed based on the number of shares issued and the future average market
price of the Company's common stock. Assuming, at the maximum of the estimated
price range, the average market price for the Company's common stock will remain
constant at $10 for the duration of the benefit plans, the common stock
purchased by the ESOP is allocated over a 15 year period and the awards granted
under the stock-based incentive plan vest on a pro rata basis over a five year
period, the additional compensation expense to be recognized by the Company will
be approximately $545,000 for the first five years and $218,000 for the next ten
years. 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 of Stock
Options 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, the
Company will not recognize compensation expense with respect to Stock Options.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL PROVISIONS. Upon Conversion, we
intend to enter into employment and change in control agreements with certain
employees and adopt an employee severance compensation plan. The 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. The
provisions in such agreements and plan would
21
<PAGE>
provide the recipient with a cash payment in the event of the recipient's
involuntary or voluntary termination of employment after a change in control. In
addition to any payments which may be made under the stock-based incentive plan
upon a change in control, these agreements and plan may have the effect of
increasing the cost of acquiring the Company. This could discourage future
attempts to take us over. Based on current salaries, cash payments to be paid
pursuant to the agreements and plan in the event of a change in control and
termination of employment would be approximately $3.0 million. However, the
actual amount to be paid in the event of a change in control cannot be estimated
at this time because the actual amount is based on the average compensation of
the employee and other factors existing at the time of the change in control.
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 THE COMPANY'S AND THE ASSOCIATION'S GOVERNING INSTRUMENTS.
The Company's Certificate of Incorporation and Bylaws, particularly a provision
limiting voting rights, and the Association's Stock Certificate of Incorporation
and Bylaws, as well as federal regulations, assist us in maintaining our status
as an independent publicly owned corporation. These provisions provide for,
among other things, supermajority voting, staggered boards of directors, non-
cumulative voting for directors, limits on the calling of special meetings,
limits on voting shares in excess of 10% of outstanding shares, and uniform
price provisions for business combinations. The Association's Stock Certificate
of Incorporation also prohibits, for five years, the acquisition or offer to
acquire, directly or indirectly, the beneficial ownership of more than 10% of
its equity securities. Any person violating this restriction may not vote the
securities in excess of 10%. These provisions in the governing instruments may
discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors
and, thus, generally may serve to perpetuate existing management. For a more
detailed discussion of these provisions, see "Restrictions on Acquisitions of
the Company and the Association."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Our directors and officers
expect to purchase an aggregate of approximately 2.7% of the shares of common
stock sold in the Conversion, assuming that shares are sold at the maximum of
the Estimated Price Range. If the ESOP is implemented and the stock-based
incentive plan and all Stock Awards and Stock Options available under the stock-
based incentive plan are granted and all such options are exercised, then the
Company's directors, officers and employees, in the aggregate, could vote shares
of common stock equal to 23.6% of the shares sold in the Conversion and issued
to the Foundation. In addition, the Foundation will be funded with a
contribution equal to 8% of the common stock sold in the Conversion. If a
waiver of the voting restriction imposed on such common stock is obtained from
the OTS, and the OTS does not impose other restrictions, the Foundation shares
may be voted as determined by the directors of the Foundation who also will
mostly be directors or officers of the Company or the Association. Management's
potential voting control could, together with additional stockholder support,
defeat stockholder proposals requiring 80% approval of stockholders. As a
result, this potential voting control may preclude takeover attempts that some
stockholders determine to be in their best interest and may tend to perpetuate
existing management. 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."
ABSENCE OF MARKET FOR OUR COMMON STOCK
The Company has never issued capital stock. The Company has received
conditional approval to have the common stock quoted on the Nasdaq National
Market (the "Nasdaq") under the symbol "SJFC" upon completion of the Conversion.
However, we cannot assure that an active and liquid trading market for the
common stock will develop or, once developed, will continue. Also, we cannot
assure that purchasers of the common stock will be able to sell their shares at
a profit. The absence or discontinuance of a market for the common stock would
have an adverse impact on both the price and liquidity of the common stock.
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<PAGE>
AN INCREASE IN THE ESTIMATED PRICE RANGE AND NUMBER OF SHARES SOLD WILL DECREASE
STOCKHOLDERS' PRO FORMA NET EARNINGS PER SHARE
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Community Offerings. In the event that the Estimated Price
Range is increased, it is expected that the Company will sell up to 4,351,025
shares of common stock at the Purchase Price for an aggregate purchase price of
up to $43.5 million. An increase in the number of shares sold will decrease a
stockholder's pro forma net earnings per share and stockholders' equity per
share and will increase our pro forma consolidated stockholders' equity and net
earnings. Such an increase will also increase the offering price as a percentage
of pro forma stockholders' equity per share and net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
We have received an opinion of FinPro that, pursuant to FinPro's Valuation,
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members have no value. However, such valuation is not
binding on the IRS. If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members are deemed to
have an ascertainable value, receipt of such rights could result in a taxable
gain to those Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members who receive and/or exercise the subscription rights in an
amount equal to such value. Additionally, we could recognize a gain for tax
purposes on such distribution. Whether subscription rights are considered to
have ascertainable value is an inherently factual determination.
SOUTH JERSEY FINANCIAL CORPORATION, INC.
The Company was recently organized in Delaware at the direction of the
Board of Directors of the Association (the "Board of Directors") for the purpose
of acquiring all of the capital stock to be issued by the Association in the
Conversion. The Company has applied to the OTS for approval to become a savings
and loan holding company. The Company will acquire the common stock of the
Association and sell its common stock in the Conversion only if such approval is
received. As a savings and loan holding company, the Company will be subject to
regulation by the OTS. See "The Conversion--General." Upon consummation of the
Conversion, the Company will conduct business initially as a unitary savings and
loan holding company. See "Regulation--Holding Company Regulation." After
completion of the Conversion, the Company's assets will consist of all of the
outstanding shares of our capital stock issued to the Company in the Conversion
and 50% of the net proceeds of the Offerings to be retained by the Company. The
Company intends to use part of such net proceeds to loan funds to the ESOP to
enable the ESOP to purchase 8% of the common stock sold in the Conversion and
issued to 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." Immediately after the Conversion, the Company will have no
significant liabilities. 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 after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any 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.
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<PAGE>
The Company's executive offices are located at 4651 Route 42, Turnersville,
New Jersey, 08012 and its telephone number is (609) 629-6000.
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 mortgage loans secured by one-
to four-family residences, 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 one- to four-family 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 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 and the OTS, its primary regulators, and 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.
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<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
----------------------------------------------------------------------------------
2,796,500 SHARES 3,290,000 SHARES 3,783,500 SHARES 4,351,025 SHARES
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF OF OF MAXIMUM OF
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED ESTIMATED
JULY 31, 1998 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2)
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP CAPITAL.............. $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-weighed 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.
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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 decline in mutuality is placing mutual savings
associations, such as the Association, at a disadvantage to the increasing base
of stock thrift and commercial bank institutions. The restructuring of the
Association into the capital stock form of organization will enable the
Association to compete more effectively with commercial banks and other
financial institutions for new business opportunities, and as a stock
institution, to increase its equity capital base and access the capital markets
when needed to enhance 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 Conversion 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 Estimated Price Range 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 Conversion in exchange for 50% of the net
proceeds and will retain the remaining net proceeds. 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 sold in the Conversion and 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, which currently is 8.5%. See "Management of the
Association -- Other Benefit Plans--Employee Stock Ownership Plan and Trust."
The Company, upon the Conversion, 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.
Upon completion of the Conversion, 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 basis, or (ii) for the
repurchase of qualifying shares of a director. Notwithstanding the foregoing and
except as provided below, beginning one year following completion of the
Conversion, 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
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<PAGE>
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 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 does not object to such repurchases.
Based upon facts and circumstances following Conversion 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 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, in connection with the Conversion, the Company and
Association have committed to the OTS that during the one-year period following
the completion of the 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.
DIVIDEND POLICY
Upon Conversion, 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
in the Conversion, 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
27
<PAGE>
a par value plus the amount of the consideration paid for shares of the
Company's capital stock without par value) or, if there is no such excess, to
its net profits for the current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and
Association have committed to the OTS that during the one-year period following
the consummation of the 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
has received conditional approval to have its Common Stock quoted on the Nasdaq
under the symbol "SJFC" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion 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 after the Conversion. See "Risk
Factors - Absence of Market for Our Common Stock."
28
<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 Conversion, including 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
------------------------------------------------------------------------
2,796,500 3,290,000 3,783,500 4,351,025
SHARES SHARES SHARES SHARES
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF OF OF MAXIMUM
ASSOCIATION ESTIMATED ESTIMATED ESTIMATED OF ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE 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 in the Conversion. 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 in the Conversion 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--Stock-Based Benefits to
Management and Directors, Employment Contracts and Change in Control
Payments--Stock-Based Incentive Plan," 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
after the Conversion. 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 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 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 in connection with the Conversion 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 in the
Conversion 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
--Stock-Based Benefits to Management and Directors, Employment Contracts
and Change in Control Payments--Stock-Based Incentive Plan," Footnote 3 to
the tables under "Pro Forma Data" and "Management of the Association--Other
Benefit Plans."
29
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion 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 Eligible Account Holders, the ESOP and
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 sold in connection with the Conversion
and 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) Conversion expenses, excluding the marketing fees paid to Sandler O'Neill,
will be approximately $850,000. 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 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.
30
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE SEVEN MONTHS ENDED JULY 31, 1998
--------------------------------------------------------------------
4,351,025
2,796,500 3,290,000 3,783,500 SHARES SOLD AT
SHARES SHARES SOLD AT SHARES SOLD AT $10.00
SOLD AT $10.00 $10.00 $10.00 PER SHARE (15%
PER SHARE PER SHARE PER SHARE ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM
OF ESTIMATED OF ESTIMATED OF 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 36,556 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)
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. 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."
(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
the Purchase Price. 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.
32
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------
4,351,025
2,796,500 3,290,000 3,783,500 SHARES SOLD AT
SHARES SHARES SOLD AT SHARES SOLD AT $10.00
SOLD AT $10.00 $10.00 $10.00 PER SHARE (15%
PER SHARE PER SHARE PER SHARE ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM
OF ESTIMATED OF ESTIMATED OF 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 36,556 42,176
Less: Common Stock purchased by ESOP................ (2,416) (2,843) (3,269) (3,759)
Common Stock purchased by Stock-Based
Incentive Plan.............................. (1,218) (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)
33
<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 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."
(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 $0.98, $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
the Purchase Price. 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.
34
<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>
35
<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 months 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 months 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>
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>
Interest income:
Loans.............................. $ 4,681 $ 4,882 $ 8,323 $ 8,550 $ 8,918 $ 9,077 $ 9,277
Mortgage-backed securities......... 2,018 1,986 3,434 2,960 2,529 2,303 3,046
Investment securities:
Taxable......................... 3,894 3,307 5,849 5,446 4,709 3,966 3,267
Non-taxable..................... -- -- -- -- 16 21 25
------- ------- ------- ------- ------- ------- -------
Total interest income........ 10,593 10,175 17,606 16,956 16,172 15,367 15,615
Interest expense:
Deposits........................... 5,665 5,368 9,318 9,118 8,579 7,413 7,564
FHLB advances and other............ 7 7 12 12 12 12 12
------- ------- ------- ------- ------- ------- -------
Total 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:
Service charges and other fees..... 350 356 623 669 605 639 724
Gain (loss) on sale of:
Real estate owned............... -- -- (14) -- 16 12 6
Loans........................... -- -- -- -- 9 12 --
Other........................... 5 8 14 13 23 17 14
------- ------- ------- ------- ------- ------- -------
Total noninterest income..... 355 364 623 682 653 680 744
Noninterest expense:
Personnel.......................... 1,845 1,736 2,977 2,920 2,717 2,711 2,481
Fixed asset........................ 425 413 723 669 600 623 530
Federal deposit insurance.......... 80 81 138 456 463 461 407
SAIF assessment.................... -- -- -- 1,314 -- -- --
Service bureau..................... 206 194 327 326 316 305 300
Advertising........................ 40 33 55 76 72 52 52
Other.............................. 416 445 740 757 742 724 736
------- ------- ------- ------- ------- ------- -------
Total noninterest expense.... 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
======= ======= ======= ======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
<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, 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 necessary, in order to improve its
market share in its primary market
37
<PAGE>
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. See "Risk Factors --
Low Demand for Mortgage Loans and Diminished Loan Growth."
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. See "Risk Factors--
Sensitivity to Changes in Interest Rates."
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 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.
<TABLE>
<CAPTION>
NPV AS % OF PRESENT
CHANGE IN VALUE OF ASSETS
INTEREST RATES NET PORTFOLIO VALUE -------------------
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.
38
<PAGE>
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.
39
<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 6.61 176 7 6.65
-------- -------- ------- -------- -------
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.
40
<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 6.82 176 12 6.82 176 12 6.82
-------- ------- -------- ------- -------- -------
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.
41
<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>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
SEVEN MONTHS ENDED JULY 31, COMPARED TO COMPARED TO
1998 COMPARED TO SEVEN YEAR ENDED YEAR ENDED
MONTHS ENDED JULY 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ---------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (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)....................... -- -- -- -- -- -- (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>
42
<PAGE>
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, 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.
43
<PAGE>
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.
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 4 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 9 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
44
<PAGE>
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 Association's 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 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
management's 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 a decrease in checking account fees and consumer insurance
fees, because the product was not offered for the full year due to a change in
insurance carriers.
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 Program and the need to satisfy reporting and the 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 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
45
<PAGE>
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 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 2 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 3 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.
46
<PAGE>
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 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 3 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 3 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.
47
<PAGE>
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.
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
48
<PAGE>
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
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 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
49
<PAGE>
or commercial borrowers, the Association would request statements concerning
Year 2000 readiness from the potential borrowers.
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 FASB issued 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." 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.
50
<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 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.
51
<PAGE>
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
Federal Reserve Board ("FRB"), and legislative tax policies.
52
<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
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <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%
Multi-family and commercial........ 3,012 2.99 3,179 3.18 6,707 6.32
-------- ------ -------- ------ -------- ------
Total real estate loans......... 83,200 82.56 81,667 81.60 87,388 82.37
Consumer loans:
Home equity loans and lines
of credit......................... 14,615 14.50 15,254 15.24 15,313 14.43
Education.......................... 2,292 2.27 2,427 2.43 2,514 2.37
Other.............................. 665 0.66 732 0.73 879 0.83
-------- ------ -------- ------ -------- ------
Total consumer loans............ 17,572 17.44 18,413 18.40 18,706 17.63
-------- ------ -------- ------ -------- ------
Total loans..................... 100,772 100.00% 100,080 100.00% 106,094 100.00%
====== ====== ======
Less:
Deferred loan origination
fees and discounts................ 390 447 645
Allowance for loan losses.......... 819 667 1,186
-------- -------- --------
Total loans, net................ $ 99,563 $ 98,966 $104,263
======== ======== ========
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family................ $ 82,935 77.45% $ 88,033 78.37% $ 84,628 77.04%
Multi-family and commercial........ 7,007 6.54 7,303 6.50 8,430 7.67
-------- ------ -------- ------ -------- ------
Total real estate loans......... 89,942 83.99 95,336 84.87 93,058 84.71
Consumer loans:
Home equity loans and lines
of credit......................... 14,301 13.35 14,154 12.60 13,029 11.86
Education.......................... 1,912 1.79 1,829 1.63 2,691 2.45
Other.............................. 935 0.87 1,008 0.90 1,074 0.98
-------- ------ -------- ------ -------- ------
Total consumer loans............ 17,148 16.01 16,991 15.13 16,794 15.29
-------- ------ -------- ------ -------- ------
Total loans..................... 107,090 100.00% 112,327 100.00% 109,852 100.00%
====== ====== ======
Less:
Deferred loan origination
fees and discounts................ 670 741 765
Allowance for loan losses.......... 1,068 968 874
-------- -------- --------
Total loans, net................ $105,352 $110,618 $108,213
======== ======== ========
</TABLE>
53
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual
maturity of the Association's total loans at July 31, 1998. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT JULY 31, 1998
----------------------------------------
MULTI-
ONE-TO FAMILY AND
FOUR- COMMERCIAL TOTAL
FAMILY REAL ESTATE CONSUMER LOANS
--------- ----------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts due in:
One year or less.......................$ 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 year.......... 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 -- Low Demand for Mortgage Loans and Diminished Loan Growth."
54
<PAGE>
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 31, FOR THE YEAR ENDED 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 one- to four-family 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. 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.
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.
55
<PAGE>
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.
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
56
<PAGE>
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, 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.
57
<PAGE>
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.
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
58
<PAGE>
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.
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.
59
<PAGE>
<TABLE>
<CAPTION>
JULY 31, 1998 DECEMBER 31, 1997
--------------------------------------------- ---------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- ------------------------ ---------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF OF BALANCE OF OF BALANCE OF
LOANS LOANS LOANS LOANS LOANS LOANS LOANS 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%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------------------- ---------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- ------------------------ ---------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF OF BALANCE OF OF BALANCE OF
LOANS LOANS LOANS LOANS LOANS LOANS LOANS 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 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 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.
60
<PAGE>
<TABLE>
<CAPTION>
AT JULY 31, AT DECEMBER 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.
61
<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 31, AT OR FOR THE YEAR ENDED 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>
62
<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>
63
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ------------------------------------
% OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- --------- -------- -------- --------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate........... $313 46.93% 81.60% $ 915 77.15% 82.37% $ 766 71.72% 83.99%
Consumer.............. 129 19.34 18.40 105 8.85 17.63 102 9.55 16.01
Unallocated........... 225 33.73 -- 166 14.00 -- 200 18.73 --
-------- --------- -------- -------- --------- -------- -------- --------- --------
Total allowance
for loan losses.... $667 100.00% 100.00% $1,186 100.00% 100.00% $1,068 100.00% 100.00%
======== ========= ======== ======== ========= ======== ======== ========== ========
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
% 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........... $625 64.57% 84.87% $471 53.89% 84.71%
Consumer.............. 52 5.37 15.13 49 5.61 15.29
Unallocated........... 291 30.06 -- 354 40.50 --
-------- --------- -------- -------- --------- --------
Total allowance
for loan losses.... $968 100.00% 100.00% $874 100.00% 100.00%
======== ========= ======== ======== ========= ========
</TABLE>
64
<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.
65
<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>
66
<PAGE>
The following table sets forth the Association's securities activities for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE
SEVEN MONTHS
ENDED JULY 31, FOR THE YEAR ENDED DECEMBER 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>
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 YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEAR MORE THAN TEN 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
67
<PAGE>
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
ENDED JULY 31, FOR THE YEAR ENDED 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>
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>
WEIGHED
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>
68
<PAGE>
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%
======== ======== ========= ==========
<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)
<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>
69
<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 SEVEN MONTHS AT OR FOR THE 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>
70
<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
YEAR DATE OF IMPROVEMENTS DEPOSITS AT
LEASED OR LEASED OR LEASE AT JULY 31,
LOCATION OWNED ACQUIRED EXPIRATION JULY 31, 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 January
Turnersville, NJ 08012 Leased 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.
71
<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 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 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
72
<PAGE>
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.
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.
73
<PAGE>
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. See "Risk Factors--Financial Institution Regulation and Possible
Legislation."
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 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."
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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 New Jersey Department of Banking and Insurance
(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 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
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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 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
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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 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 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
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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.
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.
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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 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.
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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. See "Risk Factors--Financial Institution Regulation and
Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act of 1933 (the "Securities Act") for the registration of the Common
Stock to be issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock will be registered with the SEC under the
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.
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
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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,
directors or other personnel has received remuneration from the Company.
Outside directors of the Company will receive an annual retainer of $3,500 but
will 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 1982 1999
Chief Operating Officer
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.
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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 a Chairman of
the Board since July, 1998.
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
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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.
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
-------------------------------------- ------------------------- --------
OHER 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
President and Chief
Executive Officer 1997 $141,107 $29,529 -- -- -- -- $38,275
Gregory M. DiPaolo
Executive Vice President,
Treasurer and
Chief Operating Officer 1997 $118,102 $24,733 -- -- -- -- $24,937
</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 compensation arrangements
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.
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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 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 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 base salary and
bonus 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) 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, 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
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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.
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 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
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"Supplemental Executive Retirement Plan" ("SERP"). In connection with the
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 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
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
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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.
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
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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
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.
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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 AS A PERCENT
NUMBER OF PERCENT OF NUMBER OF OF SHARES
NAME AMOUNT/(1)/ SHARES 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 THE
COMMISSIONER HAS ISSUED 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
the Plan, and subsequently amended it on September 30, 1998, 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 has received 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 ______________ (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 of the Association which totalled
$50.00 or more on June 30, 1997 ("Eligible 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
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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 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. 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.
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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. 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
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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. 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, 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 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.
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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
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
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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 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
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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 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
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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 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.
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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.
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
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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 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. SEE
"RISK FACTORS--ABSENCE OF MARKET FOR COMMON STOCK."
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
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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. 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 _____________, 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 _______________, 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.
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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 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) holders of
deposit accounts with a balance of $50 or more as of June 30, 1997 ("Eligible
Account Holders"); (2) the ESOP; (3) holders of deposit accounts with a balance
of $50 or more as of September 30, 1998 ("Supplemental Eligible
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Account Holders"); 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 $50.00 or more as of
June 30, 1997) and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders ($__________), in each case on the
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "--Limitations on Common Stock
Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account 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 sold in the Conversion and 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
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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, 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 Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
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
Conversion Stock which, when added to the shares of Conversion 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
Conversion 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 Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members 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 Subscription Offering
will expire at 12:00 noon, Eastern time on _________, 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.
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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 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 _____________, 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 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.
MARKETING AND UNDERWRITING ARRANGEMENTS
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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 7.0% 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 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
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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 Individual Retirement Accounts ("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 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.
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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.
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
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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 Subscription Expiration Date, unless extended by the Company with
the approval of the OTS. Such extensions may not be beyond
____________________. 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 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
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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 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
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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, 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
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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 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
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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.
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
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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.
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,
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by such person and his affiliates. The Certificate of Incorporation of the
Company further provides that this provision limiting voting rights may only be
amended upon the vote of 80% of the outstanding shares of voting stock (after
giving effect to the limitation on voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of members of the Board. Each class shall serve a staggered term, with
approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, shall be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides 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
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of the outstanding shares of voting stock would be sufficient. The term
"Interested Stockholder" is defined to include any individual, corporation,
partnership or other entity (other than the Company or its subsidiary) which
owns beneficially or controls, directly or indirectly, 10% or more of the
outstanding shares of voting stock of the Company. This provision of the
Certificate of Incorporation applies to any "Business Combination," which is
defined to include (i) any merger or consolidation of the Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined in
the Certificate of Incorporation) of an Interested Stockholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 25% or more of the assets of the Company
or combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash or
securities the value of which equals or exceeds 25% of the fair market value of
the Common Stock of the Company; (iv) the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportionate share of Common Stock or any class of
equity or convertible securities of the Company owned directly or indirectly by
an Interested Stockholder or Affiliate thereof. The directors and executive
officers of the 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 Company's Bylaws and
Certificate of Incorporation.
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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 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 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
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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
Which 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.
119
<PAGE>
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.
120
<PAGE>
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 (the "Preferred Stock"). 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.
121
<PAGE>
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.
122
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
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.
123
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information 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 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 Stock Certificate of Incorporation and Bylaws of the Association and the
Certificate of Incorporation and Bylaws of the Foundation are available without
charge from the Association.
124
<PAGE>
<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 Months Ended
July 31, 1998 and 1997 (unaudited) and for the Years Ended
December 31, 1997, 1996 and 1995................................. 36
Statements of Changes in Retained Earnings for the
Seven Months 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 Months Ended
July 31, 1998 and 1997 (unaudited) and for the Years Ended
December 31, 1997, 1996 and 1995................................. F-5
Notes to Financial Statements...................................... F-6 to F-21
</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.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 20, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------------------------------
JULY 31, DECEMBER 31,
1998 -------------------------------
ASSETS (UNAUDITED) 1997 1996
<S> <C> <C> <C>
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
===========
See notes to financial statements.
</TABLE>
F-4
<PAGE>
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SEVEN-MONTH PERIOD ENDED YEAR ENDED
JULY 31, DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
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)
------------ ------------ ------------ ------------ ------------
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
============ ============ ============
See notes to financial statements.
</TABLE>
F-5
<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.
F-6
<PAGE>
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.
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 bases 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.
F-7
<PAGE>
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 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.
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>
F-8
<PAGE>
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>
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>
F-9
<PAGE>
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>
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>
F-10
<PAGE>
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 mortgage
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 year $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 year $819,080 $1,392,671 $ 666,524 $1,186,235 $1,068,271
======== ========== ========== ========== ==========
</TABLE>
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.
F-11
<PAGE>
The following table summarizes impaired loan information:
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD ENDED YEAR ENDED
JULY 31, DECEMBER 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
======== ======== ========
<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 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.
F-12
<PAGE>
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>
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 YEAR ENDED
JULY 31, 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>
F-14
<PAGE>
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>
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 41,382 2.0 40,194 2.0
provision
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>
F-15
<PAGE>
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 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.
F-16
<PAGE>
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-17
<PAGE>
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-18
<PAGE>
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
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
--------------------- --------------------- --------------------
ESTIMATED ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
<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-19
<PAGE>
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 underwriters 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 completed 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.
F-20
<PAGE>
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-21
<PAGE>
<TABLE>
- ------------------------------------------------------------------ ------------------------------------------------------------
<S> <C>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY SOUTH JERSEY
FINANCIAL CORPORATION, INC., THE ASSOCIATION OR SANDLER O'NEILL 3,783,500 Shares
& PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS SOUTH JERSEY FINANCIAL
PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CORPORATION, INC.
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO (Proposed Holding Company for
CHANGE IN THE AFFAIRS OF SOUTH JERSEY FINANCIAL CORPORATION, South Jersey Savings and
INC. OR THE ASSOCIATION SINCE ANY OF THE DATES AS OF WHICH Loan Association)
INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
Page COMMON STOCK
----
Summary
Recent Developments
Selected Financial and Other Data of the Association
Risk Factors
South Jersey Financial Corporation, Inc. --------------
South Jersey Savings and Loan Association PROSPECTUS
Regulatory Capital Compliance --------------
Use of Proceeds
Dividend Policy
Market for the Common Stock
Capitalization
Pro Forma Data
Comparison of Valuation and Pro Forma Information With No
Foundation
South Jersey Savings and Loan Association
Statements of Income --------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business of the Association
Federal and State Taxation
Regulation
Management of the Company
Management of the Association
The Conversion
Restrictions on Acquisition of the Company
and the Association
Description of Capital Stock of the Company
Description of Capital Stock of the Association
Transfer Agent and Registrar
Experts
Legal and Tax Opinions
Additional Information
Index of Financial Statements
--------------------------
UNTIL __________, 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 Sandler O'Neill & Partners, L.P.
THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING 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.
- ------------------------------------------------------------------ ------------------------------------------------------------
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an
<PAGE>
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses under this Article TENTH, or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses conferred
in this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC filing(1)...................................................... $ 13,863
OTS filing fee..................................................... 14,400
New Jersey Department of Banking filing fees....................... 3,500
NASD filing fee(1)................................................. 5,200
Stock Market listing fee(1)........................................ 25,000
Printing, postage and mailing...................................... 250,000
Legal fees and expenses............................................ 200,000
Accounting fees and expenses....................................... 125,000
Appraisers' fees and expenses (including
business plan)................................................. 32,500
Marketing fees and selling commissions............................. 484,000
Underwriter's expenses (including underwriter's counsel fees)...... 65,000
Conversion agent fees.............................................. 25,000
Transfer agent fees and expenses................................... 10,000
Certificate printing............................................... 4,000
Telephone, temporary help and other equipment...................... 15,000
Blue Sky fees and expenses......................................... 10,000
Electronic Data Gathering, Analysis and Retrieval (EDGAR) filings.. 25,000
Miscellaneous...................................................... 26,537
----------
TOTAL.............................................................. $1,334,000
==========
</TABLE>
______________________
(1) Unless otherwise noted, based upon the registration and issuance of
4,699,107 shares at $10.00 per share.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
<PAGE>
ITEM 27. EXHIBITS.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between South Jersey Savings and Loan Association
and Sandler O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement
2.1 Amended Plan of Conversion (including the Stock Certificate of
Incorporation and Bylaws of South Jersey Savings and Loan Association)
3.1 Certificate of Incorporation of South Jersey Financial Corporation,
Inc.*
3.2 Bylaws of South Jersey Financial Corporation, Inc.*
3.3 Stock Certificate of Incorporation and Bylaws of South Jersey Savings
and Loan Association
(See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of South Jersey Financial Corporation, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters*
8.1 Opinion of Deloitte & Touche, LLP re: State Tax Matters
10.1 Form of South Jersey Savings and Loan Association Employee Stock
Ownership Plan Trust*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of South Jersey Savings and Loan Association Employment
Agreement*
10.4 Form of South Jersey Financial Corporation, Inc. Employment Agreement*
10.5 Form of South Jersey Savings and Loan Association Change in Control
Agreement*
10.6 Form of South Jersey Savings and Loan Association Supplemental
Executive Retirement Plan*
10.7 Form of South Jersey Savings and Loan Association Employee Severance
Compensation Plan*
23.1 Consent of Deloitte & Touche, LLP
23.2 Consent of Muldoon, Murphy & Faucette
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc.(P)*
99.2 Amended form of South Jersey Savings Charitable Foundation Gift
Instrument
- --------------------------------------
* Previously filed
(P) Previously filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
ITEM 28. UNDERTAKINGS.
The small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
CONFORMED
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Turnersville, State of New Jersey, on December 2, 1998.
South Jersey Financial Corporation, Inc.
By: /s/ Robert J. Colacicco
-----------------------
Robert J. Colacicco
President, Chief Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Robert J. Colacicco President, Chief Executive December 2, 1998
- ----------------------- Officer and Director
Robert J. Colacicco (principal executive
officer)
* Executive Vice President,
- ---------------------- Treasurer, Chief Operating
Gregory M. DiPaolo Officer and Director
(principal financial officer)
* Corporate Secretary and
- ------------------------ Chief Accounting Officer
Joseph M. Sidebotham (principal accounting officer)
* Director and Chairman of
- ------------------------------ the Board
Richard W. Culbertson, Jr.
* Director
- ---------------------------
Arthur E. Armitage, Jr.
* Director
- -----------------
John V. Field
* Director
- -----------------------
Richard G. Mohrfeld
* Director
- -----------------
Martin Rosner
* Director
- -------------------
Ronald L. Woods
</TABLE>
<PAGE>
* Pursuant to the Power of Attorney filed as Exhibit 24.1 to the Registration
Statement on Form SB-2 for South Jersey Financial Corporation, Inc. on
October 9, 1998.
/s/ Robert J. Colacicco President, Chief Executive December 2, 1998
- ----------------------- Officer and Director
Robert J. Colacicco
<PAGE>
As filed with the Securities and Exchange Commission on December 2, 1998
Registration No. 333-65519
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
EXHIBITS
TO THE
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
SOUTH JERSEY FINANCIAL CORPORATION, INC.
(Exact name of registrant as specified in its certificate of incorporation)
================================================================================
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between South Jersey Savings and Loan Association and
Sandler O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement
2.1 Amended Plan of Conversion (including the Stock Certificate of
Incorporation and Bylaws of South Jersey Savings and Loan Association)
3.1 Certificate of Incorporation of South Jersey Financial Corporation, Inc.*
3.2 Bylaws of South Jersey Financial Corporation, Inc.*
3.3 Stock Certificate of Incorporation and Bylaws of South Jersey Savings and
Loan Association (See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of South Jersey Financial Corporation, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters*
8.1 Opinion of Deloitte & Touche, LLP re: State Tax Matters
10.1 Form of South Jersey Savings and Loan Association Employee Stock Ownership
Plan Trust*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of South Jersey Savings and Loan Association Employment Agreement*
10.4 Form of South Jersey Financial Corporation, Inc. Employment Agreement*
10.5 Form of South Jersey Savings and Loan Association Change in Control
Agreement*
10.6 Form of South Jersey Savings and Loan Association Supplemental Executive
Retirement Plan*
10.7 Form of South Jersey Savings and Loan Association Employee Severance
Compensation Plan*
23.1 Consent of Deloitte & Touche, LLP
23.2 Consent of Muldoon, Murphy & Faucette
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc.(P)*
99.2 Amended form of South Jersey Savings Charitable Foundation Gift Instrument
- --------------------------------------
* Previously filed.
(P) Previously filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
EXHIBIT 1.2
3,783,500 Shares
(subject to increase up to 4,351,025 shares
in the event of an oversubscription)
SOUTH JERSEY FINANCIAL CORPORATION, INC.
(a Delaware corporation)
Common Stock
(par value $0.01 per share)
AGENCY AGREEMENT
____________________, 1998
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
South Jersey Financial Corporation, Inc., a Delaware corporation (the
"Company"), and South Jersey Savings and Loan Association, a New Jersey savings
and loan association (the "Bank"), hereby confirm their agreement with Sandler
O'Neill & Partners, L.P. ("Sandler O'Neill" or the "Agent") with respect to the
offer and sale by the Company of 3,783,500 shares (subject to increase up to
4,351,025 shares in the event of an oversubscription) of the Company's Common
Stock, par value $0.01 per share (the "Common Stock"). The shares of Common
Stock to be sold by the Company are hereinafter called the "Securities." In
addition, as described herein, the Company expects to contribute shares of
Common Stock in an amount equal to 8% of the shares of Common Stock sold in the
Offerings (as hereinafter defined) to the South Jersey Savings Charitable
Foundation (the "Foundation"), such shares hereinafter being referred to as the
"Foundation Shares."
The Securities are being offered for sale and the Foundation Shares are
being contributed in accordance with the plan of conversion (the "Plan") adopted
by the Board of Directors of the Bank pursuant to which the Bank intends to
convert from a New Jersey-chartered mutual savings and loan association to a New
Jersey-chartered stock savings association and issue all of its stock to the
Company. Pursuant to the Plan, the Company is offering to the Bank's tax
qualified employee benefit plans, including the Employee Stock Ownership Plan
(the "ESOP") (collectively, the "Employee Plans") and to certain of the Bank's
<PAGE>
depositors rights to subscribe for the Securities in a subscription offering
(the "Subscription Offering"). To the extent Securities are not subscribed for
in the Subscription Offering, such Securities may be offered to certain members
of the general public, with preference given to certain natural persons residing
in the counties in which the Bank's offices are located, in a direct community
offering (the "Community Offering" and together with the Subscription Offering,
as each may be extended or reopened from time to time, the "Subscription and
Community Offering") to be commenced concurrently with the Subscription
Offering. It is currently anticipated by the Bank and the Company that any
Securities not subscribed for in the Subscription and Community Offering will be
offered, subject to Section 3 hereof, in a syndicated community offering (the
"Syndicated Community Offering"). The Subscription Offering and the Syndicated
Community Offering are hereinafter referred to collectively as the "Offerings,"
and the conversion of the Bank from mutual to stock form, the acquisition of the
capital stock of the Bank by the Company and the Offerings are hereinafter
referred to collectively as the "Conversion." It is acknowledged that the price
of the Securities may be decreased and the number of Securities to be sold in
the Conversion may be increased or decreased as described in the Prospectus (as
hereinafter defined). If the number of Securities is increased or decreased in
accordance with the Plan, the term "Securities" shall mean such greater or
lesser number, where applicable. In the event that a holding company form of
organization is not utilized, all pertinent terms of this Agreement will apply
to the conversion of the Bank from the mutual to stock form of organization and
the sale of the Bank's common stock.
In connection with the Conversion and pursuant to the terms of the Plan as
described in the Prospectus, the Company has established the Foundation.
Immediately following the consummation of the Conversion, subject to the
approval of the establishment of the Foundation by the depositors of the Bank
and compliance with certain conditions as may be imposed by regulatory
authorities, the Company will contribute newly issued shares of Common Stock in
an amount equal to 8% of the Securities sold in the Offering, or between 223,720
and 302,680 shares of Common Stock (subject to increase in certain circumstances
to 348,082 shares).
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (No. 333-____), including a
related prospectus, for the registration of the Securities and the Foundation
Shares under the Securities Act of 1933, as amended (the "Securities Act"), has
filed such amendments thereto, if any, and such amended prospectuses as may have
been required to the date hereof by the Commission in order to declare such
registration statement effective, and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectuses constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein and the
information, if any, deemed to be a part thereof pursuant to the rules and
regulations of the Commission under the Securities Act, as from time to time
amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations")), are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that if any revised
prospectus shall be used by the Company in connection with the Subscription and
Community Offering or the Syndicated Community Offering which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such
-2-
<PAGE>
revised prospectus is required to be filed by the Company pursuant to
Rule 424(b) of the Securities Act Regulations), the term "Prospectus" shall
refer to such revised prospectus from and after the time it is first provided to
the Agent for such use.
Concurrently with the execution of this Agreement, the Company is
delivering to the Agent copies of the Prospectus of the Company to be used in
the Subscription and Community Offering. Such prospectus contains information
with respect to the Bank, the Company and the Common Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and the Bank jointly and severally represent and
warrant to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared effective
by the Commission, no stop order has been issued with respect thereto and
no proceedings therefor have been initiated or, to the knowledge of the
Company and the Bank, threatened by the Commission. At the time the
Registration Statement became effective and at the Closing Time referred to
in Section 2 hereof, the Registration Statement complied and will comply in
all material respects with the requirements of the Securities Act and the
Securities Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading. The Prospectus, at the date hereof does not and at the Closing
Time referred to in Section 2 hereof will not, include an untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the representations
and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in reliance
upon and in conformity with information with respect to the Agent furnished
to the Company in writing by the Agent expressly for use in the
Registration Statement or Prospectus (the "Agent Information," which the
Company and the Bank acknowledge appears only in the first two paragraphs
of the section captioned "The Conversion - Marketing and Underwriting
Arrangements" of the Prospectus).
(ii) The Company has filed with the Department of the
Treasury, Office of Thrift Supervision (the "OTS") the Company's
application for approval of its acquisition of the Bank (the "Holding
Company Application") on Form H-(e)1-S promulgated under the savings and
loan holding company provisions of the Home Owners' Loan Act, as amended
("HOLA") and the regulations promulgated thereunder. The Company has
received written notice from the OTS of its approval of the acquisition of
the Bank, such approval remains in full force and effect and no order has
been issued by the OTS suspending or revoking such approval and no
proceedings therefor have been initiated or, to the knowledge of the
Company or the Bank, threatened by the OTS. At the date of such approval
and at the Closing Time referred to in Section 2, the Holding Company
Application complied and will comply in all material respects with the
applicable provisions of HOLA and the regulations promulgated thereunder.
-3-
<PAGE>
(iii) The Company has filed with the New Jersey Department of
Banking and Insurance, Division of Banking (the "Department") copies of the
Holding Company Application pursuant to the rules and regulations of the
Department and the laws of the State of New Jersey.
(iv) Pursuant to the rules and regulations of the OTS and the
Department governing the conversion of state chartered mutual savings and
loan associations to stock form (the "Conversion Regulations"), the Bank
has filed with the OTS and the Department an application for conversion on
Form AC, and has filed such amendments thereto and supplementary materials
as may have been required to the date hereof (such application, as amended
to date, if applicable, and as from time to time amended or supplemented
hereafter, is hereinafter referred to as the "Conversion Application"),
including copies of the Bank's Proxy Statement, dated ______________,
199__, relating to the Conversion (the "Proxy Statement"), and the
Prospectus. The OTS and the Department have, by letters dated __________,
199__, and ___________, 199__, respectively, approved the Conversion
Application, such approvals remain in full force and effect and no order
has been issued by the OTS or the Department suspending or revoking such
approvals and no proceedings therefor have been initiated or, to the
knowledge of the Company or the Bank, threatened by the OTS or the
Department. At the date of such approval and at the Closing Time referred
to in Section 2, the Conversion Application complied and will comply in all
material respects with the applicable provisions of the Conversion
Regulations.
(v) At the time of their use, the Proxy Statement and any
other proxy solicitation materials will comply in all material respects
with the applicable provisions of the Conversion Regulations and will not
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Company and
the Bank will promptly file the Prospectus and any supplemental sales
literature with the Commission, the OTS and the Department. The Prospectus
and all supplemental sales literature, as of the date the Registration
Statement became effective and at the Closing Time referred to in Section
2, complied and will comply in all material respects with the applicable
requirements of the Conversion Regulations and, at or prior to the time of
their first use, will have received all required authorizations of the OTS
and the Department for use in final form.
(vi) Neither the SEC, the OTS nor the Department has, by
order or otherwise, prevented or suspended the use of the Prospectus or any
supplemental sales literature authorized by the Company or the Bank for use
in connection with the Offerings.
(vii) At the Closing Time referred to in Section 2, the
Company and the Bank will have completed the conditions precedent to the
Conversion and the establishment of the Foundation in accordance with the
Plan, the applicable Conversion Regulations and all other applicable laws,
regulations, decisions and orders, including all material terms,
conditions, requirements and provisions precedent to the Conversion imposed
upon the Company or the Bank by the OTS, the Department, the Federal
-4-
<PAGE>
Deposit Insurance Corporation (the "FDIC") or any other regulatory
authority, other than those which the regulatory authority permits to be
completed after the Conversion.
(viii) FinPro, Inc., which prepared the valuation of the Bank
as part of the Conversion, has advised the Company and the Bank in writing
that it satisfies all requirements for an appraiser set forth in the
Conversion Regulations and any interpretations or guidelines issued by the
Superintendent and the FDIC with respect thereto. FinPro, which prepared
the opinion filed as Exhibit ___ of the Conversion Application as required
by the Conversion Regulations, satisfies all requirements for an
"independent executive compensation expert" within the meaning of the
Conversion Regulations.
(ix) The accountants who certified the consolidated financial
statements and supporting schedules of the Bank included in the
Registration Statement have advised the Company and the Bank in writing
that they are independent public accountants within the meaning of the Code
of Ethics of the American Institute of Certified Public Accountants (the
"AICPA"), and such accountants are, with respect to the Company, the Bank
and each subsidiary of the Bank, independent certified public accountants
as required by the Securities Act and the Securities Act Regulations.
(x) The Bank has only one subsidiary, ________________, a
New Jersey corporation ("Subsidiary"). The Subsidiary is not operating.
(xi) The consolidated financial statements and the related
notes thereto included in the Registration Statement and the Prospectus
present fairly the financial position of the Company, the Bank and its
consolidated subsidiaries at the dates indicated and the results of
operations, retained earnings and cash flows for the periods specified, and
comply as to form in all material respects with the applicable accounting
requirements of the Securities Act Regulations and the Conversion
Regulations; except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis; and the
supporting schedules and tables included in the Registration Statement
present fairly the information required to be stated therein.
(xii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein (A) there has been no material adverse change in the
financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and (B) except
for transactions specifically referred to or contemplated in the
Prospectus, there have been no transactions entered into by the Company,
the Bank or any of its subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company, the
Bank and its subsidiaries, considered as one enterprise.
(xiii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with corporate power and authority to own, lease and operate its
properties and to conduct its business
-5-
<PAGE>
as described in the Prospectus and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in the
State of New Jersey and in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure to so qualify would not have
a material adverse effect on the financial condition, results of operations
or business affairs of the Company, the Bank and its subsidiaries,
considered as one enterprise.
(xiv) Upon consummation of the Conversion and the contribution
of the Foundation Shares as described in the Prospectus, the authorized,
issued and outstanding capital stock of the Company will be as set forth in
the Prospectus under "Capitalization" (except for subsequent issuances, if
any, pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectus); [EXCEPT FOR SHARES ISSUED IN CONNECTION
WITH THE INITIAL CAPITALIZATION OF THE COMPANY, WHICH SHARES WILL BE
CANCELED UPON CONSUMMATION OF THE CONVERSION,] no shares of Common Stock
have been or will be issued and outstanding prior to the Closing Time
referred to in Section 2; at the time of Conversion, the Securities will
have been duly authorized for issuance and, when issued and delivered by
the Company pursuant to the Plan against payment of the consideration
calculated as set forth in the Plan and stated on the cover page of the
Prospectus, will be duly and validly issued and fully paid and non-
assessable; the terms and provisions of the Common Stock and the capital
stock of the Company conform to all statements relating thereto contained
in the Prospectus; the certificates representing the shares of Common Stock
conform to the requirements of applicable law and regulations; and the
issuance of the Securities is not subject to preemptive or other similar
rights.
(xv) The Bank, as of the date hereof, is a New Jersey-
chartered savings and loan association in mutual form and upon consummation
of the Conversion will be a New Jersey-chartered savings and loan
association in stock form, in both instances with full corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus; the Company, the Bank and its
subsidiaries have obtained all licenses, permits and other governmental
authorizations currently required for the conduct of their respective
businesses or required for the conduct of their respective businesses as
contemplated by the Holding Company Application and the Conversion
Application, except where the failure to obtain such licenses, permits or
other governmental authorizations would not have a material adverse effect
on the financial condition, results of operations or business affairs of
the Company, the Bank and its subsidiaries considered as one enterprise;
all such licenses, permits and other governmental authorizations are in
full force and effect and the Company, the Bank and its subsidiaries are in
all material respects in compliance therewith; neither the Company, the
Bank nor any of the Bank's subsidiaries has received notice of any
proceeding or action relating to the revocation or modification of any such
license, permit or other governmental authorization which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the Bank and its
subsidiaries, considered as one enterprise; and the Bank is in good
standing under the laws of the State of New Jersey and is qualified as a
foreign corporation in any
-6-
<PAGE>
jurisdiction in which the failure to so qualify would have a material
adverse effect on the financial condition, results of operations or
business affairs of the Company, the Bank and its subsidiaries considered
as one enterprise.
(xvi) The deposit accounts of the Bank are insured by the FDIC
up to the applicable limits and upon consummation of the Conversion, the
liquidation account for the benefit of eligible account holders and
supplemental eligible account holders will be duly established in
accordance with the requirements of the Conversion Regulations. The Bank
is a "qualified thrift lender" within the meaning of 12 U.S.C. Section
1467a(m).
(xvii) Upon consummation of the Conversion, the authorized
capital stock of the Bank will be 14,000,000 shares of common stock, par
value $1.00 per share (the "Bank Common Stock") and 1,000,000 shares of
preferred stock, par value $1.00 per share (the "Bank Preferred Stock"),
and the issued and outstanding capital stock of the Bank will be [1,000]
shares of Bank Common Stock and no shares of the Bank Preferred Stock, and
no shares of Bank Common Stock or Bank Preferred Stock have been or will be
issued prior to the Closing time referred to in Section 2; and as of
Closing Time referred to in Section 2, all of the issued and outstanding
capital stock of the Bank will be duly authorized, validly issued and fully
paid and nonassessable and have been issued in compliance with all federal
and state securities laws. The shares of Bank Common Stock to be issued to
the Company will have been duly authorized for issuance and, when issued
and delivered by the Bank pursuant to the Plan against payment of the
consideration calculated as set forth in the Plan and as described in the
Prospectus, will be duly and validly issued and fully paid and
nonassessable, and all such Bank Common Stock will be owned beneficially
and of record by the Company free and clear of any security interest,
mortgage, pledge, lien, encumbrance or legal or equitable claim; the terms
and provisions of the Bank Common Stock and the Bank Preferred Stock
conform to all statements relating thereto contained in the Prospectus, and
the certificates representing the shares of the Bank Common Stock will
conform with the requirements of applicable laws and regulations; and the
issuance of the Bank Common Stock is not subject to preemptive or similar
rights.
(xviii) The Foundation has been duly authorized and incorporated
and is validly existing as a non stock corporation in good standing under
the laws of the State of Delaware with corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus; the Foundation will not be a savings and loan
holding company within the meaning of 12 C.F.R. Section 574.2(q) as a
result of the issuance of shares of Common Stock to it in accordance with
the terms of the Plan and in the amounts as described in the Prospectus; no
approvals are required to establish the Foundation and to contribute the
shares of Common Stock thereto as described in the Prospectus other than
those imposed by the Superintendent and the FDIC; except as specifically
disclosed in the Prospectus and the Proxy Statement, there are no
agreements and/or understandings, written or oral, between the Company
and/or the Bank and the Foundation with respect to the control, directly or
indirectly, over the voting and the acquisition or disposition of the
Foundation Shares; at the time of the Conversion, the Foundation Shares
will have been duly authorized for issuance and,
-7-
<PAGE>
when issued and contributed by the Company pursuant to the Plan, will be
duly and validly issued and fully paid and non-assessable; and the issuance
of the Foundation Shares is not subject to preemptive or similar rights.
(xix) Each direct and indirect subsidiary of the Bank has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and Prospectus, and
is duly qualified to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material adverse effect on
the financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise; the
activities of each such subsidiary are permitted to subsidiaries of a New
Jersey-chartered savings and loan association by the rules, regulations,
resolutions and practices of the OTS and the Department; all of the issued
and outstanding capital stock of each such subsidiary has been duly
authorized and validly issued, is fully paid and nonassessable and is owned
by the Bank, directly, free and clear of any security interest, mortgage,
pledge, lien, encumbrance or legal or equitable claim.
(xx) The Company and the Bank have taken all corporate action
necessary for them to execute, deliver and perform this Agreement, and this
Agreement has been duly executed and delivered by, and is the valid and
binding agreement of, the Company and the Bank, enforceable in accordance
with its terms, except as may be limited by bankruptcy, insolvency or other
laws affecting the enforceability of the rights of creditors generally and
judicial limitations on the right of specific performance and except as the
enforceability of indemnification and contribution provisions may be
limited by applicable securities laws.
(xxi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and
prior to the Closing Time, except as otherwise may be indicated or
contemplated therein, none of the Company, the Bank or any subsidiary of
the Bank will have (A) issued any securities or incurred any liability or
obligation, direct or contingent, or borrowed money, except borrowings in
the ordinary course of business from the same or similar sources and in
similar amounts as indicated in the Prospectus, or (B) entered into any
transaction or series of transactions which is material in light of the
business of the Company, the Bank and its subsidiaries, taken as a whole,
excluding the origination, purchase and sale of loans or the purchase or
sale of investment securities or mortgaged-backed securities in the
ordinary course of business.
(xxii) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and delivery
of this Agreement or the issuance of the Securities and the Foundation
Shares that has not been obtained and a copy of which has been delivered to
the Agent, except as may be required under the securities laws of various
jurisdictions.
-8-
<PAGE>
(xxiii) Neither the Company, the Bank nor any of the Bank's
subsidiaries is in violation of its certificate of incorporation,
organization certificate, articles of incorporation or charter, as the case
may be, or bylaws (and the Bank will not be in violation of its certificate
or bylaws in stock form upon consummation of the Conversion); and neither
the Company, the Bank nor any of the Bank's subsidiaries is in default (nor
has any event occurred which, with notice or lapse of time or both, would
constitute a default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Company, the Bank or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company, the Bank or any of its subsidiaries is subject, except for such
defaults that would not, individually or in the aggregate, have a material
adverse effect on the financial condition, results of operations or
business of the Company, the Bank and its subsidiaries considered as one
enterprise; and there are no contracts or documents of the Company, the
Bank or any of the Bank's subsidiaries which are required to be filed as
exhibits to the Registration Statement or the Conversion Application which
have not been so filed.
(xxiv) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary corporate action and do not and will
not conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company, the Bank or any of its subsidiaries
pursuant to, any contract, indenture, mortgage, loan agreement, note, lease
or other instrument to which the Company, the Bank or any of its
subsidiaries is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any of its
subsidiaries is subject, except for such defaults that would not,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise; nor
will such action result in any violation of the provisions of the
certificate of incorporation, organization certificate, articles of
incorporation or charter or bylaws of the Company, the Bank or any of its
subsidiaries, or any applicable law, administrative regulation or
administrative or court decree.
(xxv) No labor dispute with the employees of the Company, the
Bank or any of its subsidiaries exists or, to the knowledge of the Company
or the Bank, is imminent or threatened; and the Company and the Bank are
not aware of any existing or threatened labor disturbance by the employees
of any of its principal suppliers or contractors which might be expected to
result in any material adverse change in the financial condition, results
of operations or business affairs of the Company, the Bank and its
subsidiaries considered as one enterprise.
(xxvi) Each of the Company, the Bank and its subsidiaries have
good and marketable title to all properties and assets for which ownership
is material to the business of the Company, the Bank or its subsidiaries
and to those properties and assets described in the Prospectus as owned by
them, free and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Prospectus or are not
-9-
<PAGE>
material in relation to the business of the Company, the Bank or its
subsidiaries considered as one enterprise; and all of the leases and
subleases material to the business of the Company, the Bank or its
subsidiaries under which the Company, the Bank or its subsidiaries hold
properties, including those described in the Prospectus, are valid and
binding agreements of the Company, the Bank and its subsidiaries,
enforceable in accordance with their terms.
(xxvii) None of the Company, the Bank nor its subsidiaries are
in violation of any directive from the OTS, the Department or the FDIC to
make any material change in the method of conducting their respective
businesses; the Bank and its subsidiaries have conducted and are conducting
their business so as to comply in all material respects with all applicable
statutes, regulations and administrative and court decrees (including,
without limitation, all regulations, decisions, directives and orders of
the OTS, the Department or the FDIC).
