As filed with the Securities and Exchange Commission on May 6, 1998
Registration No. 333-48615
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
PRE-EFFECTIVE AMENDMENT
NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________
NORTHFIELD BANCORP, INC.
(Name of Small Business Issuer in its charter)
MARYLAND 6035 [APPLIED FOR]
- ------------------------------------------------------------------------------------------
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification number)
8005 HARFORD ROAD
BALTIMORE, MARYLAND 21234
(410) 665-7900
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices and principal place
of business)
G. RONALD JOBSON, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
NORTHFIELD BANCORP, INC.
8005 HARFORD ROAD
BALTIMORE, MARYLAND 21234
(410) 665-7900
- --------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
COPIES TO:
Gary R. Bronstein, Esquire
Cynthia R. Cross, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
APPROXIMATE DATE OF PROPOSED SALE TO THE 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. [_]
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
PROSPECTUS
Up to 595,125 Shares of Common Stock
NORTHFIELD BANCORP, INC.
Executive Offices: Main Office:
8005 Harford Road 1844 E. Joppa Road
Baltimore, Maryland 21234 Baltimore, Maryland 21234
(410) 665-7900 (410) 663-2500
================================================================================
Northfield Federal Savings is converting from a federally chartered mutual
savings association to a federally chartered stock savings bank. As part of the
conversion, Northfield Federal Savings will become a wholly owned subsidiary of
Northfield Bancorp, Inc. and will adopt the name "Northfield Federal Saving
Bank." The Company was formed in March 1998 and upon completion of the
conversion will own all of the shares of Northfield Federal Savings. The common
stock of the Company is being offered to the public in accordance with a plan of
conversion. The plan of conversion must be approved by the Office of Thrift
Supervision and by a majority of the votes eligible to be cast by members of
Northfield Federal Savings. The offering will not go forward if Northfield
Federal Savings does not receive these approvals and the Company does not sell
at least the minimum number of shares.
The shares of common stock are first being offered pursuant to
nontransferable subscription rights in a Subscription Offering. Depositor and
borrower members as of certain eligibility dates will receive subscription
rights. Shares of common stock not subscribed for in the Subscription Offering
may be offered for sale in a community offering with preference given to certain
residents of Baltimore County, Maryland.
================================================================================
TERMS OF OFFERING
Ferguson & Company, an independent appraiser, has estimated the market value of
the converted Northfield Federal Savings to be between $3,825,000 and
$5,175,000, which establishes the number of shares to be offered at a price of
$10.00 per share. Subject to Office of Thrift Supervision approval, an
additional 15% above the maximum number of shares, or 595,125 shares may be
offered. Based on these estimates, we are making the following offering of
shares of common stock:
. Price Per Share: $10.00
. Number of Shares Minimum/
Maximum as adjusted: 382,500 to 595,125
. Offering Expenses: $375,000
. Net Proceeds to the Company
Minimum/Maximum as adjusted: $3,463,000 to $5,549,250
. Net Proceeds Per Share
Minimum/Maximum as adjusted: $9.05 to $9.32
It is possible that we would issue an additional 3% of the total shares sold
under certain circumstances involving an improper allocation of shares in the
conversion.
Please refer to Risk Factors beginning on page 1 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 government agency.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, OFFICE OF THRIFT SUPERVISION,
NOR ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES
OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
For information on how to subscribe, call the Stock Information Center at (410)
668-2160.
TRIDENT SECURITIES, INC.
The date of this Prospectus is ___________, 1998
TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering ............................. (i)
Summary.................................................................... (iv)
Selected Financial and Other Data......................................... (vii)
Recent Developments.......................................................(viii)
Risk Factors................................................................ 1
Proposed Purchases by Directors and Officers................................ 6
The Company................................................................. 6
Northfield Federal Savings.................................................. 7
Use of Proceeds............................................................. 7
Dividends................................................................... 8
Market for the Common Stock................................................. 9
Capitalization.............................................................. 10
Historical and Pro Forma Capital Compliance................................. 11
Pro Forma Data.............................................................. 12
The Conversion.............................................................. 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 29
Business of Northfield Bancorp, Inc......................................... 40
Business of Northfield Federal Savings...................................... 40
Regulation.................................................................. 58
Taxation.................................................................... 65
Management of the Company................................................... 66
Management of Northfield Federal Savings.................................... 67
Restrictions on Acquisitions of the Company................................. 73
Description of Capital Stock................................................ 78
Legal and Tax Matters....................................................... 80
Experts..................................................................... 80
Additional Information...................................................... 80
Index to Financial Statements of Northfield Federal Savings................. 81
Glossary.................................................................. A-1
This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" beginning on page 1 of this document.