(xxviii) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending, or,
to the knowledge of the Company or the Bank, threatened, against or
affecting the Company, the Bank or any of its subsidiaries which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might result in any material adverse change in
the financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise, or
which might materially and adversely affect the properties or assets
thereof or which might materially and adversely affect the consummation of
the Conversion; all pending legal or governmental proceedings to which the
Company, the Bank or any subsidiary is a party or of which any of their
respective property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation incidental to
the business, are considered in the aggregate not material; and there are
no contracts or documents of the Company or any of its subsidiaries which
are required to be filed as exhibits to the Registration Statement or the
Conversion Application which have not been so filed.
(xxix) The Bank has obtained an opinion of its counsel,
Muldoon, Murphy & Faucette, Washington, D.C., with respect to the legality
of the Securities to be issued and the Foundation Shares and the federal
income tax consequences of the Conversion (including franchise tax, sales
or use tax, license fee on foreign corporations, stock transfer tax, real
property transfer gain tax and real estate transfer tax), and an opinion of
Deloitte & Touche, LLP with respect to the state and local income tax
consequences of the Conversion, copies of which are filed as exhibits to
the Registration Statement; all material aspects of the aforesaid opinions
are accurately summarized in the Prospectus; the facts and representations
upon which such opinions are based are truthful, accurate and complete in
all material respects; and neither the Bank nor the Company has taken or
will take any action inconsistent therewith.
(xxx) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
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(xxxi) All of the loans represented as assets on the most
recent consolidated financial statements or consolidated selected financial
information of the Bank included in the Prospectus meet or are exempt from
all requirements of federal, state or local law pertaining to lending,
including without limitation truth in lending (including the requirements
of Regulations Z and 12 C.F.R. Part 226 and Section 563.99), real estate
settlement procedures, consumer credit protection, equal credit opportunity
and all disclosure laws applicable to such loans, except for violations
which, if asserted, would not result in a material adverse effect on the
financial condition, results of operations or business of the Company, the
Bank and its subsidiaries considered as one enterprise.
(xxxii) To the knowledge of the Company and the Bank, with the
exception of the intended loan to the Bank's ESOP by the Company to enable
the ESOP to purchase shares of Common Stock in an amount of up to 8% of the
Common Stock issued in the Conversion, none of the Company, the Bank or
employees of the Bank has made any payment of funds of the Company or the
Bank as a loan for the purchase of the Common Stock or made any other
payment of funds prohibited by law, and no funds have been set aside to be
used for any payment prohibited by law.
(xxxiii) The Company, the Bank and its subsidiaries are in
compliance in all material respects with the applicable financial
recordkeeping and reporting requirements of the Currency and Foreign
Transaction Reporting Act of 1970, as amended, and the rules and
regulations thereunder.
(xxxiv) None of the Company, the Bank nor its subsidiaries nor
any properties owned or operated by the Company, the Bank or its
subsidiaries is in violation of or liable under any Environmental Law (as
defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse effect
on the financial condition, results of operations or business affairs of
the Company, the Bank and the subsidiaries considered as one enterprise.
There are no actions, suits or proceedings, or demands, claims, notices or
investigations (including, without limitation, notices, demand letters or
requests for information from any environmental agency) instituted or
pending, or to the knowledge of the Company or the Bank threatened,
relating to the liability of any property owned or operated by the Company,
the Bank or the subsidiaries thereof, under any Environmental Law. For
purposes of this subsection, the term "Environmental Law" means any
federal, state, local or foreign law, statute, ordinance, rule, regulation,
code, license, permit, authorization, approval, consent, order, judgment,
decree, injunction or agreement with any regulatory authority relating to
(i) the protection, preservation or restoration of the environment
(including, without limitation, air, water, vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant
and animal life or any other natural resource), and/or (ii) the use,
storage, recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of any substance
presently listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous, or otherwise regulated, whether by type or by
quantity, including any material containing any such substance as a
component.
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(xxxv) The Company, the Bank and its subsidiaries have filed
all federal income and state and local franchise tax returns required to be
filed and have made timely payments of all taxes shown as due and payable
in respect of such returns, and no deficiency has been asserted with
respect thereto by any taxing authority.
(xxxvi) The Company has received approval, subject to regulatory
approval to consummate the Offerings and issuance, to have the Securities
quoted on the National Market System of the National Association of
Securities Dealers' Automated Quotation System ("Nasdaq National Market")
effective as of the Closing Time referred to in Section 2 hereof.
(xxxvii) The Company has filed a registration statement for the
Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and such registration statement has been
deemed effective concurrent with the effectiveness of the Registration
Statement.
(b) Any certificate signed by any officer of the Company or the Bank
and delivered to either of the Agent to counsel for the Agent shall be deemed a
representation and warranty by the Company or the Bank to each Agent as to the
matters covered thereby.
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY OF THE
SECURITIES; CLOSING.
On the basis of the representations and warranties herein contained
and subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill as its Agent to consult with and advise the Company,
and to assist the Company with the solicitation of subscriptions and purchase
orders for Securities, in connection with the Company's sale of Common Stock in
the Subscription and Community Offering and the Syndicated Community Offering.
On the basis of the representations and warranties herein contained, and subject
to the terms and conditions herein set forth, Sandler O'Neill accepts such
appointment and agrees to use its best efforts to assist the Company with the
solicitation of subscriptions and purchase orders for Securities in accordance
with this Agreement; provided, however, that the Agent shall not be obligated to
take any action which is inconsistent with any applicable laws, regulations,
decisions or orders. The services to be rendered by Sandler O'Neill pursuant to
this appointment include the following: (i) consulting as to the securities
marketing implications of any aspect of the Plan of Conversion or related
corporate documents; (ii) reviewing with the Board of Directors the independent
appraiser's appraisal of the common stock; (iii) reviewing all offering
documents, including the Prospectus, stock order form and related offering
materials (it being understood that preparation and filing of such documents is
the sole responsibility of the Company and the Bank and their counsel);
(iv) assisting in the design and implementation of a marketing strategy for the
Offerings; (v) assisting the Company and the Bank in obtaining all requisite
regulatory approvals; (vi) assisting Bank management in preparing for meetings
with potential investors and broker-dealers; and (vii) providing such other
general advice and assistance as may be requested to promote the successful
completion of the Conversion.
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<PAGE>
The appointment of the Agent hereunder shall terminate upon the
earlier to occur of (a) forty-five (45) days after the last day of the
Subscription and Community Offering, unless the Company and the Agent agree in
writing to extend such period and the OTS agrees to extend the period of time in
which the Shares may be sold, or (b) the receipt and acceptance of subscriptions
and purchase orders for all of the Securities, or (c) the completion of the
Syndicated Community Offering.
If any of the Securities remain available after the expiration of the
Subscription and Community Offering, at the request of the Company and the Bank,
Sandler O'Neill will seek to form a syndicate of registered brokers or dealers
("Selected Dealers") to assist in the solicitation of purchase orders of such
Securities on a best efforts basis, subject to the terms and conditions set
forth in a selected dealers' agreement (the "Selected Dealers' Agreement"),
substantially in the form set forth in Exhibit A to this Agreement. Sandler
O'Neill will endeavor to limit the aggregate fees to be paid by the Company and
the Bank under any such Selected Dealers' Agreement to an amount competitive
with gross underwriting discounts charged at such time for underwritings of
comparable amounts of stock sold at a comparable price per share in a similar
market environment; provided, however, that the aggregate fees payable to
Sandler O'Neill and Selected Dealers shall not exceed 7% of the aggregate
Purchase Price of the Securities sold by such Selected Dealers. Sandler O'Neill
will endeavor to distribute the Securities among the Selected Dealers in a
fashion which best meets the distribution objective of the Company and the
requirements of the Plan, which may result in limiting the allocation of stock
to certain Selected Dealers. It is understood that in no event shall Sandler
O'Neill be obligated to act as a Selected Dealer or to take or purchase any
Securities.
In the event the Company is unable to sell at least the total minimum
of the Securities, as set forth on the cover page of the Prospectus, within the
period herein provided, this Agreement shall terminate and the Company shall
refund to any persons who have subscribed for any of the Securities the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the others hereunder, except for the obligations of the Company and the Bank as
set forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent as
provided in Sections 6(b) and 7 hereof. Appropriate arrangements for placing
the funds received from subscriptions for Securities or other offers to purchase
Securities in special interest-bearing accounts with the Bank until all
Securities are sold and paid for were made prior to the commencement of the
Subscription Offering, with provision for refund to the purchasers as set forth
above, or for delivery to the Company if all Securities are sold.
If at least the total minimum of Securities, as set forth on the cover
page of the Prospectus, are sold, the Company agrees to issue or have issued the
Securities sold and to release for delivery certificates for such Securities at
the Closing Time against payment therefor by release of funds from the special
interest-bearing accounts referred to above. The closing shall be held at the
offices of Muldoon, Murphy & Faucette, at 10:00 a.m., local time, or at such
other place and time as shall be agreed upon by the parties hereto, on a
business day to be agreed upon by the parties hereto. The Company shall notify
the Agent by telephone, confirmed in writing, when funds shall have been
received for all the Securities. Certificates for Securities shall be delivered
directly to the purchasers thereof in accordance with their directions.
Notwithstanding the foregoing, certificates for Securities purchased through
Selected Dealers
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<PAGE>
shall be made available to the Agent for inspection at least 48 hours prior to
the Closing Time at such office as the Agent shall designate. The hour and date
upon which the Company shall release for delivery all of the Securities, in
accordance with the terms hereof, is herein called the "Closing Time."
The Company will pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Securities.
In addition to the reimbursement of the expenses specified in Section
4 hereof, the Agent will receive the following compensation for its services
hereunder:
(a) One and one-quarter percent (1.25%) of the aggregate Actual
Purchase Price (as defined in the Prospectus) of the Securities sold in the
Subscription and Community Offering, excluding in each case shares
purchased by (i) any employee benefit plan of the Company or the Bank
established for the benefit of their respective directors, officers and
employees, (ii) by any foundation or charitable organization established by
the Bank in connection with the Conversion, and (iii) any director, officer
or employee of the Company or the Bank or members of their immediate
families (which term shall mean parents, grandparents, spouse, siblings,
children and grandchildren); and
(b) with respect to any Securities sold by an NASD member firm (other
than Sandler O'Neill) under the Selected Dealers' Agreement in the
Syndicated Community Offering, (i) the compensation payable to Selected
Dealers under any Selected Dealers' Agreement, (ii) any sponsoring dealer's
fees; and (iii) a management fee to Sandler O'Neill of one and one-quarter
percent (1.25%). Any fees payable to Sandler O'Neill for Securities sold
by Sandler O'Neill under any such agreement shall be limited to an
aggregate of one and one-quarter percent (1.25%) of the Actual Purchase
Price of such Securities.
If this Agreement is terminated by the Agent in accordance with the
provisions of Section 9(a) hereof or the Conversion is terminated by the
Company, no fee shall be payable by the Company to Sandler O'Neill; however, the
Company shall reimburse the Agent for all of its reasonable out-of-pocket
expenses incurred prior to termination, including the reasonable fees and
disbursements of counsel for the Agent in accordance with the provisions of
Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in
immediately available funds at Closing Time, or upon the termination of this
Agreement, as the case may be. In recognition of the long lead times involved
in the conversion process, the Bank agrees to make advance payments to the Agent
in the aggregate amount of $50,000, $50,000 of which has been previously paid,
which shall be credited against any fees or reimbursement of expenses payable
hereunder.
SECTION 3. COVENANTS OF THE COMPANY. The Company and the Bank
covenant with the Agent as follows:
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<PAGE>
(a) The Company and the Bank will prepare and file such amendments or
supplements to the Registration Statement, the Prospectus, the Conversion
Application and the Proxy Statement as may hereafter be required by the
Securities Act Regulations or the Conversion Regulations or as may
hereafter be requested by the Agent. Following completion of the
Subscription and Community Offering, in the event of a Syndicated Community
Offering, the Company and the Bank will (i) promptly prepare and file with
the Commission a post-effective amendment to the Registration Statement
relating to the results of the Subscription and Community Offering, any
additional information with respect to the proposed plan of distribution
and any revised pricing information or (ii) if no such post-effective
amendment is required, will file with, or mail for filing to, the
Commission a prospectus or prospectus supplement containing information
relating to the results of the Subscription and Community Offering and
pricing information pursuant to Rule 424 of the Securities Act Regulations,
in either case in a form acceptable to the Agent. The Company and the Bank
will notify the Agent immediately, and confirm the notice in writing,
(i) of the effectiveness of any post-effective amendment of the
Registration Statement, the filing of any supplement to the Prospectus and
the filing of any amendment to the Conversion Application, (ii) of the
receipt of any comments from the OTS, the Department or the Commission with
respect to the transactions contemplated by this Agreement or the Plan,
(iii) of any request by the Commission, the OTS or the Department for any
amendment to the Registration Statement or the Conversion Application or
any amendment or supplement to the Prospectus or for additional
information, (iv) of the issuance by the OTS or the Department of any order
suspending the Offerings or the use of the Prospectus or the initiation of
any proceedings for that purpose, (v) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose, and (vi) of the
receipt of any notice with respect to the suspension of any qualification
of the Securities for offering or sale in any jurisdiction. The Company and
the Bank will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof
at the earliest possible moment.
(b) The Company and the Bank will give the Agent notice of its
intention to file or prepare any amendment to the Conversion Application or
Registration Statement (including any post-effective amendment) or any
amendment or supplement to the Prospectus (including any revised prospectus
which the Company proposes for use in connection with the Syndicated
Community Offering of the Securities which differs from the prospectus on
file at the Commission at the time the Registration Statement becomes
effective, whether or not such revised prospectus is required to be filed
pursuant to Rule 424(b) of the Securities Act Regulations), will furnish
the Agent with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may be,
and will not file any such amendment or supplement or use any such
prospectus to which the Agent or counsel for the Agent may object.
(c) The Company and the Bank will deliver to the Agent as many signed
copies and as many conformed copies of the Conversion Application and the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein)
as the Agent may reasonably request,
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<PAGE>
and from time to time such number of copies of the Prospectus as the Agent
may reasonably request.
(d) During the period when the Prospectus is required to be delivered,
the Company and the Bank will comply, at their own expense, with all
requirements imposed upon them by the OTS and the Department, by the
applicable Conversion Regulations, as from time to time in force, and by
the Securities Act, the Securities Act Regulations, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
of the Commission promulgated thereunder, including, without limitation,
Regulation M under the Exchange Act, so far as necessary to permit the
continuance of sales or dealing in shares of Common Stock during such
period in accordance with the provisions hereof and the Prospectus.
(e) If any event or circumstance shall occur as a result of which it
is necessary, in the opinion of counsel for the Agent, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, the Company and the Bank will forthwith amend or supplement the
Prospectus (in form and substance satisfactory to counsel for the Agent) so
that, as so amended or supplemented, the Prospectus will not include an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading, and the Company and the Bank will furnish to the Agent a
reasonable number of copies of such amendment or supplement. For the
purpose of this subsection, the Company and the Bank will each furnish such
information with respect to itself as the Agent may from time to time
reasonably request.
(f) The Company and the Bank will take all necessary action, in
cooperation with the Agent, to qualify the Securities for offering and sale
under the applicable securities laws of such states of the United States
and other jurisdictions as the Conversion Regulations may require and as
the Agent and the Company have agreed; provided, however, that the Company
and the Bank shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation in any jurisdiction in
which it is not so qualified. In each jurisdiction in which the Securities
have been so qualified, the Company and the Bank will file such statements
and reports as may be required by the laws of such jurisdiction to continue
such qualification in effect for a period of not less than one year from
the effective date of the Registration Statement.
(g) The Company authorizes Sandler O'Neill and any Selected Dealers to
act as agent of the Company in distributing the Prospectus to persons
entitled to receive subscription rights and other persons to be offered
Securities having record addresses in the states or jurisdictions set forth
in a survey of the securities or "blue sky" laws of the various
jurisdictions in which the Offerings will be made (the "Blue Sky Survey").
(h) The Company will make generally available to its security holders
as soon as practicable, but not later than 60 days after the close of the
period covered thereby,
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<PAGE>
an earnings statement (in form complying with the provisions of Rule 158 of
the 1933 Act Regulations) covering a twelve month period beginning not
later than the first day of the Company's fiscal quarter next following the
"effective date" (as defined in said Rule 158) of the Registration
Statement.
(i) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to its stockholders as
soon as practicable after the end of each such fiscal year an annual report
(including consolidated statements of financial condition and consolidated
statements of income, stockholders' equity and cash flows, certified by
independent public accountants) and, as soon as practicable after the end
of each of the first three quarters of each fiscal year (beginning with the
fiscal quarter ending after the effective date of the Registration
Statement), consolidated summary financial information of the Company, the
Bank and its subsidiaries for such quarter in reasonable detail. In
addition, such annual report and quarterly consolidated summary financial
information shall be made public through the issuance of appropriate press
releases at the same time or prior to the time of the furnishing thereof to
stockholders of the Company.
(j) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to the Agent (i) as
soon as publicly available, a copy of each report or other document of the
Company furnished generally to stockholders of the Company or furnished to
or filed with the Commission under the Exchange Act or any national
securities exchange or system on which any class of securities of the
Company is listed, and (ii) from time to time, such other information
concerning the Company as the Agent may reasonably request.
(k) The Company and the Bank will conduct the Conversion including the
formation and operation of the Foundation in all material respects in
accordance with the Plan, the Conversion Regulations and all other
applicable regulations, decisions and orders, including all applicable
terms, requirements and conditions precedent to the Conversion imposed upon
the Company or the Bank by the OTS or the Department.
(l) The Company and the Bank will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds."
(m) The Company will file with the Commission such reports on Form SR
as may be required pursuant to Rule 463 of the Securities Act Regulations,
if such report or substantially similar report is required by the SEC.
(n) The Company will maintain the effectiveness of the Exchange Act
Registration Statement for not less than three years. The Company will
file with the Nasdaq Stock Market all documents and notices required by the
Nasdaq Stock Market of companies that have issued securities that are
traded in the over-the-counter market and quotations for which are reported
by the Nasdaq National Market.
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(o) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by the Agent in order for the Agent
to ensure compliance with the National Association of Securities Dealers,
Inc.'s "Interpretation Relating to Free-Riding and Withholding."
(p) Other than in connection with any employee benefit plan or
arrangement described in the Prospectus, the Company will not, without the
prior written consent of the Agent, sell or issue, contract to sell or
otherwise dispose of, any shares of Common Stock other than the Securities
for a period of 180 days following the Closing Time.
(q) During the period beginning on the date hereof and ending on the
later of the third anniversary of the Closing Time or the date on which the
Agent receives full payment in satisfaction of any claim for
indemnification or contribution to which it may be entitled pursuant to
Sections 6 or 7, respectively, neither the Company nor the Bank shall,
without the prior written consent of the Agent, take or permit to be taken
any action that could result in the Bank Common Stock becoming subject to
any security interest, mortgage, pledge, lien or encumbrance; provided,
however, that this covenant shall be null and void if the Board of
Governors of the Federal Reserve System, by regulation, policy statement or
interpretive release, or by written order or written advice addressed to
the Bank or the Agent specifically addressing the provisions of Section
6(a) hereof, permits indemnification of the Agent by the Bank as
contemplated by such provisions.
(r) The Company and the Bank will comply with the conditions imposed
by or agreed to with the OTS in connection with its approval of the Holding
Company Application and with the FDIC in connection with their approval or
non-objection of, or non-objection to, the Conversion Application,
including those conditions relating to the establishment and the operation
of the Foundation; the Company and the Bank shall use their best efforts to
ensure that the Foundation submits within the time frames required by
applicable law a request to the Internal Revenue Service to be recognized
as a tax-exempt organization under Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended (the "Code"); the Company and the Bank
will take no action which will result in the possible loss of the
Foundation's tax exempt status; and neither the Company nor the Bank will
contribute any additional assets to the Foundation until such time that
such additional contributions will be deductible for federal and state
income tax purposes.
(s) During the period ending on the first anniversary of the Closing
Time, the Bank will comply with all applicable law and regulation necessary
for the Bank to continue to be a "qualified thrift lender" within the
meaning of 12 U.S.C. Section 1467a(m).
(t) The Company shall not deliver the Securities until the Company and
the Bank have satisfied each condition set forth in Section 5 hereof,
unless such condition is waived by the Agent.
(u) The Company or the Bank will furnish to Sandler O'Neill as early
as practicable prior to the Closing Date, but no later than two (2) full
business days prior
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<PAGE>
thereto, a copy of the latest available unaudited interim consolidated
financial statements of the Bank and the Subsidiaries which have been read
by Deloitte & Touche, LLP, as stated in their letters to be furnished
pursuant to subsections (e) and (f) of Section 5 hereof.
SECTION 4. PAYMENT OF EXPENSES. The Company and the Bank jointly
and severally agree to pay all expenses incident to the performance of their
obligations under this Agreement, including but not limited to (i) the cost of
obtaining all securities and bank regulatory approvals, (ii) the printing and
filing of the Registration Statement as originally filed and of each amendment
thereto, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the purchasers in the Offerings, (iv) the fees and
disbursements of the Company's and the Bank's counsel, accountants appraiser and
other advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the fees and disbursements of counsel in connection therewith and in connection
with the preparation of the Blue Sky Survey, (vi) the printing and delivery to
the Agent of copies of the Registration Statement as originally filed and of
each amendment thereto and the printing and delivery of the Prospectus and any
amendments or supplements thereto to the purchasers in the Offerings and the
Agent, (vii) the printing and delivery to the Agent of copies of a Blue Sky
Survey, and (viii) the fees and expenses incurred in connection with the listing
of the Securities on the Nasdaq National Market. In the event the Agent incurs
any such fees and expenses on behalf of the Bank or the Company, the Bank will
reimburse the Agent for such fees and expenses whether or not the Conversion is
consummated; provided, however, that the Agent shall not incur any substantial
expenses on behalf of the Bank or the Company pursuant to this Section without
the prior approval of the Bank.
The Company and the Bank jointly and severally agree to pay certain
expenses incident to the performance of the Agent's obligations under this
Agreement, regardless of whether the Conversion is consummated, including (i)
the filing fees paid or incurred by the Agent in connection with all filings
with the National Association of Securities Dealers, Inc., and (ii) all
reasonable out of pocket expenses incurred by the Agent relating to the
Offerings, including, without limitation, advertising, promotional, syndication
and travel expenses and fees and expenses of the Agent's counsel. All fees and
expenses to which the Agent is entitled to reimbursement under this paragraph of
this Section 4 shall be due and payable upon receipt by the Company or the Bank
of a written accounting therefor setting forth in reasonable detail the expenses
incurred by the Agent.
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS. The Company, the Bank
and the Agent agree that the issuance and the sale of Securities and all
obligations of the Agent hereunder are subject to the accuracy of the
representations and warranties of the Company and the Bank herein contained as
of the date hereof and the Closing Time, to the accuracy of the statements of
officers and directors of the Company and the Bank made pursuant to the
provisions hereof, to the performance by the Company and the Bank of their
obligations hereunder, and to the following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Securities Act or proceedings
therefor initiated or threatened by the Commission, no order suspending the
Offerings or authorization for
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final use of the Prospectus shall have been issued or proceedings therefor
initiated or threatened by the OTS or the Department and no order
suspending the sale of the Securities in any jurisdiction shall have been
issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time, of Muldoon,
Murphy & Faucette, counsel for the Company and the Bank, in form and
substance satisfactory to counsel for the Agent, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the State of Delaware.
(ii) The Company has full corporate power and authority
to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and
Prospectus and to enter into and perform its obligations under
this Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in the
State of New Jersey and in each other jurisdiction in which such
qualification is required whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure to so qualify would not have a material adverse effect
upon the financial condition, results of operations or business
affairs of the Company, the Bank and its subsidiaries, considered
as one enterprise.
(iv) Upon consummation of the Conversion, and the
issuance of the Foundation Shares to the Foundation immediately
upon completion thereof, the authorized, issued and outstanding
capital stock of the Company will be as set forth in the
Prospectus under "Capitalization" and no shares of Common Stock
have been or will be issued and outstanding prior to the Closing
Time.
(v) The Securities and the Foundation Shares have been
duly and validly authorized for issuance and sale and, when
issued and delivered by the Company pursuant to the Plan against
payment of the consideration calculated as set forth in the Plan,
or contributed by the Company pursuant to the Plan in the case of
the Foundation Shares, will be duly and validly issued and fully
paid and non-assessable.
(vi) The issuance of the Securities and the Foundation
Shares is not subject to preemptive or other similar rights
arising by operation of law or, to the best of their knowledge
and information, otherwise.
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(vii) The Bank has been at all times since __________ and
prior to the Closing Time duly organized, and is validly existing
and in good standing under the laws of the State of New Jersey as
a New Jersey-chartered savings and loan association of mutual
form, and, at Closing Time, has become duly organized, validly
existing and in good standing under the laws of the State of New
Jersey as a New Jersey-chartered savings and loan association of
stock form, in both instances with full corporate power and
authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and the
Prospectus; and the Bank is duly qualified as a foreign
corporation in each jurisdiction in which the failure to so
qualify would have a material adverse effect upon the financial
condition, results of operations or business affairs of the Bank.
(viii) The Bank is a member in good standing of the Federal
Home Loan Bank of New York and the deposit accounts of the Bank
are insured by the FDIC up to the applicable limits.
(ix) Each direct and indirect subsidiary of the Bank has
been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and is duly qualified as
a foreign corporation to transact business and is in good
standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the
Bank and its subsidiaries, taken as a whole; the activities of
each such subsidiary are permitted to subsidiaries of a savings
association holding company and of a federally chartered savings
bank by the rules, regulations, resolutions and practices of the
OTS; all of the issued and outstanding capital stock of each such
subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Bank, directly or
through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity.
(x) The Foundation has been duly incorporated and is
validly existing as a non-stock corporation in good standing
under the laws of the State of Delaware with corporate power and
authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus; the Foundation is
not a savings and loan holding company within the meaning of 12
C.F.R. Section 574.2(q) as a result of the issuance of shares of
Common Stock to it in accordance with the terms of the Plan and
in the amounts as described in the Prospectus; no approvals are
required to establish the Foundation and to contribute the shares
of Common Stock thereto as described in the Prospectus other than
those set forth in any written notice or order of approval or
non-objection of the
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Conversion, the Conversion Application or the Holding Company
Application, copies of which were provided to the Agent prior to
the Closing Time.