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
[MAP OF NORTHFIELD FEDERAL
SAVINGS MARKET AREA]
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q. What is a mutual to stock conversion?
A: The conversion is a change in our form of organization. Currently, we
operate as a federally chartered mutual savings association with no
stockholders. As a result of the conversion, we will become a federally
chartered stock savings bank. As part of our conversion, the Company is
offering for sale shares of its common stock The Company will be our sole
stockholder and will purchase our stock in exchange for a portion of the
proceeds from its offering.
Q: What is the purpose of the conversion and the offering?
A: As a stock savings bank operating through a holding company structure, we
will have the ability to plan and develop long-term growth and improve our
future access to the capital markets. The stock offering will increase our
capital and the amount of funds available to us for lending and investment
activities. This will give us greater flexibility to diversify operations
and expand into other geographic markets if we choose to do so. If the
Company's earnings are sufficient in the future, you might also receive
dividends and benefit from the long-term appreciation of our stock price.
Q: How many shares of stock will be sold?
A: Between 382,500 and 517,500 shares of common stock will be sold, all at a
price of $10.00 per share. The number of shares to be sold may be
increased to 595,125 shares without further notice to you, subject to
receipt of approval of the Office of Thrift Supervision, if market or
financial conditions change prior to completion of the conversion or if
additional shares are needed to fill the order of our employee stock
ownership plan (the "ESOP"). Also, it is possible that we would issue an
additional 3% of the total shares sold in the event our board feels it is
necessary to correct an improper allocation of shares in the conversion.
Q: How do I subscribe for the stock?
A: You must complete and return the Stock Order Form to us together with your
payment or your authorization for withdrawal of the payment amount from an
account you have with us, on or before ___________, 1998. See pages __ to
__.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares (or $250). The maximum purchase per
eligible depositor in the Subscription Offering is 12,500 shares (or
$125,000). We may decrease or increase the maximum purchase limitation
without notifying you.
(i)
If shares are sold in a Community Offering, the maximum number of shares
that may be purchased by any party in the Community Offering, when combined
with the number of shares purchased by other parties with whom your shares
may be aggregated is 12,500 shares ($125,000).
Total purchases of stock in the conversion (i.e., combined purchases in the
----
Subscription and Community Offerings) may not exceed the lesser of $225,000
or 5% of the shares issued in the conversion. See pages __ to __.
Q: What happens if there are not enough shares to fill all orders?
A: You might not receive any or all of the shares you want to purchase. If
there is an over subscription, the stock will be offered on a priority
basis to the following persons:
. Eligible Account Holders - Persons who had a deposit account with us
on December 31, 1995 with a balance of at least $50.00. Any remaining
shares will be offered to:
. Our ESOP. Any remaining shares will be offered to:
. Supplemental Eligible Account Holders - Persons who had a deposit
account with us on March 31, 1998 with a balance of at least $50.00.
Any remaining shares will be offered to:
. Other Members - Other depositors and certain borrowers of ours, as of
__________, 1998.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public with
preference given to people who live in Baltimore County, Maryland. See
pages __ to __.
Q: What particular factors should I consider when deciding whether or not to
buy the stock?
A: There are numerous risks associated with purchasing our stock. Before you
decide to purchase stock, you should read the Risk Factors section
beginning on page 1 of this document.
Q: As a depositor or borrower member of Northfield Federal Savings, what will
happen if I do not purchase any stock?
A: You presently have voting rights while we are in the mutual form; however,
once we convert to the stock form you will lose your voting rights unless
you purchase stock. You are not
(ii)
required to purchase stock. Your deposit account, certificate accounts and
any loans you may have with us will be not be affected. See pages __ to __.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. In addition, you should contact:
Stock Information Center
Northfield Bancorp, Inc.
8005 Harford Road
Baltimore, Maryland 21234
(410) 668-2160
(iii)
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read carefully this entire document, including the
financial statements and the notes to the financial statements of Northfield
Federal Savings. References in this document to "we," "us," and "our" refer to
Northfield Federal Savings. In certain instances where appropriate, "us" or
"our" refers collectively to Northfield Bancorp, Inc. and Northfield Federal
Savings. References in this document to "the Company" refer to Northfield
Bancorp, Inc.
Northfield Bancorp, Inc.
Northfield Bancorp, Inc. was formed in March 1998 as a Maryland corporation
to be the holding company for Northfield Federal Savings Bank. The Company is
not an operating company and has not engaged in any significant business to
date. The holding company structure will provide greater flexibility in terms
of operations, expansion and diversification. See page __.
Northfield Federal Savings
We are a community and customer oriented federal mutual savings association
with two offices located in Baltimore, Maryland. We were originally founded in
1923 as a federally chartered mutual savings and loan association. Our primary
market area consists of Baltimore County, Maryland. In addition we focus our
lending efforts on Harford and Cecil Counties, Maryland. We emphasize
residential construction lending, primarily originating construction/permanent
mortgage loans on one- to four-family properties. We also make commercial real
estate loans and limited types of consumer loans. We have recently begun to
offer home equity loans. Our loans are primarily funded by deposit accounts,
approximately 61.6% of which were certificates of deposit at December 31, 1997.
At December 31, 1997, we had total assets of $36.1 million, deposits of $32.6
million, and total retained earnings of $2.9 million. See page __.
The Stock Offering
The Company is offering between 382,500 and 517,500 shares of common stock
at $10.00 per share. Subject to approval by the Office of Thrift Supervision,
the number of shares to be sold may be increased to 595,125 shares without
further notice to you if market or financial conditions change prior to
completion of the conversion or if additional shares are needed to fill the
order of our ESOP. During the 30 days following the conversion, we may also
issue an additional 3% of the total shares sold in the event our board feels it
is necessary to correct an improper allocation of shares in the conversion.
These additional shares (the "Contingent Shares"), are not reflected in the pro
forma financial data in this Prospectus.
(iv)
Stock Purchases
The Company is first offering its shares of common stock in a Subscription
Offering. Depositor and borrower members as of certain eligibility dates will
receive subscription rights. The shares of common stock will be offered on the
basis of priorities. Any remaining shares may be offered in a Community
Offering or in a Syndicated Community Offering. See pages __ to __.
Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. All persons exercising their
subscription rights will be required to certify that they are purchasing shares
solely for their own account and that they have no agreement or understanding
regarding the sale or transfer of shares. The Company intends to pursue any and
all legal and equitable remedies in the event that the Company becomes aware of
the transfer of any subscription rights. The Company will reject orders that are
determined to involve the transfer of such rights.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro forma
market value of the common stock by Ferguson & Company ("Ferguson"), an
appraisal firm experienced in appraisals of savings institutions. The pro forma
market value of the shares is our market value after giving effect to the sale
of shares in this offering. Ferguson has estimated that in its opinion as of
February 27, 1998 such value ranged between $3.8 million and $5.2 million (with
a midpoint of $4.5 million) (the "Estimated Valuation Range"). The appraisal
was based in part upon our financial condition and operations and the effect of
the additional capital raised by the sale of common stock in this offering. The
$10.00 price per share was determined by our board of directors and is the price
most commonly used in stock offerings involving conversions of mutual savings
institutions. The appraisal will be updated prior to the completion of the
conversion. If the updated pro forma market value of the common stock is either
below $3.8 million or above $6.0 million (excluding the Contingent Shares), we
will notify you and you will have the opportunity to modify or cancel your
order. See pages __ to __.
Termination of the Offering
The Subscription Offering will terminate at __:__ .m., Eastern Time, on
___________, 1998. The Community Offering, if any, may terminate at any time
without notice but no later than ___________, 1998, without approval by the OTS.