(xi) Upon consummation of the Conversion, all of the
issued and outstanding capital stock of the Bank when issued and
delivered pursuant to the Plan against payment of consideration
calculated as set forth in the Plan and set forth in the
Prospectus, will be duly authorized and validly issued and fully
paid and nonassessable, and all such capital stock will be owned
beneficially and of record by the Company free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
(xii) The OTS and the Department have duly approved the
Holding Company Application and the Conversion Application and no
action is pending, or to the best of such counsel's knowledge,
threatened respecting the Holding Company Application or the
Conversion Application or the acquisition by the Company of all
of the Bank's issued and outstanding capital stock; the Holding
Company Application and the Conversion Application comply with
the applicable requirements of the OTS and the Department,
includes all documents required to be filed as exhibits thereto,
and is, to the best of such counsel's knowledge and information,
truthful, accurate and complete; and the Company is duly
authorized to become a savings association holding company and is
duly authorized to own all of the issued and outstanding capital
stock of the Bank to be issued pursuant to the Plan.
(xiii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including
the establishment of the Foundation and the contribution thereto
of the Foundation Shares, (A) have been duly and validly
authorized by all necessary action on the part of each of the
Company and the Bank, and this Agreement constitutes the legal,
valid and binding agreement of each of the Company and the Bank,
enforceable in accordance with its terms, except as rights to
indemnity and contribution hereunder may be limited under
applicable law (it being understood that such counsel may avail
itself of customary exceptions concerning the effect of
bankruptcy, insolvency or similar laws and the availability of
equitable remedies); (B) will not result in any violation of the
provisions of the certificate of incorporation, charter or bylaws
of the Company, the Bank or any of its subsidiaries; and, (C)
will not conflict with or constitute a breach of, or default
under, and no event has occurred which, with notice or lapse of
time or both, would constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance, that,
individually or in the aggregate, would have a material adverse
effect on the financial condition, results of operations or
business affairs of the Company, the Bank and its subsidiaries
considered as one enterprise, upon any property or assets of
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the Company, the Bank or its subsidiaries pursuant to any
contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Company, the Bank or its
subsidiaries is a party or by which any of them may be bound, or
to which any of the property or assets of the Company, the Bank
or its subsidiaries is subject.
(xiv) The Prospectus has been duly authorized by the OTS
and the Department for final use pursuant to the Conversion
Regulations and no action is pending, or to the best of such
counsel's knowledge, is threatened, by the OTS or the Department
to revoke such authorization.
(xv) The Registration Statement is effective under the
Securities Act and no stop order suspending the effectiveness of
the Registration Statement has been issued under the Securities
Act or, to the best of such counsel's knowledge, proceedings
therefor initiated or threatened by the Commission.
(xvi) No further approval, authorization, consent or other
order of any public board or body is required in connection with
the execution and delivery of this Agreement, the issuance of the
Securities and the consummation of the Conversion, except as may
be required under the securities or Blue Sky laws of various
jurisdictions as to which no opinion need be rendered.
(xvii) At the time the Registration Statement became
effective, the Registration Statement (other than the financial
statements and statistical data included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the Securities Act and the
Securities Act Regulations and the Conversion Regulations.
(xviii) The Common Stock conforms to the description
thereof contained in the Prospectus, and the form of certificate
used to evidence the Common Stock is in due and proper form and
complies with all applicable statutory requirements.
(xix) There are no legal or governmental proceedings
pending or threatened against or affecting the Company, the Bank
or its subsidiaries which are required, individually or in the
aggregate, to be disclosed in the Registration Statement and
Prospectus, other than those disclosed therein, and all pending
legal or governmental proceedings to which the Company, the Bank
or any of its subsidiaries is a party or to which any of their
property is subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to
the business, are, considered in the aggregate, not material.
(xx) The information in the Prospectus under "Risk
Factors - Establishment of the Charitable Foundation,"
"- Anti-Takeover Provisions
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<PAGE>
which may Discourage Takeover Attempts," and "- Possible Adverse
Income Tax Consequences of the Distribution of Subscription
Rights," "Dividend Policy," "Business of the Association - Legal
Proceedings," "Federal and State Taxation," "Regulation," "The
Conversion - Establishment of the Charitable Foundation,
"- Effects of Conversion," "-- Effects on Liquidation Rights" and
"-- Tax Effects," "Restrictions on Acquisitions of the Holding
Company and the Association" and "Description of Capital Stock of
the Company," to the extent that it constitutes matters of law,
summaries of legal matters, documents or proceedings, or legal
conclusions, has been reviewed by them and is complete and
accurate in all material respects.
(xxi) To the best of such counsel's knowledge, there are
no contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments required to be described or referred
to in the Registration Statement or to be filed as exhibits
thereto other than those described or referred to therein or
filed as exhibits thereto, the descriptions thereof or references
thereto are correct, and no default exists, and no event has
occurred which, with notice or lapse of time or both, would
constitute a default, in the due performance or observance of any
material obligation, agreement, covenant or condition contained
in any contract, indenture, mortgage, loan agreement, note, lease
or other instrument so described, referred to or filed.
(xxii) The Plan has been duly authorized by the Board of
Directors of the Company and the Board of Directors of the Bank
and, the OTS's and the Department's approval of the Plan remains
in full force and effect; the Bank's certificate has been
amended, effective upon consummation of the Conversion and the
filing of such amended certificate with the Department, to
authorize the issuance of permanent capital stock; to the best of
such counsel's knowledge, the Company and the Bank have conducted
the Conversion and the establishment and funding of the
Foundation in all material respects in accordance with applicable
requirements of the Conversion Regulations, the Plan and all
other applicable regulations, decisions and orders thereunder,
including all material applicable terms, conditions, requirements
and conditions precedent to the Conversion imposed upon the
Company or the Bank by the OTS or the Department and no order has
been issued by the OTS or the Department to suspend the
Conversion or the Offerings and no action for such purpose has
been instituted or threatened by the OTS or the Department; and,
to the best of such counsel's knowledge, no person has sought to
obtain review of the final action of the OTS or the Department in
approving the Conversion Application (which includes the Plan
which provides for the establishment of the Foundation) or the
Holding Company Application.
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<PAGE>
(xxiii) To the best of such counsel's knowledge, the
Company and the Bank and its subsidiaries have obtained all
licenses, permits and other governmental authorizations currently
required for the conduct of their respective businesses as
described in the Registration Statement and Prospectus, and all
such licenses, permits and other governmental authorizations are
in full force and effect, and the Company and the Bank and its
subsidiaries are in all material respects complying therewith.
(xxiv) Neither the Company, the Bank nor any of its
subsidiaries is in violation of its certificate of incorporation,
organization certificate, articles of incorporation or charter,
as the case may be, or bylaws (and the Bank will not be in
violation of its charter in stock form upon consummation of the
Conversion) or, to the best of such counsel's knowledge, in
default (nor has any event occurred which, with notice or lapse
of time or both, would constitute a default) in the performance
or observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement,
note, lease or other instrument to which the Company, the Bank or
any of its subsidiaries is a party or by which the Company, the
Bank or any of its subsidiaries or any of their property may be
bound.
(xxv) The Company is not required to be registered as an
investment company under the Investment Company Act of 1940.
(2) The favorable opinion, dated as of Closing Time, of Malizia,
Spidi, Sloane & Fisch, P.C., counsel for the Agent, with respect to
the matters set forth in Section 5(b)(1)(i), (iv), (v), (vi) (solely
as to preemptive rights arising by operation of law), (xiii), (xvii)
and (xviii) and such other matters as the Agent may reasonably
require.
(3) In giving their opinions required by subsections (b)(l) and
(b)(2), respectively, of this Section, Muldoon, Murphy & Faucette and
Malizia, Spidi, Sloane & Fisch, P.C. shall each additionally state
that nothing has come to their attention that would lead them to
believe that the Registration Statement (except for financial
statements and schedules and other financial or statistical data
included therein, as to which counsel need make no statement), at the
time it became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or that the
Prospectus (except for financial statements and schedules and other
financial or statistical data included therein, as to which counsel
need make no statement), at the time the Registration Statement became
effective or at Closing Time, included an untrue statement of a
material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading. In giving their opinions,
Muldoon, Murphy & Faucette and Malizia, Spidi, Sloane & Fisch, P.C.
may rely as to matters of fact on certificates of officers and
directors of the Company and the Bank and certificates of public
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<PAGE>
officials, and as to certain matters of Delaware law upon the opinion
of Morris, Nichols, Arsht & Tunnell, which opinions shall be in form
and substance satisfactory to counsel for the Agent, and Malizia,
Spidi, Sloane & Fisch, P.C. may also rely on the opinion of Muldoon,
Murphy & Faucette.
(c) At Closing Time referred to in Section 2, the Company and the Bank
shall have completed in all material respects the conditions precedent to
the Conversion in accordance with the Plan, the applicable Conversion
Regulations and all other applicable laws, regulations, decisions and
orders, including all terms, conditions, requirements and provisions
precedent to the Conversion imposed upon the Company or the Bank by the OTS
or the Department, or any other regulatory authority other than those which
the OTS and the Department permits to be completed after the Conversion.
(d) At Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in
the financial condition, results of operations or business affairs of the
Company, the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the Agent
shall have received a certificate of the Chief Executive Officer of the
Company and of the Bank, the President of the Company and the Bank and the
chief financial or chief accounting officer of the Company and of the Bank,
dated as of Closing Time, to the effect that (i) there has been no such
material adverse change, (ii) there shall have been no material transaction
entered into by the Company or the Bank from the latest date as of which
the financial condition of the Company or the Bank as set forth in the
Registration Statement and the Prospectus other than transactions referred
to or contemplated therein and transactions in the ordinary cause of
business, (iii) neither the Company nor the Bank shall have received from
the OTS or the Department any direction (oral or written) to make any
material change in the method of conducting its business with which it has
not complied (which direction, if any, shall have been disclosed to the
Agent) or which materially and adversely would affect the business,
financial condition or results of operations of the Company, the Bank or
its subsidiaries, (iv) the representations and warranties in Section 1
hereof are true and correct with the same force and effect as though
expressly made at and as of the Closing Time, (v) the Company and the Bank
have complied with all agreements and satisfied all conditions on their
part to be performed or satisfied at or prior to Closing Time, (vi) no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been initiated or
threatened by the Commission and (vii) no order suspending the Offerings or
the authorization for final use of the Prospectus has been issued and no
proceedings for that purpose have been initiated or threatened by the OTS,
the Department or the FDIC and no person has sought to obtain regulatory or
judicial review of the action of the OTS or the Department in approving the
Plan in accordance with the Conversion Regulations nor has any person
sought to obtain regulatory or judicial review of the action of the OTS or
the Department in approving the Holding Company Application.
(e) At the time of the execution of this Agreement, the Agent shall
have received from Deloitte & Touche, LLP a letter dated such date, in form
and substance
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satisfactory to the Agent, to the effect that (i) they are independent
public accountants with respect to the Company, the Bank and its
subsidiaries within the meaning of the Code of Ethics of the American
Institute of Certified Public Accountants, the Securities Act and the
Securities Act Regulations and the Conversion Regulations; (ii) it is their
opinion that the consolidated financial statements and supporting schedules
included in the Registration Statement and covered by their opinions
therein comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Securities Act
Regulations; (iii) based upon limited procedures as agreed upon by the
Agent and Deloitte & Touche, LLP set forth in detail in such letter,
nothing has come to their attention which causes them to believe that (A)
the unaudited financial statements and supporting schedules of the Bank and
its subsidiaries included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements
of the Securities Act, the Securities Act Regulations and the Conversion
Regulations or are not presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements included in the Registration Statement
and the Prospectus, (B) the unaudited amounts of net interest income and
net income set forth under "Selected Financial Information" in the
Registration Statement and Prospectus do not agree with the amounts set
forth in unaudited consolidated financial statements as of and for the
dates and periods presented under such captions or such amounts were not
determined on a basis substantially consistent with that used in
determining the corresponding amounts in the audited financial statements
included in the Registration Statement, (C) at a specified date not more
than five days prior to the date of this Agreement, there has been any
increase in the consolidated long term or short term debt of the Bank and
its subsidiaries or any decrease in consolidated total assets, the
allowance for loan losses, total deposits or net worth of the Bank and its
subsidiaries, in each case as compared with the amounts shown in the
_____________, 199__ balance sheet included in the Registration Statement
or, (D) during the period from ______________, 199__ to a specified date
not more than five days prior to the date of this Agreement, there were any
decreases, as compared with the corresponding period in the preceding year,
in total interest income, net interest income, net interest income after
provision for loan losses, income before income tax expense or net income
of the Bank and its subsidiaries, except in all instances for increases or
decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur; and (iv) in addition to the examination referred to
in their opinions and the limited procedures referred to in clause (iii)
above, they have carried out certain specified procedures, not constituting
an audit, with respect to certain amounts, percentages and financial
information which are included in the Registration Statement and Prospectus
and which are specified by the Agent, and have found such amounts,
percentages and financial information to be in agreement with the relevant
accounting, financial and other records of the Company, the Bank and its
subsidiaries identified in such letter.
(f) At Closing Time, the Agent shall have received from Deloitte &
Touche, LLP a letter, dated as of Closing Time, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection
(d) of this Section, except that the specified date referred to shall be a
date not more than five days prior to Closing Time.
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<PAGE>
(g) At Closing Time, the Securities shall have been approved for
listing on the Nasdaq National Market upon notice of issuance.
(h) At Closing Time, the Agent shall have received a letter from
FinPro, Inc., dated as of the Closing Time, confirming its appraisal.
(i) At Closing Time, counsel for the Agent shall have been furnished
with such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities and the
Foundation Shares as herein contemplated and related proceedings, or in
order to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and sale
of the Securities and Foundation Shares as herein contemplated shall be
satisfactory in form and substance to the Agent and counsel for the Agent.
(j) At any time prior to Closing Time, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effect of which, in the judgment of the Agent,
are so material and adverse as to make it impracticable to market the
Securities or to enforce contracts, including subscriptions or orders, for
the sale of the Securities, and (ii) trading generally on either the
American Stock Exchange, the New York Stock Exchange or the Nasdaq Stock
Market shall not have been suspended, and minimum or maximum prices for
trading shall not have been fixed, or maximum ranges for prices for
securities have been required, by either of said Exchanges or by order of
the Commission or any other governmental authority, and a banking
moratorium shall not have been declared by either Federal or New York
authorities.
SECTION 6. INDEMNIFICATION.
(a) The Company and the Bank, jointly and severally, agree to
indemnify and hold harmless the Agent, each person, if any, who controls the
Agent, within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, and its respective partners, directors, officers, employees
and agents as follows:
(i) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, related to or arising out of the
Conversion (including the establishment of the Foundation and the
contribution of the Foundation Shares thereto by the Company) or any action
taken by the Agent where acting as agent of the Company or the Bank or
otherwise as described in Section 2 hereof; provided, however, that this
indemnity agreement shall not apply to any loss, liability, claim, damage
or expense found in a final judgment by a court of competent jurisdiction
to have resulted primarily from the bad faith, willful misconduct or gross
negligence of the Agent seeking indemnification hereunder.
(ii) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, based upon or arising out of any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement (or any
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amendment thereto), or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Proxy
Statement or Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(iii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or
of any claim whatsoever described in clauses (i) or (ii) above, if such
settlement is effected with the written consent of the Company or the Bank,
which consent shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as
incurred (including, subject to Section 6(c) hereof, the fees and
disbursements of counsel chosen by the Agent), reasonably incurred in
investigating, preparing for or defending against any litigation, or any
investigation, proceeding or inquiry by any governmental agency or body,
commenced or threatened, or any claim pending or threatened whatsoever
described in clauses (i) or (ii) above, to the extent that any such expense
is not paid under (i), (ii) or (iii) above;
provided, however, that the indemnification provided for in this paragraph (a)
shall not apply to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or alleged untrue statement of a material
fact contained in the Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading which was made in reliance upon and in conformity with
written information relating to the Agent furnished to the Company or the Bank
by the Agent expressly for use in the Prospectus (or any amendments or
supplements thereto), which information the Company and the Bank acknowledge is
included only in the first two paragraphs of the sections captioned "The
Conversion - Marketing and Underwriting Arrangements" of the Prospectus (the
"Agent Information"). Notwithstanding the foregoing, the indemnification
provided for in this paragraph (a) shall not apply to the Bank to the extent
that such indemnification by the Bank would constitute a covered transaction
under Section 23A of the Federal Reserve Act.
(b) The Agent agrees to indemnify and hold harmless the Company, the
Bank, their directors and trustees, each of their officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, of a material fact made in the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with the Agent
Information.
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(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of any such
action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to no more than one local counsel
in each separate jurisdiction in which any action or proceeding is commenced)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
(d) The Company and the Bank also agree that the Agent shall not have
any liability (whether direct or indirect, in contract or tort or otherwise) to
the Bank, the Company, its security holders or the Bank's or the Company's
creditors relating to or arising out of the engagement of the Agent pursuant to,
or the performance by the Agent of the services contemplated by, this Agreement,
except to the extent that any loss, claim, damage or liability is found in a
final judgment by a court of competent jurisdiction to have resulted primarily
from the Agent's bad faith, willful misconduct or gross negligence.
(e) In addition to, and without limiting, the provisions of Section
(6)(a)(iv) hereof, in the event that any Agent, any person, if any, who controls
the Agent within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act or any of its partners, directors, officers, employees or
agents is requested or required to appear as a witness or otherwise gives
testimony in any action, proceeding, investigation or inquiry brought by or on
behalf of or against the Company, the Bank, the Agent or any of its respective
affiliates or any participant in the transactions contemplated hereby in which
the Agent or such person or agent is not named as a defendant, the Company and
the Bank jointly and severally agree to reimburse the Agent for all reasonable
and necessary out-of-pocket expenses incurred by it in connection with preparing
or appearing as a witness or otherwise giving testimony and to compensate the
Agent in an amount to be mutually agreed upon.
SECTION 7. CONTRIBUTION. In order to provide for just and
equitable contribution in circumstances in which the indemnity agreement
provided for in Section 6 hereof is for any reason held to be unenforceable by
the indemnified parties although applicable in accordance with its terms, the
Company, the Bank and the Agent shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by said
indemnity agreement incurred by the Company or the Bank and the Agent, as
incurred, in such proportions (i) that the Agent is responsible for that portion
represented by the percentage that the maximum aggregate marketing fees
appearing on the cover page of the Prospectus bears to the maximum aggregate
gross proceeds appearing thereon and the Company and the Bank are jointly and
severally responsible for the balance or (ii) if, but only if, the allocation
provided for in clause (i) is for any reason held unenforceable, in such
proportion as is appropriate to reflect not only the relative benefits to the
Company and the Bank on the one hand and the Agent on the other, as reflected in
clause (i), but also the relative fault of the Company and the Bank on the one
hand and the Agent on the other, as well as any other relevant equitable
considerations; provided, however, that no person guilty of fraudulent
misrepresentation (within
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the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls the Agent within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act shall have the same rights to contribution as the
Agent, and each director of the Company, each trustee of the Bank, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company or the Bank within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company and the Bank. Notwithstanding anything to the
contrary set forth herein, to the extent permitted by applicable law, in no
event shall the Agent be required to contribute an aggregate amount in excess of
the aggregate marketing fees to which the Agent is entitled and actually paid
pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Company or the Bank
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Agent or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to the Company,
at any time at or prior to Closing Time (i) if there has been, since the date of
this Agreement or since the respective dates as of which information is given in
the Registration Statement, any material adverse change in the financial
condition, results of operations or business affairs of the Company or the Bank,
or the Company, the Bank and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effect of which, in the judgment of the Agent, are
so material and adverse as to make it impracticable to market the Securities or
to enforce contracts, including subscriptions or orders, for the sale of the
Securities, (iii) if trading generally on the Nasdaq Stock Market, the American
Stock Exchange or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of said Exchanges or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either Federal or New York authorities, (iv) if any condition
specified in Section 5 shall not have been fulfilled when and as required to be
fulfilled; (v) if there shall have been such material adverse change in the
condition or prospects of the Company or the Bank or the prospective market for
the Company's securities as in the Agent's good faith opinion would make it
inadvisable to proceed with the offering, sale or delivery of the Securities;
(vi) if, in the Agent's good faith opinion, the price for the Securities
established by FinPro, Inc.is not reasonable or equitable under then prevailing
market conditions, or (vii) if the Conversion is not consummated on or prior to
____________________.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof
-31-
<PAGE>
relating to the reimbursement of expenses and except that the provisions of
Sections 6 and 7 hereof shall survive any termination of this Agreement.
SECTION 10. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the Agent
shall be directed to the Agent at Two World Trade Center, 104th Floor, New York,
New York 10048, attention of Catherine A. Lawton, General Counsel; notices to
the Company and the Bank shall be directed to either of them at 4651 Route 42,
Turnersville, New Jersey 08012, attention of Robert J. Colacicco, President.
SECTION 11. PARTIES. This Agreement shall inure to the benefit of and
be binding upon the Agent, the Company and the Bank and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Agent, the Company and the Bank and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein or
therein contained. This Agreement and all conditions and provisions hereof and
thereof are intended to be for the sole and exclusive benefit of the Agent, the
Company and the Bank and their respective successors, and said controlling
persons and officers and directors and their heirs and legal representatives,
and for the benefit of no other person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT. This Agreement represents
the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made, except for the engagement letter dated
July 29, 1998, by and between the Agent and the Company and the Bank, relating
to the Agent's providing conversion agent services to the Company and the Bank
in connection with the Conversion. No waiver, amendment or other modification of
this Agreement shall be effective unless in writing and signed by the parties
hereto.
SECTION 13. GOVERNING LAW AND TIME. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in said State without regard to the
conflicts of laws provisions thereof. Unless otherwise noted, specified times
of day refer to Eastern time.
SECTION 14. SEVERABILITY. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
SECTION 15. HEADINGS. Sections headings are not to be considered part
of this Agreement, are for convenience and reference only, and are not to be
deemed to be full or accurate descriptions of the contents of any paragraph or
subparagraph.
-32-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Agent, the Company and the Bank in accordance with its terms.
Very truly yours,
SOUTH JERSEY FINANCIAL CORPORATION, INC.
By:
--------------------------------------
Title:
-----------------------------------
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
By:
--------------------------------------
Title:
-----------------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
SANDLER O'NEILL & PARTNERS, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:
----------------------------------
[Name]
Vice President
-33-
<PAGE>
South Jersey Financial Corporation, Inc.
3,783,500 Shares
---------
(Maximum Offered in Conversion)
Common Stock
(Par Value $0.01 Per Share)
SELECTED DEALER'S AGREEMENT
_______________, 1998
We have agreed to assist South Jersey Financial Corporation, Inc. (the
"Company") in connection with the offer and sale of shares (the "Shares") of
Common Stock, par value $0.01 per share, of the Company, to be issued in
connection with the conversion of South Jersey Savings and Loan Association, a
New Jersey savings and loan association (the "Bank") from mutual to stock form.
The Company, in connection with its plan to effect such conversion, offered
3,783,500 Shares for subscription by the Bank's employee stock ownership plan
and certain of the Bank's depositors, in a subscription offering, and certain
members of the general public in a concurrent direct community offering. The
Shares which were not subscribed for pursuant to such subscription and direct
community offerings are being offered to the public in a syndicated community
offering (the "Syndicated Community Offering") in accordance with the rules of
the Office of Thrift Supervision ("OTS"). The Shares, the bases on which the
number of Shares to be issued may change, and certain of the terms on which they
are being offered are more fully described in the enclosed Prospectus (the
"Prospectus").
We are offering to Selected Dealers (of which you are one) the opportunity
to participate in the solicitation of offers to buy the Shares in the Syndicated
Community Offering and we will pay you a fee in the amount of ___________
percent (______%) of the dollar amount of the Shares sold on behalf of the
Company by you. The number of Shares sold by you shall be determined based on
the authorized designation of your firm on the order form or forms for such
Shares accompanying the funds transmitted for payment therefor (whether in the
form of a check payable to the Bank or a withdrawal from an existing account at
the Bank) to the special account established by the Company for the purpose of
holding such funds. It is understood, of course, that payment of your fee will
be made only out of compensation received by us for the Shares sold on behalf of
the Company by you, as evidenced in accordance with the preceding sentence. The
Bank has requested us to invite you to become a "Sponsoring Dealer," that is, a
Selected Dealer who solicits offers which result in the sale on behalf of the
Bank of at least ________ Shares. You may become a Sponsoring Dealer (subject
to your fulfillment of the requirement in the preceding sentence) by checking
the box on the confirmation at the end of this letter. If you become a
Sponsoring Dealer, you shall be entitled to an additional fee in the amount of
______ percent (_____%) of the dollar amount of the Shares sold on behalf of the
Company by you as evidenced in the manner set forth above.
Each order form for the purchase of Shares must set forth the identity,
---- --------
address and tax identification number of each person ordering Shares regardless
- ------- --- -------------- ------
of whether the Shares will be
<PAGE>
registered in street name or in the purchaser's name. Such order form should
clearly identify your firm.
As soon as practicable after all the Shares are sold, we will remit to you,
out of our compensation as provided above, the fees to which you are entitled
hereunder, including your Sponsoring Dealer fee.
This offer is made subject to the terms and conditions herein set forth and
is made only to Selected Dealers which are (i) members in good standing of the
National Association of Securities Dealers, Inc. ("NASD") which agree to comply
with all applicable rules of the NASD, including, without limitation, the NASD's
Interpretation With Respect to Free-Riding and Withholding and Section 24 of
Article III of the NASD's Rules of Fair Practice, or (ii) foreign dealers not
eligible for membership in the NASD which agree (A) not to sell any Shares
within the United States, its territories or possessions or to persons who are
citizens thereof or resident therein and (B) in making other sales to comply
with the above-mentioned NASD Interpretation, Sections 8, 24 and 36 of the
above-mentioned Article III as if they were NASD members and Section 25 of such
Article III as it applies to non-member brokers or dealers in a foreign country.
Orders for Shares will be strictly subject to confirmation and we, acting
on behalf of the Company, reserve the right in our absolute discretion to reject
any order in whole or in part, to accept or reject orders in the order of their
receipt or otherwise, and to allot. Neither you nor any other person is
authorized by the Company, the Bank or by us to give any information or make any
representations other than those contained in the Prospectus in connection with
the sale of any of the Shares. No Selected Dealer is authorized to act as agent
for us when soliciting offers to buy the Shares from the public or otherwise.
No Selected Dealer shall engage in any stabilizing (as defined in Regulation M
promulgated under the Securities Exchange Act of 1934, as amended) with respect
to the Company's Common Stock during the offering.