Benefits to Management from the Offering
Our full-time employees will participate in the offering through purchases
of stock by our employee stock ownership plan (the "ESOP"), which is a form of
retirement plan. Following the
(v)
conversion, we also intend to implement a management recognition plan ("MRP")
under which officers will be entitled to receive awards of restricted stock at
no cost to them and a stock option and incentive plan (the "Option Plan"), which
will benefit our officers and directors. However, the MRP and Option Plan may
not be adopted until at least six months after the conversion and are subject to
stockholder approval and compliance with OTS regulations if adopted within the
first year following our conversion. See pages __ to __.
Use of the Proceeds from the Sale of Common Stock
The Company intends to retain 50% of the net proceeds from the stock
offering. The Company will use a portion of the net proceeds from the stock
offering to make a loan to our ESOP to fund its purchase of 8% of the common
stock issued in the conversion. The Company will use a portion of the net
proceeds to purchase all the capital stock to be issued by us in the conversion.
The Company will retain the balance of the funds as its initial capitalization.
The Bank intends to use its portion of the net proceeds in the future to finance
a new office building for its main office and to lease or purchase property to
establish a branch in Cecil County or Harford County, Maryland. The Bank will
also use a portion of the net proceeds from the conversion to expand its small
business lending, which we expect to commence in the summer of 1998 with the
hiring of a small business lending officer. The remainder of the net proceeds
will be used to fund the Bank's other lending activities. See page __.
Dividends
Our board of directors intends to adopt a policy of paying regular semi-
annual cash dividends on the common stock at a rate of 2% of the $10.00 per
share purchase price of the common stock ($0.20 per share). The first dividend
will be declared and paid no earlier than the semi-annual period ending June 30,
1999. See page __.
Market for the Common Stock
The Company intends to list the common stock over-the-counter through the
OTC "Electronic Bulletin Board" under the symbol "____." The Company intends to
request Trident Securities undertake to match offers to buy and offers to sell
the common stock. Since the size of the offering is small, it is unlikely that
an active and liquid trading market for the shares will develop and be
maintained. Investors should have a long-term investment intent. Persons
purchasing shares may not be able to sell their shares when they desire or to
sell them at a price equal to or above $10.00. See page __.
Important Risks in Owning the Company's Common Stock
Before you decide to purchase stock in the offering, you should read the
"Risk Factors" section beginning on page 1 of this document.
(vi)
SELECTED FINANCIAL AND OTHER DATA
We are providing the following summary financial information about us for
your benefit. This information is derived from our audited financial statements
for each of the fiscal years shown below. The following information is only a
summary and you should read it in conjunction with our financial statements and
notes to our financial statements which you can find beginning on page F-1 of
this Prospectus.
Selected Financial Data
The following table sets forth certain information concerning our financial
position at the dates indicated.
At December 31,
--------------------------
1997 1996
-------- --------
(In thousands)
Total assets........................................ $ 36,084 $ 32,228
Cash................................................ 117 173
Interest-bearing deposits in other banks............ 3,514 5,186
Securities available for sale....................... -- 197
Mortgage-backed securities.......................... 1,955 2,333
Loans receivable - net.............................. 29,961 23,841
Federal Home Loan Bank of Atlanta stock............. 226 226
Deposit accounts.................................... 32,622 29,116
Total retained earnings - substantially restricted.. 2,894 2,729
Summary of Operations
The following table sets forth certain information concerning our results of
operations for the periods shown.
Year Ended December 31,
-------------------------
1997 1996
------- -------
(In thousands)
Interest income..................................... $ 2,626 $ 2,457
Interest expense.................................... 1,493 1,397
------- -------
Net interest income................................. 1,133 1,060
Provision for loan losses........................... 123 10
------- -------
Net interest income after provision
for loan losses.................................... 1,010 1,050
Noninterest income (loss)........................... (2) 31
Noninterest expense................................. 772 843
------- -------
Income before taxes................................. 236 238
Income tax expense.................................. 91 89
------- -------
Net income.......................................... $ 145 $ 149
======= =======
(vii)
Key Operating Ratios
The table below sets forth certain performance ratios for us for the
periods indicated.
At or for the
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Performance Ratios:
Return on assets (ratio of net earnings
to average total assets)...................... .43% .46% .85%
Return on equity (ratio of net earnings
to average equity)............................ 4.99 5.50 10.47
Ratio of average interest-earning assets
to average interest-bearing liabilities....... 111.11 109.99 109.33
Ratio of net interest income, after
provision for loan losses and
noninterest expense........................... 130.83 124.56 161.31
Net interest rate spread....................... 2.88 2.90 3.08
Net interest margin............................ 3.37 3.34 3.50
Asset Quality Ratios:
Nonperforming loans to total loans
at end of period.............................. 1.31 1.07 .50
Nonperforming loans to total assets............ 1.15 .84 .35
Nonperforming assets to total assets
at end of period.............................. 1.15 .84 .35
Allowance for loan losses to nonperforming
loans at end of period........................ 52.17 37.04 79.65
Allowance for loan losses to total loans,
net........................................... .72 .42 .41
Capital Ratios:
Equity to total assets at end of period........ 8.02 8.47 8.04
Average equity to average assets............... 8.52 8.39 8.07
Other Data:
Number of full service offices................. 2 2 2
(viii)
RECENT DEVELOPMENTS
The tables below set forth certain selected financial data for us at the
dates and for the periods indicated. The data at March 31, 1998, and for the
three months ended March 31, 1998 and 1997 is unaudited, but in the opinion of
management reflects all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation. This information at December 31,
1997 is derived in part from, and is qualified in its entirety by reference to,
the Financial Statements and Notes thereto included elsewhere herein. The
financial data for the three months ended March 31, 1998 is not necessarily
indicative of the operating results to be expected for the entire fiscal year.
AT AT
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS)
FINANCIAL CONDITION DATA:
Total assets......................................... $37,924 $36,084
Cash................................................. 252 117
Interest-bearing deposits in other banks............. 4,048 3,514
Securities available for sale........................ -- --
Mortgage-backed securities........................... 1,728 1,955
Loans receivable - net............................... 31,223 29,961
Federal Home Loan Bank of Atlanta stock.............. 273 226
Deposit accounts..................................... 34,223 32,622
Total retained earnings - substantially restricted... 2,979 2,894
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
------- -------
(IN THOUSANDS)
OPERATING DATA:
Interest income...................................... $ 719 $ 614
Interest expense..................................... 413 349
------- -------
Net interest income.................................. 306 265
Provision for loan losses............................ -- 3
------- -------
Net interest income after provision for loan losses.. 306 262
Noninterest income (loss)............................ 9 8
Noninterest expense.................................. 172 144
------- -------
Income before taxes.................................. 143 126
Income tax expense................................... 58 48
------- -------
Net income........................................... $ 85 $ 78
======= =======
(ix)
AT OR FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------
1998 1997
--------- ----------
(IN THOUSANDS)
SELECTED RATIOS:
Interest rate spread............ 2.90% 2.80%
Interest rate margin (1)........ 3.35 3.28
REGULATORY CAPITAL RATIOS:
Tangible capital................ 7.86 8.55
Core capital.................... 7.86 8.55
Total risk-based capital........ 16.76 18.71
- ----------
(1) Annualized.
RESULTS OF OPERATIONS
We earned net income of $85,000 for the three months ended March 31, 1998
as compared to net income of $78,000 for the three month period ended March 31,
1997. The $7,000 improvement in our net income for the first three months of
fiscal year 1998 was due primarily to an increase in the amount of mortgage
loans in our portfolio, which bring in more income than other assets.
Net interest income during the three months ended March 31, 1998 increased
by $41,000 as compared to the same period in 1997 as a result of an increase in
the size of our mortgage portfolio.
FINANCIAL CONDITION
Our total assets at March 31, 1998 were $37.9 million, a slight increase
from December 31, 1997's level of $36.1 million. The increase was due to an
increase in the level of deposits, which led to an increase in the amount of
loans. Net loans receivable increased by $1.3 million, or 4.2%, due to
increased demand for and the ability to make more loans. At March 31, 1998, we
were in compliance with all applicable regulatory capital requirements with
total core and tangible capital of $2.9 million (7.86% of adjusted total assets)
and total risk-based capital of $3.2 million (16.76% of risk-weighted assets).
(x)
RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in deciding whether to invest in the common
stock.