We and each Selected Dealer assisting in selling Shares pursuant hereto
agree to comply with the applicable requirements of the Securities Exchange Act
of 1934, as amended, and applicable rules and regulations issued by the Federal
Reserve Board and the OTS. In addition, we and each Selected Dealer confirm
that the Securities and Exchange Commission interprets Rule 15c2-8 promulgated
under the Securities Exchange Act of 1934, as requiring that a prospectus be
supplied to each person who is expected to receive a confirmation of sale 48
hours prior to delivery of such person's order form.
We and each Selected Dealer further agree to the extent that our customers
desire to pay for Shares with funds held by or to be deposited with us, in
accordance with the interpretation of the Securities and Exchange Commission of
Rule 15c2-4 promulgated under the Securities Exchange Act of 1934, as amended
either (a) upon receipt of an executed order form or direction to execute an
order form on behalf of a customer to forward the syndicated community offering
price for the Shares ordered on or before 12:00 p.m. on the business day
following receipt or execution of an order form by us to the Bank for deposit in
a segregated account or (b) to solicit indications of interest in which event
(i) we will subsequently contact any customers indicating interest to confirm
the interest and give instructions to execute and return an order form or to
receive authorization to execute an order form on their behalf, (ii) we will
mail acknowledgements of receipt of orders to each customer confirming interest
on the business day
-2-
<PAGE>
following such confirmation, (iii) we will debit accounts of such customers on
the fifth business day (the "debit date") following receipt of the confirmation
referred to in (i) and (iv) we will forward completed order forms together with
such funds to the Bank on or before 12:00 p.m. on the next business day
following the debit date for deposit in a segregated account. We acknowledge
that if the procedure in (b) is adopted, our customer's funds are not required
to be in their accounts until the debit date. We and each Selected Dealer
further acknowledge that, in order to use the foregoing "sweep arrangements,"
we comply with the net capital requirements for broker/dealers under Rule
15c3-1(a)(1) of the Securities Exchange Act of 1934.
Unless earlier terminated by us, this Agreement shall terminate 45 full
business days after the date hereof, but may be extended by us for an additional
period or periods not exceeding 30 full business days in the aggregate. We may
terminate this Agreement or any provisions hereof at any time by written or
telegraphic notice to you. Of course, our obligations hereunder are subject to
the successful completion of the offering, including the sale of all of the
Shares.
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of Shares sold on
behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem advisable
in respect to all matters pertaining to the offering. We shall be under no
liability to you except for lack of good faith and for obligations expressly
assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which we
believe the Shares have been qualified for sale under, or are exempt from the
requirements of, the respective blue sky laws of such states, but we assume no
responsibility or obligation as to your rights to sell Shares in any state.
Additional copies of the Prospectus and any supplements thereto will be
supplied in reasonable quantities upon request.
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of New York.
Please confirm your agreement hereto by signing and returning the
confirmation accompanying this letter at once to us at Sandler O'Neill &
Partners, L.P., Two World Trade Center, 104th Floor, New York, New York 10048.
The enclosed duplicate copy will evidence the agreement between us.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: _________________________________
-3-
<PAGE>
Sandler O'Neill & Partners, L.P.
Two World Trade Center - 104th Floor
New York, New York 10048
Re: South Jersey Financial Corporation, Inc.
----------------------------------------
We hereby confirm our agreement to all the terms and conditions stated
in the foregoing letter. We acknowledge receipt of the Prospectus relating to
the Shares and we further state that in agreeing thereto we have relied upon the
Prospectus and no other statement whatsoever, written or oral. We confirm that
we are (i) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"), which agrees to comply with all applicable rules of the
NASD, including, without limitation, the NASD's Interpretation With Respect to
Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of
Fair Practice, or (ii) a foreign dealer not eligible for membership in the NASD
which agrees (A) not to sell any Shares within the United States, its
territories or possessions or to persons who are citizens thereof or resident
therein and (B) in making other sales to comply with the above-mentioned NASD
Interpretation, Sections 8, 24 and 26 of the above-mentioned Article III as if
they were NASD members and Section 25 of such Article III as it applies to a
non-member broker or dealer in a foreign country.
[ ] We wish to become a "Sponsoring Dealer."
________________________________________
(Please print or type name of firm)
________________________________________
(Authorized Representative)
Dated: ___________
<PAGE>
EXHIBIT 2.1
AMENDED
PLAN OF CONVERSION
FOR
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
as amended on
November 24, 1998
<PAGE>
AMENDED
PLAN OF CONVERSION
FOR
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
1. INTRODUCTION
This Plan of Conversion, as amended ("Plan") provides for the conversion
(the "Conversion") of South Jersey Savings and Loan Association ("ASSOCIATION")
from a state-chartered mutual savings and loan association to a state-chartered
capital stock savings association. The Board of Directors of the ASSOCIATION
currently contemplates that all of the stock of the ASSOCIATION will be held by
a Delaware corporation (the "Holding Company"). 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
as described in this Plan is in the best interests of the ASSOCIATION, its
depositors and the community served by the ASSOCIATION. The Board of Directors
believes that the decline in mutuality is placing mutual savings associations,
such as the ASSOCIATION, at a disadvantage to the increasing base of stock
thrift and commercial bank institutions. The restructuring of the ASSOCIATION
into the capital stock form of organization will enable the ASSOCIATION to
compete more effectively with commercial banks and other financial institutions
for new business opportunities, and as a stock institution, to increase its
equity capital base and access the capital markets when needed and to enhance
the ASSOCIATION'S ability to expand its franchise and the products it offers.
The use of the Holding Company, if so utilized, would also provide greater
organizational and operating flexibility. Shares of capital stock of the
ASSOCIATION will be sold
<PAGE>
to the Holding Company and the Holding Company will offer the Conversion Stock
upon the terms and conditions set forth herein to the Eligible Account Holders,
the Employee Plans established by the ASSOCIATION or Holding Company,
Supplemental Eligible Account Holders and Other Members in the respective
priorities set forth in this Plan. Any shares of Conversion Stock not subscribed
for by the foregoing classes of persons will be offered for sale to certain
members of the public either directly by the ASSOCIATION and the Holding Company
through a Community Offering or a Syndicated Community Offering or through an
underwritten firm commitment public offering or through a combination thereof.
In the event that the ASSOCIATION decides not to utilize the Holding Company in
the Conversion, Conversion Stock of the ASSOCIATION, in lieu of the Holding
Company, will be sold as set forth above and in the respective priorities set
forth in this Plan. In addition to the foregoing, the ASSOCIATION and the
Holding Company, as part of this Plan, intend to implement stock option plans
and other stock benefit plans and will provide employment or severance
agreements to certain management employees and certain other compensation to the
directors, officers and employees of the ASSOCIATION as described in the
prospectus for the Conversion Stock.
In furtherance of the ASSOCIATION's long term commitment to its community,
this Plan provides for the establishment of a foundation (the "Foundation") as
part of the Conversion. The Foundation is intended to complement the
ASSOCIATION's existing community reinvestment activities in a manner that will
allow the communities in which the ASSOCIATION operates to share in the
potential growth and profitability of the Holding Company and the ASSOCIATION
over the long term. Consistent with the ASSOCIATION's goals, the Holding
Company intends to donate to the Foundation from its authorized but unissued
common stock up to 8% of the
2
<PAGE>
number of shares sold in the Conversion. The establishment of the Foundation is
subject to the approval of the Voting Members of the ASSOCIATION. In the event
the Foundation is not approved, the ASSOCIATION may determine to complete the
Conversion without the Foundation.
This Plan, which has been unanimously approved by the Board of Directors of
the ASSOCIATION, must also be approved by the affirmative vote of a majority of
the total number of outstanding votes entitled to be cast by Voting Members of
the ASSOCIATION at a special meeting to be called for that purpose. Prior to
the submission of this Plan to the Voting Members for consideration, the Plan
must be approved by the Office of Thrift Supervision (the "OTS") and the New
Jersey Department of Banking (the "Department").
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a Savings
--------------
Account in the ASSOCIATION.
Acting in Concert - The term "Acting in Concert" means (i) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. In
addition, a person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party, except
that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be
3
<PAGE>
acting in concert with its trustee or a person who serves in a similar capacity
solely for the purpose of determining whether stock held by the trustee and
stock held by the plan will be aggregated.
Actual Purchase Price - The term Actual Purchase Price means the per share
---------------------
price at which the Conversion Stock is ultimately sold in accordance with the
terms hereof.
Associate - The term Associate when used to indicate a relationship with
---------
any person, means (i) any corporation or organization (other than the
ASSOCIATION or a majority-owned subsidiary of the ASSOCIATION) of which such
person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10 percent or more of any class of equity securities, (ii) any trust or
other estate in which such person has a substantial beneficial interest or as to
which such person serves as trustee or in a similar fiduciary capacity except
that for the purposes of Sections 9 and 14 hereof, the term "Associate" does not
include any Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified
Employee Stock Benefit Plan in which a person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity, and except
that, for purposes of aggregating total shares that may be held by Officers and
Directors the term "Associate" does not include any Tax-Qualified Employee Stock
Benefit Plan, and (iii) any relative or spouse of such person, or any relative
of such spouse, who has the same home as such person or who is a Director or
Officer of the ASSOCIATION or the Holding Company, if utilized, or any of its
parents or subsidiaries.
Association - The term ASSOCIATION means South Jersey Savings and Loan
-----------
Association, Turnersville, New Jersey.
4
<PAGE>
Community Offering - The term Community Offering means the offering for
------------------
sale to certain members of the general public directly by the ASSOCIATION or the
Holding Company, if utilized, of any shares of Conversion Stock not subscribed
for in the Subscription Offering.
Conversion - The term Conversion means the conversion of the Association
----------
from the mutual to the stock form of organization in accordance with the Plan,
and as the context requires, includes the other transactions contemplated by the
Plan.
Conversion Stock - The term Conversion Stock means the $.01 par value
----------------
common stock offered and issued by the Holding Company or the $1.00 par value
common stock offered and issued by the ASSOCIATION, if the Holding Company form
of organization is not utilized, in connection with the Conversion.
Department - The term Department means the New Jersey Department of
----------
Banking.
Director - The term Director means a member of the Board of Directors of
--------
the ASSOCIATION and, where applicable, a member of the Board of Directors of the
Holding Company.
Eligible Account Holder - The term Eligible Account Holder means any person
-----------------------
holding a Qualifying Deposit on the Eligibility Record Date.
Eligibility Record Date - The term Eligibility Record Date means the date
-----------------------
for determining Eligible Account Holders in the ASSOCIATION and is June 30,
1997.
Employees - The term Employees means all Persons who are employed by the
---------
ASSOCIATION but does not include an Officer or Director.
Employee Plans - The term Employee Plans means the Tax Qualified Employee
--------------
Stock Benefit Plans approved by the Board of Directors of the ASSOCIATION.
5
<PAGE>
Estimated Price Range - The term Estimated Price Range means the range of
---------------------
minimum and maximum aggregate proposed sales prices for the Conversion Stock,
determined by the Board of Directors of the ASSOCIATION and within which range
the aggregate sales price of the Conversion Stock will fall. The Estimated
Price Range will be within the estimated pro forma market value of the
Conversion Stock as determined by the Independent Appraiser prior to the
Subscription Offering and as it may be amended from time to time thereafter.
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
----
Holding Company - The term Holding Company means the Delaware corporation
---------------
formed for the purpose of acquiring all of the shares of capital stock of the
ASSOCIATION to be issued upon its Conversion unless the Holding Company form of
organization is not utilized. Shares of common stock of the Holding Company
will be issued in the Conversion to Participants and others in a Subscription
and Community, Syndicated Community, or underwritten firm commitment public
offerings, or through a combination thereof.
Independent Appraiser - The term Independent Appraiser means an appraiser
---------------------
retained by the ASSOCIATION to prepare an appraisal of the pro forma market
value of the Conversion Stock.
Local Community - The term Local Community means all counties in which the
---------------
Bank maintains a banking office.
Member - The term Member means any Person or entity who qualifies as a
------
member of the ASSOCIATION pursuant to its certificate of incorporation and
bylaws.
OTS - The term OTS means Office of Thrift Supervision of the Department of
---
the Treasury and its successors.
6
<PAGE>
Officer - The term Officer means an executive officer of the ASSOCIATION,
-------
which includes the Chief Executive Officer, President, Executive Vice President,
Senior Vice Presidents, Vice Presidents in charge of principal business
functions, Secretary, Treasurer and Controller and any person performing
functions similar to those performed by the foregoing persons.
Order Form - The term Order Form means any form together with attached
----------
cover letter, sent by the ASSOCIATION to any Participant or Person containing
among other things a description of the alternatives available to such Person
under the Plan and by which any such Person may make elections regarding
subscriptions for Conversion Stock in the Subscription and Community Offerings.
Other Member - The term Other Member means any person who is a Member of
------------
the ASSOCIATION (other than an Eligible Account Holder or Supplemental Eligible
Account Holder) at the close of business on the Voting Record Date.
Participants - The term Participants means the Eligible Account Holders,
------------
Employee Plans, Supplemental Eligible Account Holders and Other Members.
Person - The term Person means an individual, a corporation, a partnership,
------
an association, a joint-stock company, a trust (including Individual Retirement
Accounts and KEOGH Accounts), any unincorporated organization or a government or
political subdivision thereof.
Plan - The term Plan means this Plan of Conversion, as amended, of the
----
ASSOCIATION as it exists on the date hereof and as it may hereafter be amended
in accordance with its terms.
Preferred Subscribers - The term Preferred Subscribers means those members
---------------------
of the general public which are natural persons residing in the Bank's Local
Community.
7
<PAGE>
Qualifying Deposit - The term Qualifying Deposit means the balance of each
------------------
Savings Account of $50 or more in the ASSOCIATION at the close of business on
the Eligibility Record Date or the Supplemental Eligibility Record Date,
whichever may be the case. Savings Accounts with total deposit balances of less
than $50 shall not constitute a Qualifying Deposit.
SEC - The term SEC refers to the United States Securities and Exchange
---
Commission.
Savings Account - The term Savings Account includes savings accounts, as
---------------
the term is defined in Section 561.42 of the Rules and Regulations of the OTS,
withdrawable accounts, including certificates of deposit, and demand accounts
which are defined in Section 561.16 of the Rules and Regulations of the OTS.
Special Meeting of Members - The term Special Meeting of Members means the
--------------------------
special meeting and any adjournments thereof held to consider and vote upon this
Plan.
Subscription Offering - The term Subscription Offering means the offering
---------------------
of Conversion Stock for purchase through Order Forms to Participants.
Subscription Price - The term Subscription Price means the amount per share
------------------
of Conversion Stock to be paid initially by Participants in the Subscription
Offering and persons in the Community Offering.
Supplemental Eligibility Record Date - The term Supplemental Eligibility
------------------------------------
Record Date means the supplemental record date for determining Supplemental
Eligible Account Holders of the ASSOCIATION. The Supplemental Eligibility
Record Date shall be the last day of the calendar quarter preceding the OTS'
approval of the application for Conversion.
8
<PAGE>
Supplemental Eligible Account Holder - The term Supplemental Eligible
------------------------------------
Account Holder means any person (other than an Eligible Account Holder) holding
a Qualifying Deposit, except Officers, Directors and their associates, as of the
Supplemental Eligibility Record Date.
Syndicated Community Offering - The term Syndicated Community Offering
-----------------------------
means the offering of Conversion Stock following the Subscription and Community
Offerings through a syndicate of broker-dealers.
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified Employee
-----------------------------------------
Stock Benefit Plan means any defined benefit plan or defined contribution plan,
such as an employee stock ownership plan, stock bonus plan, profit-sharing plan
or other plan, which, with its related trust, meets the requirements to be
"qualified" under Section 401 of the Internal Revenue Code. A "Non-Tax-
Qualified Employee Stock Benefit Plan" is any defined benefit plan or defined
contribution plan which is not so qualified.
Voting Members - The term Voting Members means those persons qualifying as
--------------
voting members of the ASSOCIATION pursuant to its Certificate of Incorporation
and bylaws.
Voting Record Date - The term Voting Record Date means the date fixed by
------------------
the Directors in accordance with OTS regulations for determining eligibility to
vote at the Special Meeting of Members.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by a vote of not less than two-thirds (2/3) of
the Board of Directors of the ASSOCIATION, the Plan, together with all other
requisite material, shall be submitted to the OTS and the Department for
approval. Notice of the adoption of the Plan by the Board of Directors of the
ASSOCIATION and the submission of the Plan to the OTS and the
9
<PAGE>
Department for approval will be published in a newspaper having general
circulation in each community in which an office of the ASSOCIATION is located
and copies of the Plan will be made available at each office of the ASSOCIATION
for inspection by the Members. Upon receipt of notice from the OTS to do so, the
ASSOCIATION also will cause to be published a notice of the filing with the OTS
of an application to convert in accordance with the provisions of the Plan.
Following approval by the OTS and the Department, the Plan will be submitted to
a vote of the Voting Members at the Special Meeting of Members called for that
purpose. Upon approval of the Plan by a majority of the total outstanding votes
of the Voting Members, the ASSOCIATION will take all other necessary steps
pursuant to applicable laws and regulations to convert the ASSOCIATION to stock
form. The Conversion must be completed within 24 months of the approval of the
Plan by the Voting Members, unless a longer time period is permitted by
governing laws and regulations.
The Board of Directors of the ASSOCIATION intends to take all necessary
steps to form the Holding Company, including the filing of an Application on
Form H-(e)1 or H-(e)1-S, if available to the Holding Company, with the OTS. In
the event that the Holding Company is utilized, upon Conversion the ASSOCIATION
will issue capital stock to the Holding Company and the Holding Company will
issue and sell the Conversion Stock in accordance with this Plan.
The Board of Directors of the ASSOCIATION may determine for any reason at
any time prior to the issuance of the Conversion Stock not to utilize a holding
company form of organization in the Conversion, in which case, the Holding
Company's registration statement on Form S-1 will be withdrawn from the SEC, the
ASSOCIATION will take all steps necessary to complete the Conversion, including
filing any necessary documents with the OTS, and will issue
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and sell the Conversion Stock in accordance with this Plan. In such event, any
subscriptions or orders received for Conversion Stock of the Holding Company
shall be deemed to be subscriptions or orders for Conversion Stock of the
ASSOCIATION without any further action by the ASSOCIATION or the subscribers for
the Conversion Stock, unless any such further action is required by the SEC, the
OTS or the Department, in which case the ASSOCIATION shall take such necessary
action to complete the Conversion. Any references to the Holding Company in this
Plan shall mean the ASSOCIATION in the event the Holding Company is eliminated
in the Conversion.
The Board of Directors of the ASSOCIATION also intend to take all necessary
steps to establish the Foundation, and to fund such Foundation in the manner set
forth in Section 7A hereof, subject to the approval of the Voting Members.
The Conversion Stock will not be insured by the FDIC. The ASSOCIATION will
not knowingly lend funds or otherwise extend credit to any Person to purchase
shares of the Conversion Stock.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and, to the extent
applicable, the Department, and a Registration Statement on Form S-1 to be filed
with the SEC. The ASSOCIATION shall be a wholly-owned subsidiary of the Holding
Company unless the Holding Company is eliminated in the Conversion.
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5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the Subscription
Offering to the Eligible Account Holders, Employee Plans, Supplemental Eligible
Account Holders and Other Members in the respective priorities set forth in
Sections 8 through 11 of this Plan. The Subscription Offering may be commenced
as early as the mailing of the Proxy Statement for the Special Meeting of
Members and must be commenced in time to complete the Conversion within the time
period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering will be offered for sale in the Community Offering as provided in
Section 12 of this Plan. The Subscription Offering may be commenced prior to
the Special Meeting of Members and, in that event, the Community Offering may
also be commenced prior to the Special Meeting of Members. The offer and sale
of Conversion Stock prior to the Special Meeting of Members shall, however, be
conditioned upon approval of the Plan by the Voting Members.
If feasible, any shares of Conversion Stock remaining after the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering or such other offering as provided in Section 13 of this Plan in a
manner that will achieve the widest distribution of the Conversion Stock as
determined by the ASSOCIATION. The sale of all Conversion Stock subscribed for
in the Subscription and Community Offerings will be consummated simultaneously
on the date the sale of Conversion Stock in the Syndicated Community Offering or
such other offering is consummated and only if all unsubscribed for Conversion
Stock is sold.
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The ASSOCIATION may elect to offer to pay fees on a per share basis to
brokers who assist Persons in determining to purchase shares in the Subscription
and Community Offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to be
issued and offered for sale will be determined jointly by the Board of Directors
of the ASSOCIATION and the Board of Directors of the Holding Company, if the
holding company form of organization is utilized, immediately prior to the
commencement of the Subscription and Community Offerings, subject to adjustment
thereafter if necessitated by market or financial conditions, with the approval
of the OTS and the Department, if necessary. In particular, the total number of
shares may be increased by up to 15% of the number of shares offered in the
Subscription and Community Offering if the Estimated Price Range is increased
subsequent to the commencement of the Subscription and Community Offering to
reflect changes in market and financial conditions.
All shares sold in the Conversion will be sold at a uniform price per share
referred to in this Plan as the Actual Purchase Price. The aggregate purchase
price for all shares of Conversion Stock will not be inconsistent with the
estimated consolidated pro forma market value of the ASSOCIATION or the Holding
Company, if utilized. The estimated consolidated pro forma market value of the
ASSOCIATION or the Holding Company, if utilized, will be determined for such
purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Price Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Conversion Stock to be issued and the
purchase price per share may be increased or decreased by the ASSOCIATION. In
the event that the aggregate purchase price of the Conversion Stock is below
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the minimum of the Estimated Price Range, or materially above the maximum of the
Estimated Price Range, resolicitation of purchasers may be required provided
that up to a 15% increase above the maximum of the Estimated Price Range will
not be deemed material so as to require a resolicitation. Up to a 15% increase
in the number of shares to be issued which is supported by an appropriate change
in the estimated pro forma market value of the ASSOCIATION or the Holding
Company, if utilized, will not be deemed to be material so as to require a
resolicitation of subscriptions. In the event that the aggregate purchase price
of the Conversion Stock is below the minimum of the Estimated Price Range or in
excess of 15% above the maximum of the Estimated Price Range, and a
resolicitation is required, such resolicitation shall be effected in such manner
and within such time as the ASSOCIATION shall establish, with the approval of
the OTS and the Department, if required.
Based upon the independent valuation as updated prior to the commencement
of the Subscription and Community Offerings, the Board of Directors of the
Holding Company, (if a holding company form of organization is utilized) and the
Board of Directors of the ASSOCIATION will fix the Subscription Price and the
range of the number of shares to be offered. If upon completion of the
Subscription and Community Offerings all of the Conversion Stock is subscribed
for, or if because of a limited number of unsubscribed shares or otherwise a
Syndicated Community Offering cannot be effected, the total number of shares of
Conversion Stock to be issued and sold will be jointly determined by the
ASSOCIATION and Holding Company (if a holding company form of organization is
utilized) as follows: (a) the estimated aggregate pro forma market value of the
ASSOCIATION or the Holding Company, as the case may be, immediately after
Conversion as determined by the Independent Appraiser, expressed in
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terms of a specific aggregate dollar amount rather than as a range, upon
completion of the Subscription and Community Offerings or other sale of all of
the Conversion Stock shall be divided by (b) the Actual Purchase Price.
If there is a Syndicated Community Offering or other offering of shares of
Conversion Stock not subscribed for in the Subscription and Community Offerings,
the price per share at which the Conversion Stock is sold in such Syndicated
Community Offering or other offering shall be the Subscription Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the ASSOCIATION and Holding Company, if utilized, and to the OTS
that, to the best knowledge of the Independent Appraiser, nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
the Independent Appraiser to conclude that the aggregate value of the Conversion
Stock at the Actual Purchase Price is incompatible with its estimate of the
aggregate consolidated pro forma market value of the Holding Company or the
ASSOCIATION if no Holding Company is utilized. If such confirmation is not
received, the ASSOCIATION may cancel the Subscription and Community Offerings
and/or the Syndicated Community Offering, extend the Conversion, establish a new
Subscription Price Range and/or Estimated Price Range, extend, reopen or hold
new Subscription and Community Offerings and/or Syndicated Community Offering or
take such other action as the OTS and the Department may permit.
The Conversion Stock to be issued in the Conversion shall be fully paid and
nonassessable.
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7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE ASSOCIATION
Upon the consummation of the sale of all of the Conversion Stock, and in
the event that a holding company form of organization is utilized, the Holding
Company will purchase from the ASSOCIATION all of the capital stock of the
ASSOCIATION to be issued by the ASSOCIATION in the Conversion in exchange for
the Conversion proceeds that are not permitted to be retained by the Holding
Company.
The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. Assuming the Holding Company is not eliminated, a
lesser percentage may be acceptable. The ASSOCIATION believes that the
Conversion proceeds will provide economic strength to the Holding Company and
the ASSOCIATION for the future in a highly competitive and regulated environment
and would facilitate expansion through acquisitions, diversification into other
related businesses and for other business and investment purposes, including the
payment of dividends and future repurchases of Conversion Stock as permitted by
the OTS. If during the Conversion process the Board of Directors of the
ASSOCIATION determines not to complete the Conversion utilizing a holding
company form of organization, capital stock of the ASSOCIATION will be issued
and sold in accordance with the Plan. The above activities may also be engaged
in by the ASSOCIATION if the Holding Company is eliminated.
7A. ESTABLISHMENT AND FUNDING OF FOUNDATION
As part of the Conversion, the Holding Company and the ASSOCIATION intend
to establish a Foundation that will qualify as an exempt organization under
Section 501(c)(3) of the Internal Revenue Code and to donate to the Foundation
up to 8% of the number of shares of
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Common Stock sold in the Conversion. The Foundation is being formed in
connection with the Conversion in order to complement the ASSOCIATION's existing
community reinvestment activities and to share with the communities in which the
ASSOCIATION operates a part of the ASSOCIATION's financial success as a
community-minded, financial services institution. The funding of the Foundation
with Common Stock of the Holding Company accomplishes this goal as it enables
such communities to share in the potential growth and profitability of the
Holding Company and the ASSOCIATION over the long-term.
The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the ASSOCIATION operates, including, but not
limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-for-profit community
groups and other types of organizations or civic minded projects. The board of
directors of the Foundation will be responsible for establishing the polices of
the Foundation with respect to grants or donations, consistent with the stated
purposes of the Foundation. The Foundation will annually distribute total
grants to assist charitable organizations or to fund projects within its local
community of not less than 5% of the average fair value of Foundation assets
each year. In order to serve the purposes for which it was formed and maintain
its 501(c)(3) qualification, the Foundation may sell, on an annual basis, a
limited portion of the Common Stock contributed to it by the Holding Company.
The establishment and funding of the Foundation as part of the Conversion
is subject to the approval of the Voting Members by an affirmative vote of a
majority of the votes eligible to be cast by Voting Members in person or by
proxy at the Special Meeting. In the event that the ASSOCIATION's Members
approve this Plan, but not the Foundation, the ASSOCIATION may
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determine to complete the Conversion without the establishment of the Foundation
and may do so without amending this Plan or obtaining any further vote of the
ASSOCIATION's Members. Failure of the Voting Members to approve the Foundation
may materially affect the pro forma market value of the ASSOCIATION. In such an
event, the ASSOCIATION may establish a new Estimated Price Range and commence a
resolicitation of subscribers. For comparison purposes, Voting Members will be
provided with a projection of the pro forma market value of the Conversion
Stock, an Estimated Price Range and certain selected pro forma financial data
that would result if the Conversion were consummated without establishment of
the Foundation.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, as first priority and
without payment, nontransferable subscription rights to subscribe for shares of
Conversion Stock equal to an amount up to the greater of: the amount permitted
to be subscribed for in the Community Offering which amount, pursuant to Section
12, currently is $200,000 of the Conversion Stock offered, but which may be
increased to 5% or decreased to less than $200,000 without the further approval
of members or resolicitation of subscribers; one-tenth of one percent (.10%) of
the total offering of shares of Conversion Stock; or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Conversion Stock to be issued by a fraction of which the numerator
is the amount of the Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all Eligible Account
Holders, in each case on the Eligibility Record Date, subject to the maximum
purchase limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C and exclusive of an
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increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%.
B. In the event that Eligible Account Holders exercise subscription
rights for a number of shares of Conversion Stock in excess of the total number
of shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holders. Any shares remaining after that allocation
will be allocated among the 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.
C. Subscription rights as Eligible Account Holders received by Directors
and Officers and their Associates which are based on deposits made by such
persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
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9. SUBSCRIPTION RIGHTS OF THE EMPLOYEE PLANS (SECOND PRIORITY)
The Employee Plans shall receive, without payment, as a second priority
after the filling of subscriptions of Eligible Account Holders, nontransferable
subscription rights to purchase in the Subscription Offering the number of
shares of Conversion Stock requested by such Employee Plans. If, after the
filling of subscriptions of Eligible Account Holders, a sufficient number of
shares are not available to fill the subscriptions by such Employee Plans, the
subscription by such Employee Plans shall be filled to the maximum extent
possible; provided, however, that in the event of an increase in the total
number of shares issued due to an increase in the Estimated Price Range of up to
15%, the additional shares may be sold to the Employee Plans subject to the
provisions of Section 14.
The Employee Plans shall not be deemed to be an associate or affiliate of
or Person Acting in Concert with any Director or Officer of the Holding Company
or the ASSOCIATION.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS
(THIRD PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, as third
priority and without payment, nontransferable subscription rights to subscribe
for shares of Conversion Stock equal to an amount up to the greater of: the
amount permitted to be subscribed for in the Community Offering which amount,
pursuant to Section 12, currently is $200,000 of the Conversion Stock offered,
but which may be increased to 5% or decreased to less than $200,000 without the
further approval of members or resolicitation of subscribers; one-tenth of one
percent (.10%) of the total offering of Conversion Stock; or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock
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to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders in the ASSOCIATION on the Supplemental Eligibility
Record Date, subject to the maximum purchase limitation specified in Section 14A
and the minimum purchase limitation specified in Section 14C and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%.
B. In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of shares eligible for subscription, the remaining shares of
Conversion Stock shall be allocated among the subscribing Supplemental Eligible
Account Holders so as to permit each subscribing Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation of Conversion Stock equal to the lesser of 100
shares or the number of shares subscribed for by the Supplemental Eligible
Account Holder. Any shares remaining after that allocation will be allocated
among the 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.
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C. Subscription rights received by an Eligible Account Holder pursuant to
Section 8 shall be applied in partial satisfaction of the subscription rights to
be received as a Supplemental Eligible Account Holder pursuant to this Section
10.
11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, as a fourth priority
after the filling of subscriptions of the Eligible Account Holders, the Employee
Plans, and the Supplemental Eligible Account Holders, nontransferable
subscription rights to subscribe for shares of Conversion Stock equal to an
amount up to the greater of: the amount permitted to be subscribed for in the
Community Offering which amount, pursuant to Section 12, currently is $200,000
of the Conversion Stock offered, but which may be increased to 5% or decreased
to less than $200,000 without the further approval of members or resolicitation
of subscribers; or one-tenth of one percent (.10%) of the total offering of
shares of Conversion Stock, subject to the maximum purchase limitation specified
in Section 14A and the minimum purchase limitation specified in Section 14C and
exclusive of an increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%.
B. In the event that Other Members exercise subscription rights for a
number of shares of Conversion Stock in excess of the total number of shares
eligible for subscription, the remaining shares of Conversion Stock shall 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 Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain
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unsatisfied pro rata in the same proportion that the number of votes of a
subscribing Other Member on the Voting Record Date bears to the total votes on
the Voting Record Date of all subscribing Other Members. If the amount so
allocated exceeds the amount subscribed for by any one or more remaining Other
Members, the excess shall be reallocated (one or more times as necessary) among
those remaining Other Members whose subscriptions are still not fully satisfied
on the same principle until all available shares have been allocated or all
subscriptions satisfied.
12. COMMUNITY OFFERING (FIFTH PRIORITY)
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, it is
expected that shares remaining unsubscribed for will be made available for
purchase in the Community Offering to certain members of the general public,
which may subscribe together with any Associate or group of persons Acting in
Concert for up to $200,000 of the shares of Conversion Stock offered subject to
the Maximum Overall Purchase Limitation as specified in Section 14A and the
minimum purchase limitation specified in Section 14C and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%; provided, however, that the amount permitted
to be purchased in the Community Offering may be increased to 5% of the
Conversion Stock; or decreased to less than $200,000 without the further
approval of members or resolicitation of subscribers. The shares may be made
available in the Community Offering through a direct community marketing program
which may provide for utilization of a broker, dealer, consultant or investment
banking firm, experienced and expert in the sale of savings institution
securities. Such entities may be compensated on a fixed fee basis or on a
commission basis, or a combination thereof. Preference shall be given to
Preferred Subscribers in the
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Community Offering. The ASSOCIATION shall make distribution of the Conversion
Stock to be sold in the Community Offering in such a manner as to promote the
widest distribution of Conversion Stock. The ASSOCIATION reserves the right to
reject any or all orders, in whole or in part, which are received in the
Community Offering.
If the Preferred Subscribers in the Community Offering, whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among the Preferred
Subscribers in the manner which permits each such person to the extent possible,
to purchase the number of shares necessary to make his total allocation of
Conversion Stock equal to the lesser of 100 shares or the number of shares
subscribed for by such persons. Thereafter, unallocated shares will be
allocated among the Preferred Subscribers whose subscriptions remain unsatisfied
on a 100 shares per order basis until all such orders have been filled or the
remaining shares have been allocated. To the extent that there are shares
remaining after all subscriptions by Preferred Subscribers, any remaining shares
will be allocated among members of the general public using the foregoing
allocation as applied to Preferred Subscribers. The ASSOCIATION may establish
all other terms and conditions of such offer. It is expected that the Community
Offering will commence concurrently with the Subscription Offering. The
Community Offering must be completed within 45 days after the completion of the
Subscription Offering unless otherwise extended by the OTS.
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13. SYNDICATED COMMUNITY OFFERING
If feasible, all shares of Conversion Stock not subscribed for in the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be determined
by the ASSOCIATION, in a manner that will achieve the widest distribution of the
Conversion Stock subject to the right of the ASSOCIATION to accept or reject in
whole or in part all subscriptions in the Syndicated Community Offering. In the
Syndicated Community Offering, any person together with any Associate or group
of persons Acting in Concert may purchase up to $200,000 of the total number of
shares of Conversion Stock offered subject to the maximum purchase limitation
specified in Section 14A and the minimum purchase limitation specified in
Section 14C and exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%; provided, however,
that this amount may be increased to 5% or decreased to less than $200,000
without the further approval of members or resolicitation of subscribers. The
shares purchased by any Person together with any Associate or group of persons
Acting in Concert pursuant to Section 12 shall be counted toward meeting the
maximum percentage of shares permitted to be purchased pursuant to this Section.
Provided that the Subscription Offering has commenced, the ASSOCIATION may
commence the Syndicated Community Offering at any time after the mailing to the
Members of the Proxy Statement to be used in connection with the Special Meeting
of Members, provided that the completion of the offer and sale of the Conversion
Stock shall be conditioned upon the approval of this Plan by the Voting Members.
If the Syndicated Community Offering is not sooner commenced pursuant to the
provisions of the preceding sentence, the Syndicated
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Community Offering will be commenced as soon as practicable following the date
upon which the Subscription and Community Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the
ASSOCIATION shall have the right to sell any shares of Conversion Stock
remaining following the Subscription and Community Offerings in an underwritten
firm commitment public offering. The provisions of Section 14 hereof shall not
be applicable to sales to underwriters for purposes of such an offering but
shall be applicable to the sales by the underwriters to the public. The price
to be paid by the underwriters in such an offering shall be equal to the Actual
Purchase Price less an underwriting discount to be negotiated among such
underwriters and the ASSOCIATION, which will in no event exceed an amount deemed
to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Conversion Stock not sold in the
Subscription and Community Offerings can not be effected, or in the event that
any insignificant residue of shares of Conversion Stock is not sold in the
Subscription and Community Offerings or in the Syndicated Community Offering or
an underwritten firm commitment public offering, other purchase arrangements
will be made for the sale of unsubscribed shares by the ASSOCIATION, if
possible. Such other purchase arrangements will be subject to the approval of
the OTS.
14. LIMITATION ON PURCHASES
In addition to the maximum amount of Conversion Stock that may be
subscribed for as set forth in Sections 8, 10, 11, 12 and 13, the following
limitations shall apply to all purchases of shares of Conversion Stock:
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A. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the Conversion by any Person or
Participant together with any Associate or group or persons Acting in Concert
shall not exceed 1.0% of the Conversion Stock offered (the "Maximum Overall
Purchase Limitation"), except for the Employee Plans which may subscribe for up
to 10% of the Conversion Stock issued and except for certain Eligible Account
Holders and Supplemental Eligible Account Holders which may subscribe for or
purchase shares in accordance with Sections 8 and 10 herein, respectively;
provided, however, in the event that the Maximum Overall Purchase Limitation is
increased to more than 2.0% of the shares of Conversion Stock offered, orders
for Conversion Stock in the Community Offering and in the Syndicated Community
Offering (or, alternatively an underwritten firm commitment public offering), if
any, shall, as determined by the ASSOCIATION, first be filled to a maximum of
2.0% of the total number of shares of Conversion Stock offered and thereafter
remaining shares shall be allocated on an equal number of shares basis per order
until all orders have been filled.
B. The maximum number of shares of Conversion Stock which may be
purchased in all categories in the Conversion by Officers and Directors of the
ASSOCIATION and their Associates in the aggregate shall not exceed 30% of the
total number of shares of Conversion Stock issued.
C. A minimum of 25 shares of Conversion Stock must be purchased by each
Person purchasing shares in the Conversion to the extent those shares are
available; provided, however, that in the event the minimum number of shares of
Conversion Stock purchased times the price per share exceeds $500, then such
minimum purchase requirement shall be reduced to such
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number of shares of Conversion Stock which when multiplied by the price per
share shall not exceed $500, as determined by the Board.
If the number of shares of Conversion Stock otherwise allocable pursuant to
Sections 8, 10, 11, 12 and 13, to any Person or that Person's Associates would
be in excess of the maximum number of shares permitted as set forth above, the
number of shares of Conversion Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that Person, and then the number
of shares allocated to each group consisting of a Person and that Person's
Associates shall be reduced so that the aggregate allocation to that Person and
his or her Associates complies with the above maximums, and such maximum number
of shares shall be reallocated among that Person and his or her Associates as
they may agree, or in the absence of an agreement, in proportion to the shares
subscribed by each (after first applying the maximums applicable to each Person,
separately).
Depending upon market or financial conditions, the Board of Directors of
the ASSOCIATION and the Holding Company, without further approval of the
Members, may decrease or increase the purchase limitations in this Plan,
provided that the maximum purchase limitations may not be increased to a
percentage in excess of 5%. Notwithstanding the foregoing, the Maximum Overall
Purchase Limitation may be increased up to 9.99% provided that orders for
Conversion Stock exceeding 5% of the shares being offered shall not exceed, in
the aggregate, 10% of the total offering. If the ASSOCIATION or the Holding
Company, as the case may be, increases the maximum purchase limitations, the
ASSOCIATION or the Holding Company, as the case may be, is only required to
resolicit Persons who subscribed for the maximum purchase
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amount and may, in the sole discretion of the ASSOCIATION or the Holding
Company, as the case may be, resolicit certain other large subscribers.
In the event shares of Conversion Stock are sold in excess of the maximum
of the Estimated Price Range, (the "Adjusted Maximum") such shares will be
allocated in the following order of priority: (i) to fill the Employee Plans'
subscription to the Adjusted Maximum; (ii) in the event that there is an over
subscription at the Eligible Account Holder level, to fill unfulfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum in
accordance with Section 8; (iii) in the event there is an over subscription at
the Supplemental Eligible Account Holder level, to fill unfulfilled
subscriptions of Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum in accordance with Section 10; (iv) in the event that there is an over
subscription at the Other Member level, to fill unfulfilled subscriptions of
Other Members exclusive of the Adjusted Maximum in accordance with Section 11;
and (v) to fill unfulfilled Subscriptions in the Community Offering exclusive of
the Adjusted Maximum in accordance with Section 12.
For purposes of this Section 14, the Directors and Officers of the
ASSOCIATION and the Holding Company shall not be deemed to be Associates or a
group affiliated with each other or otherwise Acting in Concert solely as a
result of their being Directors or Officers of the ASSOCIATION or the Holding
Company.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the Conversion, no Officer, Director
or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares
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of common stock of the ASSOCIATION or the Holding Company, as the case may be,
except from a broker-dealer registered with the SEC. This provision shall not
apply to negotiated transactions involving more than one percent of the
outstanding shares of common stock of the ASSOCIATION or the Holding Company, as
the case may be, the exercise of any options pursuant to a stock option plan or
purchases of common stock of the ASSOCIATION or the Holding Company, as the case
may be, made by or held by any Tax-Qualified Employee Stock Benefit Plan or Non-
Tax-Qualified Employee Stock Benefit Plan of the ASSOCIATION or the Holding
Company (including the Employee Plans) which may be attributable to any Officer
or Director. As used herein, the term "investment representative" shall mean a
professional investment advisor acting as agent for the purchaser and
independent of the seller and not acting on behalf of the seller in connection
with the transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Syndicated Community Offerings must be delivered in full to the
ASSOCIATION, together with a properly completed and executed Order Form, or
purchase order in the case of the Syndicated Community Offering, on or prior to
the expiration date specified on the Order Form or purchase order, as the case
may be, unless such date is extended by the ASSOCIATION; provided, however, that
if the Employee Plans subscribe for shares during the Subscription Offering,
such plans will not be required to pay for the shares at the time they subscribe
but rather may pay for
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such shares of Conversion Stock subscribed for by such plans at the Actual
Purchase Price upon consummation of the Conversion, provided that, in the case
of the employee stock ownership plan ("ESOP") there is in force from the time of
its subscription until the consummation of the Conversion, a loan commitment
from the Holding Company or an unrelated financial institution to lend to the
ESOP, at such time, the aggregate Subscription Price of the shares for which it
subscribed. The ASSOCIATION may make scheduled discretionary contributions to an
Employee Plan provided such contributions do not cause the ASSOCIATION to fail
to meet its regulatory capital requirement.
Notwithstanding the foregoing, the ASSOCIATION and the Holding Company, if
utilized, shall have the right, in their sole discretion, to permit
institutional investors to submit contractually irrevocable orders in the
Community Offering and to thereafter submit payment for the Conversion Stock for
which they are subscribing in the Community Offering at any time prior to 48
hours before the completion of the Conversion, unless such 48 hour period is
waived by the ASSOCIATION and the Holding Company, in their sole discretion.
Payment for Conversion Stock subscribed for shall be made either in cash
(if delivered in person), check or money order. Alternatively, subscribers in
the Subscription and Community Offerings may pay for the shares subscribed for
by authorizing the ASSOCIATION on the Order Form to make a withdrawal from the
subscriber's Savings Account at the ASSOCIATION in an amount equal to the
purchase price of such shares. Such authorized withdrawal, whether from a
savings passbook or certificate account, shall be without penalty as to
premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be cancelled at the time of
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withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate. Funds for which a withdrawal is authorized will remain in the
subscriber's Savings Account but may not be used by the subscriber until the
Conversion Stock has been sold or the 45-day period (or such longer period as
may be approved by the OTS) following the Subscription and Community Offering
has expired, whichever occurs first. Thereafter, the withdrawal will be given
effect only to the extent necessary to satisfy the subscription (to the extent
it can be filled) at the purchase price per share. Interest will continue to be
earned on any amounts authorized for withdrawal until such withdrawal is given
effect. Interest will be paid by the ASSOCIATION at not less than the passbook
annual rate on payments for Conversion Stock received in cash or by check or
money order. Such interest will be paid from the date payment is received by the
ASSOCIATION until consummation or termination of the Conversion. If for any
reason the Conversion is not consummated, all payments made by subscribers in
the Subscription, Community and Syndicated Community Offerings will be refunded
to them with interest. In case of amounts authorized for withdrawal from Savings
Accounts, refunds will be made by cancelling the authorization for withdrawal.
The ASSOCIATION is prohibited by regulation from knowingly making any loans or
granting any lines of credit for the purchase of stock in the Conversion, and
therefore, will not do so.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding Company
and ASSOCIATION has been declared effective by the OTS and the SEC, if the
holding company form of organization is utilized, Order Forms will be
distributed to all Eligible Account Holders,
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the Employee Plans, the Supplemental Eligible Account Holders and Other Members
at their last known addresses appearing on the records of the ASSOCIATION for
the purpose of subscribing to shares of Conversion Stock in the Subscription
Offering and will be made available for use by those Persons entitled to
purchase in the Community Offering. Notwithstanding the foregoing, the
ASSOCIATION may elect to send Order Forms only to those Persons who request them
after such notice as is approved by the OTS and is adequate to apprise all
Eligible Account Holders, the Employee Plans, Supplemental Eligible Account
Holders and Other Members of the pendency of the Subscription Offering has been
given. Such notice may be included with the proxy statement for the Special
Meeting of Members and may also be included in a notice of the pendency of the
Conversion and the Special Meeting of Members sent to all Eligible Account
Holders and Supplemental Eligible Account Holders in accordance with regulations
of the OTS.
Each Order Form will be preceded or accompanied by the Prospectus (if a
holding company form of organization is utilized) or the Offering Circular (if
the holding company form of organization is not utilized) describing the Holding
Company, if utilized, the ASSOCIATION, the Conversion Stock and the Subscription
and Community Offerings. Each Order Form will contain, among other things, the
following:
A. A specified date by which all Order Forms must be received by the
ASSOCIATION, which date for Subscription Offering Order Forms shall be not less
than twenty (20), nor more than forty-five (45) days, following the date on
which the Order Forms are mailed by the ASSOCIATION, and which date will
constitute the termination of the Subscription Offering;
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B. The Subscription Price per share for shares of Conversion Stock to be
sold in the Subscription and Community Offerings;
C. A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
subscription rights or otherwise subscribed for in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to indicate
thereon the number of shares of Conversion Stock for which such person elects to
subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has received a
final copy of the Prospectus or Offering Circular, as the case may be, prior to
execution of the Order Form;
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of Conversion Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on the Order Form
that the ASSOCIATION withdraw said amount from the subscriber's Savings Account
at the ASSOCIATION) to the ASSOCIATION;
G. A statement to the effect that the executed Order Form, once received
by the ASSOCIATION, may not be modified or amended by the subscriber without the
consent of the ASSOCIATION; and
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H. A statement with respect to the residence of the subscriber.
Notwithstanding the above, the ASSOCIATION and the Holding Company will not
accept orders received on photocopied or facsimilied order forms.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
ASSOCIATION by the United States Postal Service or the ASSOCIATION is unable to
locate the addressee, (b) are not received back by the ASSOCIATION or are
received by the ASSOCIATION after the expiration date specified thereon, (c) are
defectively filled out or executed, (d) are not accompanied by the full required
payment, except in the case of institutional investors in the Community
Offering, by delivering irrevocable orders together with a legally binding
commitment to pay in cash, check, money order or wire transfer the full amount
of the purchase price prior to 48 hours before the completion of the Conversion
for the shares of Conversion Stock subscribed for (including cases in which
savings accounts from which withdrawals are authorized are insufficient to cover
the amount of the required payment), or (e) are not mailed pursuant to a "no
mail" order placed in effect by the account holder, the subscription rights of
the person to whom such rights have been granted will lapse as though such
person failed to return the contemplated Order Form within the time period
specified thereon; provided, however, that the ASSOCIATION may, but will not be
required to, waive any immaterial irregularity on any Order Form or require the
submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the ASSOCIATION may specify. The
interpretation of the ASSOCIATION of
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terms and conditions of the Plan and of the Order Forms will be final, subject
to the authority of the OTS.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers of
the ASSOCIATION or the Holding Company in the Conversion shall be subject to the
restriction that, except as provided in Section 18B, below, or as may be
approved by the OTS, no interest in such shares may be sold or otherwise
disposed of for value for a period of one (l) year following the date of
purchase.
B. The restriction on disposition of shares of Conversion Stock set forth
in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the ASSOCIATION or the Holding Company, as the case may
be, which has been approved by the OTS; and
(ii) Any disposition of such shares following the death of the person
to whom such shares were initially sold under the terms of the Plan.
C. With respect to all shares of Conversion Stock subject to restrictions
on resale or subsequent disposition, each of the following provisions shall
apply:
(i) Each certificate representing shares restricted within the meaning
of Section 18A, above, shall bear a legend prominently stamped on its face
giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer agent for the
ASSOCIATION or the Holding Company, as the case may be, not to recognize or
effect any
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transfer of any certificate or record of ownership of any such shares
in violation of the restriction on transfer; and
(iii) Any shares of capital stock of the ASSOCIATION or the Holding
Company, as the case may be, issued with respect to a stock dividend, stock
split, or otherwise with respect to ownership of outstanding shares of
Conversion Stock subject to the restriction on transfer hereunder shall be
subject to the same restriction as is applicable to such Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon Conversion, the holders of the capital stock of the ASSOCIATION shall
have the exclusive voting rights with respect to the ASSOCIATION as specified in
its Certificate of Incorporation. The holders of the common stock of the
Holding Company (if a holding company form of organization is utilized) shall
have the exclusive voting rights with respect to the Holding Company.
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The ASSOCIATION shall establish at the time of Conversion a liquidation
account in an amount equal to its net worth as of the latest practicable date
prior to Conversion ("Liquidation Account"). The Liquidation Account will be
maintained by the ASSOCIATION for the benefit of the Eligible Account Holders
and Supplemental Eligible Account Holders who continue to maintain their Savings
Accounts at the ASSOCIATION. Each Eligible Account Holder and Supplemental
Eligible Account Holder shall, with respect to his Savings Account, hold a
related inchoate interest in a portion of the Liquidation Account balance, in
relation to his Savings Account balance at the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as hereinafter provided.
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In the unlikely event of a complete liquidation of the ASSOCIATION (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the Liquidation Account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the
ASSOCIATION's capital stock. No merger, consolidation, bulk purchase of assets
with assumption of Savings Accounts and other liabilities, or similar
transactions with an FDIC-insured institution, in which the ASSOCIATION is not
the surviving institution, shall be deemed to be a complete liquidation for this
purpose. In such transactions, the Liquidation Account shall be assumed by the
surviving institution.
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's and/or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the ASSOCIATION. Such
initial subaccount balance shall not be increased, but shall be subject to
downward adjustment as described below. For Savings Accounts in existence at
both dates, separate subaccounts shall be determined on the basis of the
Qualifying Deposits in such Savings Account on such record dates. Such initial
subaccount balances shall not be increased but shall be subject to downward
adjustment as described below.
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If, at the close of business on any annual closing date, commencing on or
after the effective date of Conversion, the deposit balance in the Savings
Account of an Eligible Account Holder or Supplemental Eligible Account Holder is
less than the lesser of (i) the balance in the Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Savings Account, the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the Liquidation Account shall not operate
to restrict the use or application of any of the net worth accounts of the
ASSOCIATION.
21. TRANSFER OF SAVINGS ACCOUNTS AND CONTINUITY OF THE ASSOCIATION
Upon Conversion, each Savings Account Holder having a Savings Account at
the ASSOCIATION prior to the Conversion will continue to have a Savings Account,
without payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
Conversion.
After the Conversion, the ASSOCIATION will succeed to all the rights,
interests, duties and obligations of the ASSOCIATION before the Conversion,
including but not limited to all rights and interests of the ASSOCIATION in and
to its assets and properties, whether real,
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personal or mixed. The ASSOCIATION will continue to be a member of the Federal
Home Loan Bank System and all its insured savings deposits will continue to be
insured by the FDIC to the extent provided by applicable law.
22. RESTRICTIONS ON ACQUISITION OF THE ASSOCIATION AND HOLDING COMPANY
A. In accordance with OTS regulations, for a period of three years from
the date of consummation of the Conversion, no Person, other than the Holding
Company (if a holding company form of organization is utilized), shall directly
or indirectly offer to acquire or acquire the beneficial ownership of more than
10% of any class of an equity security of the ASSOCIATION without the prior
written consent of the OTS.
B. 1. The Certificate of Incorporation of the ASSOCIATION contains a
provision stipulating that no person, except the Holding Company (if a holding
company form of organization is utilized), for a period of five years following
the date of the Conversion shall directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of an equity
security of the ASSOCIATION, without the prior written approval of the OTS. In
addition, such Certificate of Incorporation may also provide that for a period
of five years following the Conversion, shares beneficially owned in violation
of the above-described Certificate of Incorporation provision shall not be
entitled to vote and shall not be voted by any person or counted as voting stock
in connection with any matter submitted to stockholders for a vote. In
addition, special meetings of the stockholders relating to changes in control or
amendment of the Certificate of Incorporation may only be called by the Board of
Directors, and shareholders shall not be permitted to cumulate their votes for
the election of directors.
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2. The Certificate of Incorporation of the Holding Company, if a
holding company form of organization is utilized, will contain a provision
stipulating that in no event shall any record owner of any outstanding shares of
the Holding Company's common stock hold such shares on behalf of a person who
beneficially owns in excess of 10% of such outstanding shares be entitled or
permitted to any vote to the extent that any shares held in excess of 10% of the
outstanding shares would be voted on behalf of the beneficial owner. In
addition, the Certificate of Incorporation and Bylaws of the Holding Company
will provide for staggered terms of the directors, noncumulative voting for
directors, limitations on the calling of special meetings, a fair price
provision for certain business combinations and certain notice requirements.