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit, like that of most financial institutions, is
substantially dependent on our net interest income, which is the difference
between the interest income we earn on our interest-earning assets (such as
mortgage loans and investments) and the interest expense we pay on our interest-
bearing liabilities (such as deposits). Because most of the loans we originate
have fixed rates and have longer effective maturities than our interest-bearing
liabilities, the yield on our interest-earning assets adjusts more slowly to
changes in interest rates than the cost of our interest-bearing liabilities.
Accordingly, our net interest income could be adversely affected by material
and prolonged increases in interest rates since our interest expense would
increase at a faster rate than our interest income. Unlike many other thrift
institutions who offer both adjustable and fixed rates on single family loans
and tend to emphasize adjustable rate loans under rising interest rate
conditions, our policy is to originate all of our one- to four-family
residential loans, representing 81.4% of our total loans at December 31, 1997,
with fixed rates. As a result, we have significant exposure to interest rate
risk. Our earnings may also be adversely affected by rising interest rates due
to decreased customer demand. We attempt to reduce this risk by seeking shorter
term assets, longer term liabilities and originating variable rate loans if
possible. We also believe that our interest rate risk exposure will be partly
mitigated by the introduction of shorter-term home equity loans and small
business loans, all of which will have variable rates.
The average life of loans and mortgage-backed securities can also be
affected by changes in interest rates. As interest rates decline, borrowers
tend to refinance higher-rate, fixed rate loans at lower rates. We also
experience an increase in prepayments on mortgage-backed securities as the loans
underlying such securities are prepaid. Since rates will have declined, we
would not be able to reinvest such prepayments in assets earning interest rates
as high as the rates on the prepaid loans or mortgage-backed securities. As a
result our interest income could decline.
Our investment portfolio is also affected by changes in interest rates
since a substantial portion of our investments carry fixed rates. Generally,
the value of a fixed rate investment will decrease as interest rates rise. As
of December 31, 1997, the market value of our mortgage-backed securities
portfolio (the primary component of our investment portfolio) exceeded the
carrying value of such investments by $56,000.
Below Average Return on Average Equity and Increased Expenses After Conversion
Return on average equity (net income divided by average equity) is a ratio
used by many investors to compare the performance of a savings institution to
its peers. As a result of the conversion, our equity will increase
substantially. Our expenses also will increase due to several
1
factors. First, we plan to spend approximately $1.5 million on a new office
building for our main office. We will also incur significant expenses relating
to the development of a new branch office in Harford or Cecil County, Maryland.
Our compensation expense will increase due to added personnel to staff our new
branch and due to the addition of a small business loan officer. We will also
see added expense associated with the ESOP and, later on, the MRP as well as
with the costs of being a public company. Because of the increases in our equity
and expenses, we expect our return on equity to decrease as compared to our
performance in previous years. At December 31, 1996 and 1997 our return on
average equity was 5.5% and 4.99%, respectively. A lower return on equity could
reduce the trading price of our shares. While increases in our operating
expenses may be offset by earnings on the conversion proceeds, there can be no
assurance that we will be able to increase net income in future periods. We plan
to use a portion of the net proceeds from the conversion to expand our small
business lending, which we commenced in ________ 1998 when we hired a small
business lending officer. See "Business of Northfield Federal Savings -- Lending
Activities."
Risks Associated with Commercial Leases, Including Regulatory Matters
We purchase commercial finance leases from a local leasing company. At
December 31, 1997, our portfolio of commercial leases totaled $741,000 or 2.3%
of total loans. In recent years, we have come under regulatory criticism based
on violation of the OTS's loans to one borrower regulation due to a
misinterpretation of the application of the regulation to the commercial
leases. We have made changes to the program and are in the process of bringing
the program into compliance with the loans to one borrower regulation.
Currently, we exceed the applicable regulation by $241,000. Following our
receipt of the net conversion proceeds, we will be in compliance with such
regulation. Since the program began, we have experienced losses of $7,700 in
connection with these leases, all involving non-recourse purchases. All of our
future purchases when we are in compliance will be on a recourse basis.
Commercial leases are subject to the same risk of default as direct
commercial loans. See "Business of Northfield Federal Savings -- Lending
Activities."
Risks Associated with Construction, Commercial Real Estate, Consumer Lending and
the Introduction of Small Business Lending
Our primary lending activity is the origination of loans to finance the
construction of one-to four-family residential properties. Nearly all of these
loans are structured to be converted to permanent loans at the end of the
construction phase. A majority of our one-to four- family residential loans
were originated as construction/permanent loans. Construction financing
involves a greater risk of loss than long-term financing on improved, occupied
real estate. Our risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. If the estimate of construction cost proves to be inaccurate, we
may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, we may be confronted, at or prior to the maturity of the loan, with
a project with a value which is insufficient to assure full repayment.
2
We are also actively involved in commercial real estate lending. At
December 31, 1997, these loans represented approximately 8.9% of the loans in
our portfolio. These loans are secured by small office buildings or by multi-
family residential investment properties. Commercial real estate lending
involves a higher degree of credit risk than one- to four-family residential
lending due primarily to concentration of funds in a limited number of loans and
because such loans depend on cash flow from the property to service the debt.
Cash flow may be significantly affected by general economic conditions.
We also plan to begin offering small business loans guaranteed by the Small
Business Administration in the summer of 1998. Unlike residential mortgage
loans, commercial business loans are typically made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business, and therefore involve a greater degree of risk than one- to four-
family residential loans.
Lack of Active Market for Common Stock
Due to the small size of the offering, it is highly unlikely that an active
trading market will develop and be maintained. If an active market does not
develop, you may not be able to sell your shares promptly or perhaps at all, or
sell your shares at a price equal to or above the price you paid for the shares.
The common stock may not be appropriate as a short-term investment. See "Market
for the Common Stock."
Risk of Decline in Demand for Construction Loans in Our Market Areas
A majority of our one- to four-family residential loans are originated as
construction/permanent loans. As a result, our business is heavily dependent on
the continued demand for single family housing construction in our market areas.
In the event the demand for new houses in our market areas were to decline, we
would be forced to shift our lending emphasis. There can be no assurance of our
ability to continue growth and profitability in our lending activities in the
event of such a decline.
Economic Viability of Market Area
Our business is heavily dependent upon the continuing economic viability of
our market area, Baltimore, Harford and Cecil Counties in Maryland. The
principal sources of employment in our market area are the services, retail
trade and manufacturing industries, which are dependent upon prevailing economic
conditions and local conditions, such as layoffs and population growth. Our
business, therefore, is susceptible to an economic downturn which could affect
our earnings or reduce the demand for loans.
Risks of Delay in Completion of the Offering
Shares of common stock are first being offered in a Subscription Offering
which will terminate on ___________, 1998, subject to extension to no later
than ___________, 1998. To the extent shares remain available after the
Subscription Offering, we may offer shares in a Community Offering. Since
subscription orders, once submitted, cannot be revoked without our consent
unless the conversion is not completed within 45 days after the end of the
Subscription Offering, investors will bear the risk of a delay in completing the
conversion. These risks would include a possible change in our Estimated
Valuation Range and an increase in the expense of the conversion.
Impact of Technological Advances; Year 2000 Compliance
Our industry is experiencing rapid changes in technology. Technology-
driven products and services are frequently introduced. In addition to
improving customer services, effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will
thus depend partly on our ability to address our customers' needs by using
technology. Many of our competitors have far greater resources than we have to
invest in technology. There can be no assurance that we will be able to
effectively develop new technology-driven products and services or be successful
in marketing these products to our customers.
3
Our operations are also dependent on computers and computer systems,
whether we maintain them internally or they are maintained by a third party. We
have taken steps to ensure that our computer systems will properly recognize
information when the year changes to 2000. Systems that do not properly
recognize the correct year could produce faulty data or cause a system to fail.