C. For the purposes of this Section 22:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription rights
issued pursuant to a plan of conversion as well as a "security" as defined in 15
U.S.C. (S)78c(a)(10).
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23. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The ASSOCIATION shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its regulatory
capital to be reduced below (i) the amount required for the Liquidation Account
or (ii) the federal regulatory capital requirement in Section 567.2 of the Rules
and Regulations of the OTS or applicable rules or regulations of the Department.
Otherwise, the ASSOCIATION may declare dividends, make capital distributions or
repurchase its capital stock in accordance with applicable law and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively amended at
any time prior to solicitation of proxies from Members to vote on the Plan by a
two-thirds vote of the ASSOCIATION's Board of Directors, and at any time
thereafter by such vote of such Board of Directors with the concurrence of the
OTS and, if applicable, the Department. Any amendment to the Plan made after
approval by the Members with the approval of the OTS and, if applicable, the
Department, shall not necessitate further approval by the Members unless
otherwise required by the OTS and, if applicable, the Department. The Plan may
be terminated by majority vote of the ASSOCIATION's Board of Directors at any
time prior to the Special Meeting of Members to vote on the Plan, and at any
time thereafter with the concurrence of the OTS and, if applicable, the
Department.
By adoption of the Plan, the Members of the ASSOCIATION authorize the Board
of Directors to amend or terminate the Plan under the circumstances set forth in
this Section.
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25. CERTIFICATE OF INCORPORATION AND BYLAWS
By voting to adopt the Plan, members of the ASSOCIATION will be voting to
adopt the proposed Certificate of Incorporation and Bylaws for the Association
as a New Jersey Stock Savings Association attached as Exhibits I and II to this
Plan. The effective date of the ASSOCIATION's Certificate of Incorporation and
bylaws shall be the date of issuance and sale of the Conversion Stock as
specified by the OTS and the Department.
26. CONSUMMATION OF CONVERSION
The Conversion of the ASSOCIATION shall be deemed to take place and be
effective upon the completion of all requisite organizational procedures for
obtaining the Certificate of Incorporation for the ASSOCIATION from the State of
New Jersey and the sale of all Conversion Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
ASSOCIATION or the Holding Company, as the case may be, will register the
securities issued in connection with the Conversion pursuant to the Securities
Exchange Act of 1934 and will not deregister such securities for a period of at
least three years thereafter, except that the maintenance of registration for
three years requirement may be fulfilled by any successor to the ASSOCIATION or
any holding company of the ASSOCIATION. In addition, the ASSOCIATION or Holding
Company, as the case may be, will use its best efforts to encourage and assist a
market-maker to establish and maintain a market for the Conversion Stock and to
list those securities on a national or regional securities exchange or the
NASDAQ system.
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28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
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 shares of Conversion Stock pursuant to the Plan reside. However, no such
Person will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country or in a state of the United States with respect to which both of
the following apply: A. a small number of Persons otherwise eligible to
subscribe for shares under the Plan reside in such state and; B. the issuance of
subscription rights or the offer or sale of shares of Conversion Stock to such
Persons would require the ASSOCIATION or the Holding Company, as the case may
be, under the securities laws of such state, to register as a broker, dealer,
salesman or agent or to register or otherwise qualify its securities for sale in
such state and such registration or qualification would be impracticable for
reasons of cost or otherwise.
29. EXPENSES OF CONVERSION
The ASSOCIATION shall use its best efforts to assure that expenses incurred
by it in connection with the Conversion shall be reasonable.
30. CONDITIONS TO CONVERSION
The Conversion of the ASSOCIATION pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the ASSOCIATION of rulings of the United States
Internal Revenue Service and any applicable state taxing authority, or opinions
of counsel, or other tax advisor acceptable to the Association, substantially to
the effect that the Conversion will not result
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in any adverse federal or state tax consequences to Eligible Account Holders or
to the ASSOCIATION and the Holding Company before or after the Conversion;
(b) The sale of all of the Conversion Stock offered in the Conversion; and
(c) The completion of the Conversion within the time period specified in
Section 3 of this Plan.
31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the
ASSOCIATION shall be final, subject to the authority of the OTS and the
Department.
32. OTHER INFORMATION
(a) The interests of Directors, Officers, employees and associates shall be
disclosed in the application for Conversion filed with the Department and in the
notice to Members of the meeting called to adopt the Plan of Conversion.
(b) Each Member as of the Record Date shall receive such rights with
respect to the capital stock of the ASSOCIATION as shall be set forth in
regulations promulgated by the Department.
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EXHIBIT I
CERTIFICATE OF INCORPORATION
OF
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
SECTION 1. Corporate Title. The name of the savings association is South
----------------
Jersey Savings and Loan Association (the "Association").
SECTION 2. Office. The principal place of business of the Association
-------
shall be located at 4651 Route 42, Turnersville, New Jersey.
SECTION 3. Purpose and Powers. The Association is incorporated to operate
-------------------
as a capital stock savings association pursuant to the New Jersey Savings and
Loan Act of 1963, as amended (N.J.S.A. 7:12B-l et seq.), for the purposes stated
in such Act. The Association has and may exercise all express, implied and
incidental powers conferred thereby and by all acts amendatory thereof and
supplemental thereto, subject to the Constitutions and laws of the United States
and the State of New Jersey as they are now in effect, or as they may hereafter
be amended.
SECTION 4. Capital Stock. The total number of shares of all classes of
-------------
capital stock which the Association has authority to issue is fifteen million
(15,000,000), of which fourteen million (14,000,000) shall be common stock, par
value $1.00 per share, and of which one million (1,000,000) shall be preferred
stock, par value $1.00 per share. The shares may be issued from time to time as
authorized by the Board of Directors without further approval of stockholders,
except as otherwise provided in this Section 4 or to the extent that such
approval is required by governing law, rule, or regulation. The consideration
for the issuance of the shares shall be paid in full before their issuance and
shall not be less than the par value. Neither promissory notes nor future
services shall constitute payment or part payment for the issuance of shares of
the Association. The consideration for the shares shall be cash, tangible or
intangible property (to the extent direct investment in such property would be
permitted), labor or services actually performed for the Association, or any
combination of the foregoing. In the absence of actual fraud in the transaction,
the value of such property, labor, or services, as determined by the Board of
Directors of the Association, shall be conclusive. Upon payment of such
consideration, such shares shall be deemed to be fully paid and nonassessable.
In the case of a stock dividend, that part of the surplus of the Association
which is transferred to stated capital upon the issuance of shares as a share
dividend shall be deemed to be the consideration for their issuance.
Nothing contained in this Section 4 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share.
Provided, that this restriction on voting separately by class or series shall
not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the Board of
Directors, less than a majority thereof, in the event of default in the
payment of dividends on any class or series of preferred stock;
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(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or consolidation
of the Association with another corporation, or the sale, lease, or
conveyance (other than by mortgage or pledge) of properties or business in
exchange for securities of a corporation other than the Association if the
preferred stock is exchanged for securities of such other corporation:
Provided, that no provision may require such approval for transactions
undertaken with the assistance or pursuant to the direction of the New
Jersey Department of Banking or the Office of Thrift Supervision;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth in this Section
4 (or in any supplementary sections hereto), including any amendment which
would create or enlarge any class or series ranking prior thereto in rights
and preferences. An amendment which increases the number of authorized
shares of any class or series of capital stock, or substitutes the
surviving Association in a merger or consolidation for the Association,
shall not be considered to be such an adverse change.
A description of the different classes and series (if any) of the
Association's capital stock and a statement of the designations, and the
relative rights, preferences, and limitations of the shares of each class of and
series (if any) of capital stock and a statement of the authority of the Board
of Directors to divide the preferred stock into classes or series or both and to
determine or change for any such class or series its designation, number of
shares, relative rights, preferences and limitations are as follows:
A. Common Stock. Except as provided in this Section 4 the holders of the
------------
common stock shall exclusively possess all voting power. Each holder of shares
of common stock shall be entitled to one vote for each share held by such
holder.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund, or retirement fund, or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends out of any
assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
Association, the holders of the common stock (and the holders of any class or
series of stock entitled to participate with the common stock in the
distribution of assets) shall be entitled to receive, in cash or in kind, the
assets of the Association available for distribution remaining after: (i)
payment or provision for payment of the Association's debts and liabilities,
including the withdrawal of all accounts and deposits; (ii) distributions or
provision for distributions in settlement of its liquidation account; and (iii)
distributions or provision for distributions to holders of any class or series
of stock having preference over the common stock in the liquidation,
dissolution, or winding up of the Association. Each share of common stock shall
have the same relative rights as and be identical in all respects with all the
other shares of common stock in the event of such liquidation, dissolution or
winding up of the Association.
-2-
<PAGE>
B. Preferred Stock. The Association may provide for one or more classes
---------------
of preferred stock, which shall be separately identified. The shares of any
class may be divided into and issue in series, with each series separately
designated so as to distinguish the shares thereof from the shares of all other
series and classes. All shares of the same class shall be identical except as
to the following relative rights and preferences, as to which there may be
variations between different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and,
if so, from which date(s), the payment date(s) for dividends, and
the participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of the shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price(s) at which, and the terms and conditions on which, such
shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event
of voluntary or involuntary liquidation, dissolution, or winding
up of the Association;
(f) Whether the shares of such series shall be entitled to the benefit
of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such
fund and the manner of its application, including the price(s) at
which such shares may be redeemed or purchased through the
application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of
the Association and, if so, the conversion price(s) or the rate(s)
of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and
conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares
of the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The Board of Directors shall have authority to divide any authorized class
of preferred stock into classes, or into classes or series, within the
limitations set forth in this section, and to determine
-3-
<PAGE>
or change for any class or series its designation, number of shares, relative
rights, preferences and limitations.
SECTION 5. Incorporation. The name, residence, post office address and
-------------
occupation of each incorporator of the Association are as follows:
<TABLE>
<CAPTION>
NAME RESIDENCE AND ADDRESS OCCUPATION
- ----------------------- ---------------------- -------------------------------------------
<S> <C> <C>
Arthur E. Armitage, Jr. 1125 Lake Shore Drive Insurance Broker
Collingswood, NJ 08108
Robert J. Colacicco 24 Regency Court President, South Jersey Savings and Loan
Marlton, NJ 08053 Association
Richard W. Culbertson, Jr. 107 Uxbridge Partner/Accountant
Cherry Hill, NJ 08034
Gregory M. DiPaolo 351 Ganttown Road Executive Vice President/Treasurer, South
Charles Carrol #8 Jersey Savings and Loan Association
Turnersville, NJ 08012
John V. Field 422 Kings Highway East Attorney
Haddonfield, NJ 08033
Richard G. Mohrfeld 47 Treaty Elms Lane President/Fuel Oil Company
Haddonfield, NJ 08033
Martin Rosner Apt. D282 Retired
1 Brendenwood Drive
Voorhees, NJ 08043
Ronald L. Woods 204 Breslin Avenue Realtor
Haddonfield, NJ 08033
Joseph M. Sidebotham 51 West Elm Avenue Senior Vice President, South Jersey
Mantua, NJ 08051 Savings and Loan Association
</TABLE>
SECTION 6. Preemptive Rights. Holders of the capital stock of the
-----------------
Association shall not be entitled to preemptive rights with respect to any
shares of the Association which may be issued.
SECTION 7. Certain Provisions Applicable for Five Years.
--------------------------------------------
Notwithstanding anything contained in the Association's Certificate of
Incorporation or bylaws to the contrary, for a period of five years from the
date of consummation of the conversion of the Association from mutual to stock
form, the following provisions shall apply:
A. Beneficial Ownership Limitation. No person shall directly or
-------------------------------
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of any equity security of the Association unless such offer to
acquire or acquisition is approved by a majority of the Board of Directors.
This limitation shall not apply to a transaction in which the Association forms
a holding company in conjunction with conversion, or thereafter, if such
formation is without change in the respective beneficial ownership interest of
the Association's stockholders other than pursuant to the exercise of any
dissenter and appraisal rights, the purchase of shares by
-4-
<PAGE>
underwriters in connection with a public offering or the purchase of shares by a
tax-qualified employee stock benefit plan which is exempt from the approval
requirement under 12 CFR (S)574.3(c)(1)(vi).
In the event shares are acquired in violation of this Section 7, all shares
beneficially owned by person in excess of 10% shall be considered "excess
shares" and shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matters
submitted to the stockholders for a vote.
For purposes of this Section 7, the following definitions apply:
(1) The term "person" includes an individual, a group acting in concert, a
corporation, a partnership, a bank, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate or any other group
formed for the purpose of acquiring, holding or disposing of the equity
securities of the Association.
(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value.
(3) The term "acquire" includes every type of acquisition, whether effected
by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a joint
activity or conscious parallel action towards a common goal whether or not
pursuant to an express agreement, or (b) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangements,
whether written or otherwise.
B. Call for Special Meetings. Special meetings of stockholders relating
--------------------------
to changes in control of the Association or amendments to its Certificate of
Incorporation shall be called only upon direction of the Board of Directors.
SECTION 8. Directors. The Association shall be under the direction of
---------
a Board of Directors. The authorized number of directors, as stated in the
Association's bylaws, shall not be less than five or more than fifteen except
when a greater number is approved by the Board.
-5-
<PAGE>
The number of directors constituting the initial Board of Directors upon
organization of the Association is eight. The first Board of Directors, to
serve until the first annual meeting of the Association, is comprised of the
following individuals:
<TABLE>
<CAPTION>
NAME RESIDENCE AND ADDRESS
- ----------------------- -----------------------
<S> <C>
Arthur E. Armitage, Jr. 1125 Lake Shore Drive
Collingswood, NJ 08108
Robert J. Colacicco 24 Regency Court
Marlton, NJ 08053
Richard W. Culbertson, Jr. 107 Uxbridge
Cherry Hill, NJ 08034
Gregory M. DiPaolo 351 Ganttown Road
Charles Carrol #8
Turnersville, NJ 08012
John V. Field 422 Kings Highway East
Haddonfield, NJ 08033
Richard G. Mohrfeld 47 Treaty Elms Lane
Haddonfield, NJ 08033
Martin Rosner Apt. D282
1 Brendenwood Drive
Voorhees, NJ 08043
Ronald L. Woods 204 Breslin Avenue
Haddonfield, NJ 08033
</TABLE>
SECTION 9. Liability of Directors. No director or officer of the
----------------------
Association shall be personally liable to the Association or its stockholders
for damages for breach of any duty owed to the Association or its stockholders
except that this Section 9 shall not relieve any director from liability for any
breach of duty based upon an act or omission (a) in breach of such person's duty
of loyalty to the Association or its stockholders, (b) not in good faith or
involving a knowing violation of law, or (c) resulting in receipt by such person
of an improper personal benefit. As used in this Section 9, an act or omission
in breach of a person's duty of loyalty means an act or omission which that
person knows or believes to be contrary to the best interests of the
-6-
<PAGE>
Association or its stockholders in connection with a matter in which he has a
material conflict of interest.
If the Savings and Loan Act of New Jersey (1963) as presently enacted is
amended after the date hereof to authorize further eliminating or limiting the
personal liability of directors or officers, then the liability of a director or
officer of the Association shall be eliminated or limited to the fullest extent
permitted by the Savings and Loan Act of New Jersey (1963), as so amended. Any
repeal or modification of this Section 9 by the stockholders of the Association
shall be prospective only and shall not adversely affect any right or protection
of a director or officer existing at the time of such repeal or modification.
SECTION 10. Indemnification of Officers, Directors and Employees. Any
----------------------------------------------------
person shall be indemnified or reimbursed by the Association for reasonable
expenses, including, but not limited to, attorney fees, actually incurred by him
in connection with any action, suit or proceeding, instituted or threatened,
judicial or administrative, civil or criminal, to which he is made a party by
reason of his being or having been a director, officer or employee of the
Association; provided, however, that no person be so indemnified or reimbursed,
nor shall he retain any advancement or allowance for indemnification which may
have been made by the Association in advance of final disposition in relation to
such action, suit or proceeding in which, and to the extent that, he finally
shall be adjudicated to have been guilty of a breach of good faith, to have been
negligent in the performance of his duties or to have committed an action or
failed to perform a duty for which there is a common law or statutory liability;
and, provided further, that a person may, with the approval of the Commissioner
of Banking of the State of New Jersey be so indemnified or reimbursed for:
(1) Amounts paid in compromise or settlement of any action, suit or
proceeding, including reasonable expenses incurred in connection therewith; or
(2) Reasonable expenses, including fines and penalties, incurred in
connection with a criminal civil action, suit or proceeding in which such person
has been adjudicated guilty, negligent or liable, if it shall be determined by
the Board of Directors and by the Commissioner that such person was acting in
good faith and in what he believed to be the best interest of the Association
and without knowledge that the action was illegal, and if such indemnification
or reimbursement is approved at an annual or special meeting of the members or
stockholders by a majority of the votes eligible to be cast. Amounts paid to
the Association, whether pursuant to judgment or settlement, by any person
within the meaning of this section shall not be indemnified or reimbursed in any
case.
SECTION 11. Liquidation Account. Pursuant to the requirements of 12 CFR
-------------------
563b.3, the Association shall establish and maintain a liquidation account for
the benefit of its savings account holders as of June 30, 1997 and
[_______________] ("eligible savers"). In the event of a complete liquidation
of the Association, it shall comply with such regulations with respect to the
amount and the priorities on liquidation of each of the Association's eligible
saver's inchoate interest in the liquidation account, to the extent it is still
in existence; provided, that an eligible saver's inchoate
-7-
<PAGE>
interest in the liquidation account shall not entitle such eligible saver to any
voting rights at meetings of the Association's stockholders.
SECTION 12. Perpetual Existence. The Association shall have a perpetual
-------------------
existence, subject to liquidation and dissolution as provided by law.
SECTION 13. Amendment of Certificate. Except as provided in Section 4, no
-------------------------
amendment, addition, alteration, change, or repeal of this Certificate of
Incorporation shall be made, unless such is first proposed by the Board of
Directors of the Association, approved by the stockholders by a majority of the
total votes eligible to be cast and submitted to the Commissioner of Banking of
the State of New Jersey for action as specified by law or regulation.
SECTION 14. Subscribed Shares. The total amount of capital stock
-----------------
subscribed for as of the date of this Certificate of Incorporation is one
thousand (1,000). The undersigned incorporators are of the age of eighteen
years or over.
-8-
<PAGE>
IN WITNESS WHEREOF, this Certificate has been executed this ___ day of
_______, 199__.
Signature:
---------------------------------------
Arthur E. Armitage, Jr.
---------------------------------------
Robert J. Colacicco
---------------------------------------
Richard W. Culbertson, Jr.
---------------------------------------
Gregory M. DiPaolo
---------------------------------------
John V. Field
---------------------------------------
Richard G. Mohrfeld
---------------------------------------
Martin Rosner
---------------------------------------
Ronald L. Woods
---------------------------------------
Joseph M. Sidebotham
-9-
<PAGE>
STATE OF NEW JERSEY )
) ss:
COUNTY OF GLOUCESTER )
BE IT REMEMBERED, that on this _____ of _________________, 199__, before
me, the subscriber, ____________________, personally appeared
____________________ who, I am satisfied, is the person named in and who
executed the foregoing certificate, and I having made known to him the contents
thereof, he did acknowledge that he signed, sealed and delivered the same as his
voluntary act and deed, for the purposes and uses therein expressed.
---------------------------------------
Notary
-10-
<PAGE>
EXHIBIT II
BYLAWS OF
SOUTH JERSEY SAVINGS AND LOAN ASSOCIATION
ARTICLE I. HOME OFFICE
The home office of South Jersey Savings and Loan Association
(the"Association") is 4651 Route 42, Turnersville, New Jersey 08012.
ARTICLE II. SHAREHOLDERS
Section l. Place of Meetings. All annual and special meetings of
-----------------------------
shareholders shall be held at the home office of the Association or at such
other place in the State as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the
--------------------------
Association for the election of directors and for the transaction of any other
business of the Association shall be held annually within 120 days after the end
of the Association's fiscal year and at such time as the board of directors may
determine.
Section 3. Special Meetings. For a period of five years from the date of
----------------------------
the completion of the organization of the Association, special meetings of the
shareholders relating to a change in control of the Association or to an
amendment of the Certificate of Incorporation of the Association may be called
only by the board of directors. Thereafter, special meetings of the
shareholders for any purpose or purposes may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president or the secretary
upon the written request of the holders of not less than ten percent of all the
outstanding capital stock of the Association entitled to vote at the meeting.
Such written request shall state the purpose or purposes of the meeting and
shall be delivered at the home office of the Association addressed to the
chairman of the board, the president or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
-------------------------------
conducted in accordance with the rules and procedures adopted by the board of
directors unless otherwise prescribed by these bylaws. The board of directors
shall designate, when present, either the chairman of the board or president to
preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day and
------------------------------
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 10 nor more than 60 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, the secretary, or the directors calling the meeting,
to each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the mail, to the
address as it appears on the
<PAGE>
stock transfer books or records of the Association as of the record date
prescribed in Section 6 of this Article II, with postage prepaid. When any
shareholders' meeting, either annual or special, is adjourned for 30 days or
more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any meeting adjourned for less than 30 days or of the business to be
transacted at the meeting, other than an announcement at the meeting at which
such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
---------------------------------
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to, or dissent from, any proposal
without a meeting, or for the purposes of determining shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the board of directors shall fix in
advance a date as the record date for any such determination of shareholders.
Such date in any case shall be not more than 60 days and, in case of a meeting
of shareholders, not fewer than 10 days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment.
Section 7. Voting Lists. At least 10 days before each meeting of the
------------------------
shareholders, the officer or agent having charge of the stock transfer books for
shares of the Association shall make a complete list of the shareholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
shareholders shall be kept on file at the home office of the Association and
shall be subject to inspection by any shareholder at any time during usual
business hours, for a period of 10 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the meeting and shall be
subject to the inspection by any shareholder during the entire time of the
meeting. The original stock transfer book shall constitute prima facie evidence
of the shareholders entitled to examine such list or transfer books or to vote
at any meeting of shareholders.
Section 8. Quorum. A majority of the outstanding shares of the
------------------
Association entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of
the outstanding shares is represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to constitute less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
-------------------
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the shareholder or, in the
II-2
<PAGE>
absence of such direction, as determined by a majority of the board of
directors. No proxy shall be valid more than eleven months from the date of its
execution except for a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
----------------------------------------------------------------
ownership stands in the name of two or more persons, in the absence of written
directions to the Association to the contrary, at any meeting of the
shareholders of the Association any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
------------------------------------------------
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer into his name
if authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee, shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Association, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Association, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Shareholders shall not be entitled to
------------------------------
cumulate their votes for election of directors.
Section 13. Inspectors of Election. In advance of any meeting of
-----------------------------------
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails
II-3
<PAGE>
or refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting, or at the meeting by the chairman of the
board or the president.
The duties of such inspectors shall include: determining the number of
shares and the voting power of each share, the shares represented at the
meeting, the existence of a quorum, and the authenticity, validity and effect of
proxies; receiving votes, ballots, or consents; hearing and determining all
challenges and questions in any way arising in connection with the rights to
vote; counting and tabulating all votes or consents; determining the result; and
such acts as may be proper to conduct the election or vote with fairness to all
shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
---------------------------------
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 15 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in the principal place of business of the Association. No
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by shareholders are
made in writing and delivered to the secretary of the Association at least 60
days prior to the date of the annual meeting. Upon delivery, such nominations
shall be posted in a conspicuous place in the principal place of business of the
Association. Ballots bearing the names of all persons nominated by the
nominating committee and by shareholders shall be provided for use at the annual
meeting. However, if the nominating committee shall fail or refuse to act at
least 15 days prior to the annual meeting, nominations for directors may be made
at the annual meeting by any shareholder entitled to vote and shall be voted
upon.
Section 15. New Business. Any new business to be taken up at the annual
-------------------------
meeting shall be stated in writing and filed with the secretary of the
Association at least 15 days before the date of the annual meeting, and all
business so stated, proposed, and filed shall be considered at the annual
meeting, but no other proposal shall be acted upon at the annual meeting. Any
shareholder may make any other proposal at the annual meeting and the same may
be discussed and considered, but unless stated in writing and filed with the
secretary at least 60 days before the meeting, such proposal shall be laid over
for action at an adjourned, special, or annual meeting of the shareholders
taking place at least 60 days thereafter. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of reports of
officers, directors and committees; but in connection with such reports no new
business shall be acted upon at such annual meeting unless stated and filed as
herein provided.
Section 16. Action by Consent of Shareholders. Any action required to be
----------------------------------------------
taken at a meeting of shareholders, or any other action which may be taken at a
meeting of the shareholders must be effected at an annual or special meeting of
shareholders of the Association and may not be affected by any consent in
writing by such shareholders.
II-4
<PAGE>
ARTICLE III. BOARD OF DIRECTORS
Section l. General Powers. The business and affairs of the Association
--------------------------
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of eight
---------------------------
(8) members and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of directors
----------------------------
shall be held without other notice than this bylaw immediately after, and at the
same place as, the annual meeting of shareholders. The board of directors may
provide, by resolution, the time and place, for the holding of additional
regular meetings without other notice than such resolution.
Section 4. Qualification. Each director shall at all times be the
-------------------------
beneficial owner of not less than 100 shares of capital stock of the Association
unless the Association is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
----------------------------
may be called by or at the request of the chairman of the board, the president
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place as the place for holding any special
meeting of the board of directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone, or by means of similar communications equipment
by which all persons participating in the meeting can hear each other. Such
participation shall constitute attendance for the purpose of compensation
pursuant to Section 12 of this Article.
Section 6. Notice. Written notice of any special meeting shall be given
------------------
to each director at least 24 hours prior thereto when delivered personally or by
telegram, or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by Section
------------------
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of
II-5
<PAGE>
directors, but if less than such majority is present at a meeting, a majority of
the directors present may adjourn the meeting from time to time. Notice of any
adjourned meeting shall be given in the same manner as prescribed by Section 6
of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
----------------------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by applicable regulation or
by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted to
------------------------------------
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
Section 10. Resignation. Any director may resign at any time by sending a
------------------------
written notice of such resignation to the home office of the Association
addressed to the chairman of the board or president. Unless otherwise specified
such resignation shall take effect upon receipt by the chairman of the board or
president. The Board may, in its discretion by a majority vote, remove any
director who has absented without authority of the board from three consecutive
meetings of the board.
Section 11. Vacancies. Any vacancy occurring in the board of directors
----------------------
may be filled by the affirmative vote of a majority of the remaining directors,
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election of directors by
the shareholders. Any directorship to be filled by reason of an increase in the
number of directors may be filled by election by the board of directors for a
term of office continuing only until the next election of directors by the
shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
-------------------------
compensation for their services. By resolution of the board of directors, a
reasonable fixed sum or such other compensation, including reasonable expenses
of attendance, if any, may be allowed for actual attendance at each regular or
special meeting of the board of directors. Members of either standing or
special committees may be allowed such compensation for actual attendance at
committee meetings as the board of directors may determine.
Section 13. Presumption of Assent. A director of the Association who is
----------------------------------
present at a meeting of the board of directors at which action on any
Association matter is taken shall be presumed to have assented to the action
taken unless his dissent or abstention shall be entered in the minutes of the
meeting or unless he shall file a written dissent to such action with the person
acting as the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the secretary of the Association
within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in
favor of such action.
Section 14. Removal of Directors. Any director may be removed for cause
---------------------------------
by a two-thirds vote of the board. In addition to the foregoing, any director,
or the entire board of directors, may be removed from office at any time, but
only for cause and upon the affirmative
II-6
<PAGE>
vote of the holders of at least eighty percent (80%) of the voting power of all
the then outstanding shares of capital stock of the Association entitled to vote
generally in the election of Directors.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
Section l. Appointment. The board of directors, by resolution adopted by
-----------------------
a majority of the full board, may designate the chairman of the board and two or
more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
---------------------
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
Certificate of Incorporation or bylaws of the Association, or recommending to
the shareholders a plan of merger, consolidation, or conversion; the sale, lease
or other disposition of all or substantially all of the property and assets of
the Association otherwise than in the usual and regular course of its business;
a voluntary dissolution of the Association; a revocation of any of the
foregoing; or the approval of a transaction in which any member of the executive
committee, directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
------------------
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
--------------------
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than 24 hours notice stating
the place, date and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
------------------
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
------------------------------------
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing,
II-7
<PAGE>
setting forth the action so taken, shall be signed by all of the members of the
executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
---------------------
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
------------------------------------
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the Association. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
---------------------
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
-----------------------------
establish an audit, loan, or other committees composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
Association and may prescribe the duties, constitution and procedures thereof.
ARTICLE V. OFFICERS
Section l. Positions. The officers of the Association shall be a
---------------------
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may
also designate the chairman of the board as an officer. The president shall be
the chief executive officer, unless the board of directors designates the
chairman of the board as chief executive officer. The president shall be a
director of the Association. The offices of the secretary and treasurer may be
held by the same person and a vice president may also be either the secretary or
the treasurer. The board of directors may designate one or more vice presidents
as executive vice president or senior vice president. The board of directors
may also elect or authorize the appointment of such other officers as the
business of the Association may require. The officers shall have such authority
and perform such duties as the board of directors may from time to time
authorize or determine. In the absence of action by the board of directors, the
officers shall have such powers and duties as generally pertain to their
respective offices.
Section 2. Election and Term of Office. The officers of the Association
---------------------------------------
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of the shareholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation or removal in
the manner hereinafter provided. Election or appointment of an officer,
employee or agent shall not of itself create
II-8
<PAGE>
contractual rights. The board of directors may authorize the Association to
enter into an employment contract with any officer in accordance with
regulations; but no such contract shall impair the right of the board of
directors to remove any officer at any time in accordance with Section 3 of this
Article V.
Section 3. Removal. Any officer may be removed by the board of directors
-------------------
whenever in its judgment the best interests of the Association will be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
---------------------
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
------------------------
from time to time by the board of directors.
Section 6. Prohibited Affiliation. No person may be an Officer or
----------------------------------
Director of the Association if such person is related to any two Directors,
Officers, or Employees, or any combination thereof, of the Association in the
following degrees: such person's spouse, father, mother, children, brothers,
sisters and grandchildren; the father, mother, brothers, sisters of the such
person's spouse; and the spouse of a child, brother or sister, whether by full,
half blood or adoption.
Section 7. Limitation of Director or Officer Liability. No Director or
-------------------------------------------------------
Officer of the Association shall be personally liable to the Association or its
members for damages for breach of any duty owed to the Association or its
members except as set forth in N.J.S.A. 17:12B-38.1.
ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section l. Contracts. Except as otherwise prescribed by these bylaws with
---------------------
respect to certificates for shares, the board of directors may authorize any
officer, employee, or agent of the Association to enter into any contract or
execute and deliver any instrument in the name of and on behalf of the
Association. Such authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
-----------------
Association and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for
--------------------------------
the payment of money, notes or other evidences of indebtedness issued in the
name of the Association shall be signed by one or more officers, employees or
agents of the Association in such manner as shall from time to time be
determined by the board of directors.
II-9
<PAGE>
Section 4. Deposits. All funds of the Association not otherwise employed
--------------------
shall be deposited from time to time to the credit of the Association in any
duly authorized depositories as the board of directors may select.
ARTICLE VII. CERTIFICATES FOR SHARES
AND THEIR TRANSFER
Section l. Certificates for Shares. Certificates representing shares of
-----------------------------------
capital stock of the Association shall be in such form as shall be determined by
the board of directors. Such certificates shall be signed by the chief
executive officer or by any other officer of the Association authorized by the
board of directors, attested by the secretary or an assistant secretary, and
sealed with the corporate seal or a facsimile thereof. The signatures of such
officers upon a certificate may be facsimiles if the certificate is manually
signed on behalf of a transfer agent or a registrar, other than the Association
itself or one of its employees. Each certificate for shares of capital stock
shall be consecutively numbered or otherwise identified. The name and address
of the person to whom the shares are issued, with the number of shares and date
of issue, shall be entered on the stock transfer books of the Association.
All certificates surrendered to the Association for transfer shall be
cancelled and no new certificate shall be issued until the former certificate
for a like number of shares has been surrendered and cancelled, except that in
case of a lost or destroyed certificate, a new certificate may be issued upon
such terms and indemnity to the Association as the board of directors may
prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
------------------------------
Association shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
Association. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Association shall be deemed by the Association
to be the owner for all purposes.
ARTICLE VIII. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Association shall end on December 31 of each year.
The Association shall be subject to an annual audit as of the end of its fiscal
year by independent public accountants appointed by and responsible to the board
of directors. The appointment of such accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX. DIVIDENDS
Subject to the terms of the Association's Certificate of Incorporation, the
board of directors may, from time to time, declare, and the Association may pay,
dividends on its outstanding shares of capital stock.
II-10
<PAGE>
ARTICLE X. CORPORATE SEAL
The board of directors shall provide an Association seal, which shall be
two concentric circles between which shall be the name of the Association. The
year of incorporation or an emblem may appear in the center.
ARTICLE XI. AMENDMENTS
These bylaws may be amended in a manner consistent with regulations of the
New Jersey Department of Banking and at any time by a majority vote of the full
board of directors, or by a majority vote of the votes cast by the shareholders
of the Association at any legal meeting.
ARTICLE XII. NEW JERSEY LAW
Any provision required by New Jersey law to be included in these bylaws
shall be deemed to be included herein and to the extent any other provision of
these bylaws is inconsistent with any such required provisions, the required
provisions shall govern.
II-11
<PAGE>
Exhibit 5.0
[LETTERHEAD OF MULDOON, MURPHY & FAUCETTE APPEARS HERE]
December 2, 1998
Board of Directors
South Jersey Financial Corporation, Inc.
4651 Route 42
Turnersville, New Jersey 08012
Re: The issuance of up to 4,699,107 shares of
South Jersey Financial Corporation, Inc. Common Stock
Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with the conversion of South Jersey Savings and Loan Association
(the "Association"), a New Jersey-chartered savings association, from the mutual
to the stock form of ownership (the "Conversion"), and the related subscription
offering, community offering and syndicated community offering (the "Offerings")
by South Jersey Financial Corporation, Inc., (the "Company"), a Delaware
corporation and the proposed holding company for the Association, of up to
3,783,500 shares of its common stock, par value $.01 per share ("Common Stock")
(4,351,025 shares if the estimated valuation range is increased up to 15% to
reflect changes in market and financial conditions following commencement of the
Offerings) and the issuance of up to 302,680 shares to South Jersey Savings
Charitable Foundation, (the "Foundation") a privately-owned charitable
foundation formed by the Company, (348,082 shares if the estimated valuation
range is increased up to 15% to reflect changes in market and financial
conditions following commencement of the Offerings).
We understand that the Company will loan to the trust for the Association's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP trust will use to
purchase shares of Common Stock for which the ESOP trust subscribes pursuant to
the Offerings and for purposes of rendering the opinion set forth in paragraph 2
below, we assume that: (a) the Board of Directors of the Company (the "Board")
has duly authorized the loan to the ESOP trust (the "Loan"); (b) the ESOP serves
a valid corporate purpose for the Company; (c) the Loan will be made at an
interest rate and on other terms that are fair to the Company; (d) the terms of
the Loan will be set forth in customary and appropriate documents including,
without limitation, a
<PAGE>
Board of Directors
South Jersey Financial Corporation, Inc.
December 2, 1998
Page 2
promissory note representing the indebtedness of the ESOP trust to the Company
as a result of the Loan; and (e) the closing for the Loan and for the sale of
Common Stock to the ESOP trust will be held after the closing for the sale of
the other shares of Common Stock sold in the Offerings and the receipt by the
Company of the proceeds thereof.
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on September 28, 1998 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form SB-2, as initially filed with the Securities and Exchange Commission on
October 9, 1998 and as amended (the "Registration Statement"); a consent of the
sole incorporator of the Company; the plan of Conversion; the form of gift
instrument (the "Gift Instrument") whereby, and in accordance with the terms of
which, shares will be granted to the Foundation; the ESOP trust agreement and
the ESOP Loan agreement; resolutions of the Board concerning the organization of
the Company, the Offerings and designation of a pricing committee of the Board
(the "Pricing Committee"); and the form of stock certificate approved by the
Board to represent shares of Common Stock. We have also been furnished a
certificate of the Delaware Secretary of State certifying the Company's good
standing as a Delaware corporation. Capitalized terms used but not defined
herein shall have the meaning given them in the Certificate of Incorporation.
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law, upon which opinion we
believe we are justified in relying. We have examined the opinion of Morris,
Nichols, Arsht & Tunnell which opinion is in form satisfactory to us.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offerings, the Common
Stock to be issued in the Offerings (including the shares to be issued to the
ESOP trust) will be duly authorized and, when such shares are sold and paid for
in accordance with the terms set forth in the prospectus which is included in
the Registration Statement and such resolution of the Pricing Committee and,
certificates representing such shares in the form provided to us are duly and
properly issued, will be validly issued, fully paid and nonassessable.
<PAGE>
Board of Directors
South Jersey Financial Corporation, Inc.
December 2, 1998
Page 3
3. The Foundation Shares have been duly and validly authorized for
issuance and sale, and when granted, issued and delivered by the Company as
provided in the Gift Instrument against payment therefor, and a certificate
representing such shares in a form provided to us is duly and properly issued,
such shares will be duly issued, fully paid and nonassessable.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe
and apply the provisions of those Articles, subsection C.4 of
Article FOURTH, to the extent that subsection obligates any
person to provide to the Board the information such subsection
authorizes the Board to demand, and the provision of Subsection
C.7 of Article EIGHTH empowering the Board to determine the Fair
Market Value of property offered or paid for the Company's stock
by an Interested Stockholder, in each case to the extent, if any,
that a court applying Delaware law were to impose equitable
limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider the effect
of any offer to acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We assume no obligation to advise you of any events that occur subsequent
to the date of this opinion. This opinion is being furnished to you solely in
response to the requirements contained in the Form SB-2 and the Form AC to be
filed with the Securities and Exchange Commission and the Office of Thrift
Supervision, respectively, for your benefit and may not be relied upon by any
other person or for any other purpose and it should not be quoted in whole or in
part or otherwise referred to or furnished to any other person or entity without
the prior written consent of this firm.
Very truly yours,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 5.1
[Morris, Nichols, Arsht & Tunnell Letterhead]
November 25, 1998
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the conversion of South Jersey Savings and Loan
Association, a New Jersey chartered savings and loan association (the
"Association"), from the mutual form of ownership to stock form of ownership
(the "Conversion") and the subscription and community offering (the
"Offering"), in connection with the Conversion, by South Jersey Financial
Corporation, Inc., a Delaware corporation (the "Company"), of up to 4,351,025
shares of its common stock, par value $.01 per share (the "Common Stock").
In connection with your request for our opinion, you have provided to
us, and we have reviewed, the Company's certificate of incorporation (the
"Certificate of Incorporation"), its bylaws, the Registration Statement filed
with the Securities and Exchange Commission in connection with the Offering (the
"Registration Statement"), including the prospectus constituting a part thereof
(the "Prospectus"), a consent of the sole incorporator of the Company,
resolutions of the Board of Directors of the Company (the "Board") concerning,
inter alia, the organization of the Company, the Offering and the designation of
- ----- ----
a Pricing Committee of the Board (the "Pricing Committee") and the form of stock
certificate approved by the Board to represent shares of
<PAGE>
Muldoon, Murphy & Faucette
November 25, 1998
Page 2
Common Stock. We have also obtained a certificate of the Delaware Secretary of
State as to the Company's good standing as a Delaware corporation. Capitalized
terms used but not defined herein shall have the meanings given them in the
Certificate of Incorporation.
We understand that the Company will loan to the Association's Employee
Stock Ownership Plan (the "ESOP") the funds the ESOP will use to purchase the
shares of Common Stock for which the ESOP has subscribed as part of the
Offering. In this regard, we have assumed, for purposes of rendering the
opinion set forth in paragraph 2 below, that: (a) the Board has duly authorized
the loan to the ESOP (the "Loan"); (b) the Loan serves a valid corporate
purpose; (c) the Loan will be made at an interest rate and on other terms that
are fair to the Company; (d) the terms of the Loan will be set forth in
customary and appropriate documents including, without limitation, a promissory
note representing the indebtedness of the ESOP to the Company as a result of the
Loan; and (e) the closing for the Loan and for the sale of Common Stock to the
ESOP will be held after the closing for the sale of the other shares of Common
Stock sold in the Offering and the receipt by the Company of the proceeds
thereof.
We call your attention to the fact that the opinions expressed herein
are limited in all respects to matters of Delaware corporate law. We express no
opinion concerning the requirements of any other law, rule or regulation, state
or federal, applicable to the Association, the Company, the Offering or the
Conversion, including, without limitation, those applicable to federally insured
savings and loan associations or their holding companies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in
good standing as a corporation under the laws of the State of Delaware, with the
corporate power and authority to own its property and conduct its business as
now conducted as described in the Prospectus.
<PAGE>
Muldoon, Murphy & Faucette
November 25, 1998
Page 3
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offering, the
Common Stock to be issued in the Offering (including the shares to be issued to
the ESOP) will be duly authorized and, when such shares are sold and paid for in
accordance with the terms set forth in the Prospectus and such resolution of the
Pricing Committee, and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and non-assessable, with no personal liability for the payment of the Company's
debts arising solely by virtue of the ownership thereof; such issuance and sale
will not be in violation of or subject to any preemptive rights provided for by
Delaware law or by the Certificate of Incorporation.
The following provisions of the Certificate of Incorporation may not
be given effect by a court applying Delaware law, but in our opinion the failure
to give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and non-assessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply the provisions
of those Articles, subsection C.4 of Article FOURTH, to the extent that
provision obligates any person to provide to the Board the information such
subsection authorizes the Board to demand, and the provision of Section C.7 of
Article EIGHTH empowering the Board to determine the Fair Market Value of
property offered or paid for the Company's stock by an Interested Stockholder,
to the extent, if any, that a court applying Delaware law were to impose
equitable limitations upon the authority of the Board under such provisions.
<PAGE>
Muldoon, Murphy & Faucette
November 25, 1998
Page 4
(b) Article NINTH of the Certificate of Incorporation, which purports
to permit the Board to consider the effect of any offer to acquire the Company
on constituencies other than stockholders in evaluating any such offer.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
November 25, 1998
Private and Confidential
- ------------------------
Board of Directors
South Jersey Savings and Loan Association
4651 Route 42
Turnersville, NJ 08012
Dear Board Members:
You have requested an opinion from Deloitte & Touche LLP ("D&T") regarding
certain state tax consequences to South Jersey Savings and Loan Association
("the Association") and its depositors regarding the proposed conversion of the
Association from a New Jersey chartered mutual savings and loan association into
a New Jersey chartered stock savings and loan association and the acquisition of
the Association's stock by South Jersey Financial Corporation, Inc. (the
"Holding Company"), a newly formed Delaware corporation, pursuant to the plan of
conversion ("the Conversion") adopted by the Board of Directors on July 28, 1998
and as amended on September 30, 1998 and November 24, 1998. The Conversion and
its components and related transactions are described in the plan of conversion
filed with the Office of Thrift Supervision ("OTS") in connection with the
Conversion.
You have provided us with an opinion of tax counsel, Muldoon, Murphy & Faucette
("Federal Tax Opinion"), stating the federal income tax consequences that should
result from the (1) conversion, (2) exchange, and (3) the transfer of 100% of
the stock of the Association to the Holding Company in a capital contribution.
In rendering the opinion set forth below, we have relied upon, without
independent verification or investigation, that the facts and circumstances
attendant to the Conversion as described in the Federal Tax Opinion are true and
complete. We have, based on your specific instructions, specifically relied
upon the conclusions of law stated in the Federal Tax Opinion as to the
treatment of the Conversion for federal income tax purposes, and our opinion as
set forth herein assumes the accuracy of such conclusions of law.
NEW JERSEY SAVINGS INSTITUTION TAX
- ----------------------------------
Based upon the Federal Tax Opinion, and all underlying contingencies expressed
in that document, it is our opinion that the laws of the State of New Jersey
will, pursuant to N.J. Rev. Stat. Section 54:10D-Z (1937) and under N.J. Reg
18:7-5.4(a)(1), for Savings Institution Tax (SIT) purposes, treat the conversion
and subsequent acquisition transaction as detailed in the plan of conversion in
an identical
<PAGE>
Board of Directors
South Jersey Savings and Loan Association
November 25, 1998
Page 2
manner as it is treated by the Internal Revenue Service for federal income tax
purposes. Consequently, no adverse SIT consequences will be incurred by either
the Association or its stockholders as a result of the Conversion.
NEW JERSEY PERSONAL INCOME TAX
- ------------------------------
CONVERSION
The Association has received the Federal Tax Opinion from tax counsel stating
that for federal income tax purposes no gain or loss will be recognized by
Eligible Account Holders and Supplemental Eligible Account Holders of the
Association upon the issuance to them of withdrawable deposit accounts in the
Association plus interests in the liquidation account of the converted
Association in exchange for their deposit accounts in the Association and their
related interest in the residual equity of the Association or to the other
depositors on the issuance to them of withdrawable deposit accounts.
Consistent with federal income tax treatment, N.J. Rev. Stat. Section 54A:5-1(c)
(1937) affords the depositors similar tax-free treatment with respect to the
Conversion.
DISTRIBUTION OF SUBSCRIPTION RIGHTS
Tax counsel has also opined that for federal income tax purposes, no gain or
loss will be recognized by Eligible Account Holders and Supplemental Eligible
Account Holders of the Association upon the distribution to them of the
nontransferable subscription rights to purchase shares of stock in the Holding
Company, provided that the amount paid for the Holding Company stock is equal to
the fair value of such stock. Gain realized, if any, by the Eligible Account
Holders and Supplemental Eligible Account Holders of the Association on the
distribution to them of nontransferable subscription rights to purchase the
Holding Company stock will be recognized but only in an amount not in excess of
the fair market value of such subscription rights. Eligible Account Holders and
Supplemental Eligible Account Holders of the Association will not realize any
taxable income for federal income tax purposes as a result of the exercise by
them of the nontransferable subscription rights.
<PAGE>
Board of Directors
South Jersey Savings and Loan Association
November 25, 1998
Page 3
Consistent with federal income tax treatment, N.J. Rev. Stat. Section 54A:5-1(c)
(1937) affords the depositors similar tax-free treatment with respect to the
distribution of subscription rights.
DELAWARE CORPORATE INCOME TAX
- -----------------------------
Del. Code Rev. Section 1902(b)(6) exempts an entity from Delaware corporation
income tax if the corporation maintains a statutory corporate office in Delaware
but is not doing business in Delaware. The Holding Company is a domestic
Delaware corporation, organized at the direction of the Association to become a
savings and loan holding company and own all of the Association's capital stock
to be issued upon its conversion from mutual form to stock form. The Holding
Company does not maintain any physical presence in nor conduct any business in
the State of Delaware. Thus, it should be exempt from Delaware corporate income
tax.
* * * * * * *
The opinion expressed is limited to the specific matters discussed herein and
does not address any federal tax considerations or any other state tax or local
tax considerations. If any of the information upon which we have relied is
incorrect, or if changes in the relevant facts occur after the date hereof, our
opinion could be affected thereby.
Moreover, this opinion is based on New Jersey and Delaware law as it now exists.
Any such change in New Jersey or Delaware law would have a material impact on
the advice rendered in this opinion. Deloitte & Touche LLP assumes no
responsibility to update this opinion in the event of any such changes.
This opinion is given solely for the benefit of the parties to the Conversion
and the shareholders of the Association, and may not be relied upon by any other
party or entity or referred to in any document without our express written
consent. This opinion is not binding on any tax authority (including the New
Jersey or Delaware Department of Revenue) or any court. No assurance can be
given that a tax authority will not take a different view of these transactions
and that such view may be ultimately sustained by a court.
<PAGE>
Board of Directors
South Jersey Savings and Loan Association
November 25, 1998
Page 4
We hereby consent to the filing of this opinion as an exhibit to the
Association's application to be filed with the Office of Thrift Supervision and
as an exhibit to the Holding Company's Registration Statement to be filed with
the Securities and Exchange Commission.
If you have any questions concerning this matter, please contact Mr. Melvin S.
Toren at (215) 246-2337 or Ms. Joyce M. Klinewski at (215) 299-4566.
Yours very truly,
/s/ Deloitte & Touche
cc: Muldoon, Murphy & Faucette
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-65519 of South Jersey Financial Corporation, Inc. on Form SB-2 and on Form
AC for South Jersey Savings and Loan Association (the "Association") of our
report for the Association dated March 20, 1998, appearing in the Prospectus,
which is part of the Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
December 1, 1998
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-65519 of South Jersey Financial Corporation, Inc. on Form SB-2 and on Form
AC for South Jersey Savings and Loan Association (the "Association") of our
state tax opinion for the Association dated November 25, 1998, appearing as an
exhibit to the Registration Statement.
We also consent to the reference to us under the headings "Tax Considerations,"
"Tax Effects," "Tax Aspects" and "Legal and Tax Opinions" appearing in the
Prospectus, which is part of the Registration Statement.
/s/ Deloitte & Touche, LLP
Philadelphia, Pennsylvania
December 1, 1998
<PAGE>
MULDOON, MURPHY & FAUCETTE Exhibit 23.2
CONSENT
We hereby consent to the references to this firm and our opinions in: the
Registration Statement on Form SB-2 filed by South Jersey Financial Corporation,
Inc., Turnersville, New Jersey, and all amendments thereto; in the Form H-(e)1
for South Jersey Financial Corporation, Inc., and all amendments thereto; and in
the Application for Conversion on Form AC filed by South Jersey Savings and Loan
Association (the "Association"), and all amendments thereto, relating to the
conversion of the Association from a New Jersey-chartered mutual savings
association to a New Jersey-chartered stock savings association, the concurrent
issuance of the Association's outstanding capital stock to South Jersey
Financial Corporation, Inc., a holding company formed for such purpose, and the
offering of South Jersey Financial Corporation, Inc.'s common stock. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended.
MULDOON, MURPHY & FAUCETTE
/s/ MULDOON, MURPHY & FAUCETTE
Dated this 2nd day of
December, 1998
<PAGE>
EXHIBIT 99.2
GIFT INSTRUMENT
CHARITABLE GIFT TO
SOUTH JERSEY SAVINGS CHARITABLE FOUNDATION
South Jersey Savings Charitable Foundation, Turnersville, New Jersey (the
"Company"), desires to make a gift of its common stock, par value $.01 per share
to South Jersey Savings Charitable Foundation (the "Foundation"), a nonprofit
corporation organized under the laws of the State of Delaware. The purpose of
the donation is to establish a bond between Security of South Jersey Financial
Corporation, Inc. and the community in which it and its affiliates operate to
enable the community to share in the potential growth and success of the Company
and its affiliates over the long term. To that end, South Jersey Financial
Corporation, Inc. now gives, transfers, and delivers to the Foundation
__________ shares of its common stock, par value $.01 per share, for
consideration of $.01 per share, or total consideration of $__________, subject
to the following conditions:
1. The Foundation shall use the donation solely for charitable purposes,
including community development, in the communities in which the Company and its
affiliates operate in accordance with the provisions of the Foundation's
Certificate of Incorporation; and
2. Consistent with the Company's intent to form a long-term bond between
the Company and the community, the amount of Common Stock that may be sold by
the Foundation in any one year shall not exceed 5% of the market value of the
assets held by the Foundation, except that this restriction shall not prohibit
the board of directors of the Foundation from selling a greater amount of Common
Stock in any one year if the board of directors of the Foundation determines
that the failure to sell a greater amount of the Common Stock held by the
Foundation would: (a) result in a long-term reduction of the value of the
Foundation's assets relative to their then current value that would jeopardize
the Foundation's capacity to carry out its charitable purposes; or (b) otherwise
jeopardize the Foundation's tax-exempt status or cause it to be subject to a
federal excise tax.
3. The Common Stock contributed to the Foundation by the Company shall,
for so long as such shares are held by the Foundation, be considered by the
Company to be voted in the same ratio as all other shares of Common Stock of the
Company which are voted on each and every proposal considered by stockholders of
the Company, provided, however, that if this Condition No. 3 is waived by the
Office of Thrift Supervision pursuant to Office of Thrift Supervision Order No.
______, dated _____________, 1998 (a copy of which is attached hereto), then
this Condition No. 3 shall become void and of no effect.
4. For a period of five years from the date of the organization of the
Corporation: (i) one board seat shall be reserved for an individual who is not
an officer and/or director of South Jersey Financial Corporation, Inc. or South
Jersey Savings and Loan Association and who is a civic or community leader
within Turnersville, New Jersey or its neighboring communities and is not an
associate of any officer or director of South Jersey Financial Corporation, Inc.
or its affiliates or subsidiaries ("Community Member") and (ii) one board seat
shall be reserved for an individual who is also a member of the board of
directors of South Jersey Savings and Loan Association.
Dated: ___________, 1998 SOUTH JERSEY FINANCIAL CORPORATION, INC.
By:________________________________