We have also taken steps to ensure that we are in compliance with regulatory
directives in this area. There can be no assurance, however, that we and our
third party providers will be successful in making all necessary changes to
avoid computer system failure related to the year 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in the Company's articles of incorporation and bylaws, the
General Corporation Law of the State of Maryland, and certain federal
regulations may make it difficult, and expensive, to pursue a tender offer,
change in control or takeover attempt which we oppose. 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. In
addition, these provisions may reduce the trading price of our stock. These
provisions include: restrictions on the acquisition of the Company's equity
securities and limitations on voting rights; the classification of the terms of
the members of the board of directors; certain provisions relating to the
meeting of stockholders; denial of cumulative voting by stockholders in the
election of directors; the issuance of preferred stock and additional shares of
common stock without shareholder approval; and super-majority provisions for the
approval of certain business combinations. See "Restrictions on Acquisitions of
the Company"
Possible Voting Control by Directors and Officers
The proposed purchases of the common stock by our directors, officers and
ESOP (estimated to be approximately 103,000 shares, or 22.89% of the shares to
be outstanding assuming 450,000 shares are sold), as well as the potential
acquisition of common stock through the Option Plan and MRP, could make it
difficult to obtain majority support for stockholder proposals which are opposed
by us. In addition, the voting of those shares could enable us to block the
approval of transactions (i.e., business combinations and amendment to our
articles of incorporation and bylaws) requiring the approval of 80% of the
stockholders under the Company's articles of incorporation. See "Management of
Northfield Federal Savings -- Executive Compensation -- Employee Stock Ownership
Plan," " -- Proposed Future Stock Benefit Plans -- Stock Option Plan," " --
Management Recognition Plan," "Description of Capital Stock," and "Restrictions
on Acquisitions of the Company."
Awards to Director and Officers under Stock Benefit Plans
While no definite plans have been formulated with respect to individual
awards under the MRP and Option Plan, it is expected that in the aggregate as
many as 63,000 shares at the midpoint of the Estimated Valuation Range could be
awarded to the Company's directors and officers which they will be entitled to
receive under the plans. These awards will benefit our directors and officers.
Shares awarded to officers and directors under the MRP will be made at no cost
to the recipient. See "Management of Northfield Federal Savings -- Executive
Compensation -- Proposed Future Stock Benefit Plans -- Stock Option Plan" and "
- -- Management Recognition Plan."
4
Possible Dilutive Effect and Expense of MRP and Stock Options
If the conversion is completed and stockholders subsequently approve the
MRP and Option Plan, we will issue stock to our officers and directors through
these plans. If the shares for the MRP are issued from our authorized but
unissued stock, your ownership percentage could be diluted by up to
approximately 4% and the trading price of our stock may be reduced. See "Pro
Forma Data," "Management of Northfield Federal Savings -- Proposed Future Stock
Benefit Plans -- Stock Option Plan," and "-- Management Recognition Plan."
These plans will also involve additional expense. See "Risk Factors -- Below
Average Return on Average Equity and Increased Expenses After Conversion."
Financial Institution Regulation of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by the
OTS and FDIC. A bill has been introduced in the House Banking Committee that
would consolidate the OTS with the Office of the Comptroller of the Currency
("OCC"). If this regulation is approved, we could be forced to become a state
or national commercial bank. If we become a commercial bank, our investment
authority, branching authority and the ability of the Company to engage in,
diversified activities may be limited, which could affect our profitability.
See "Regulation."
Possible Adverse Tax Consequences of the Subscription Rights
We have received the opinion of Ferguson that the subscription rights
granted to eligible members in connection with the conversion have no value.
This opinion is not binding on the Internal Revenue Service ("IRS"), however.
Should the IRS determine that the subscription rights do have ascertainable
value, you could be taxed as a result of your exercise of such rights in an
amount equal to such value.
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, the Company may
not repurchase its shares. During each of the second and third years following
the conversion, the Company may repurchase up to 5% of its outstanding shares.
During those periods, if we decide that additional repurchases would be a good
use of funds, we would not be able to do so, without obtaining OTS approval.
There is no assurance that OTS approval would be given. See "The Conversion --
Restrictions on Repurchase of Shares."
5
PROPOSED PURCHASES BY DIRECTORS AND OFFICERS
The following table sets forth the approximate purchases of common stock by
each director and executive officer and their associates in the conversion. The
table assumes that 450,000 shares (the midpoint of the Estimated Valuation
Range) of the common stock will be sold at $10.00 per share and that sufficient
shares will be available to satisfy their subscriptions.
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased Purchased Purchased
- ---- -------- --------- --------- ---------
Gary R. Bozel Chairman of the Board 12,500 $125,000 2.78%
J. Thomas Hoffman Director 12,500 125,000 2.78
G. Ronald Jobson Director, President and
Chief Executive Officer 12,500 125,000 2.78
E. Thomas Lawrence, Jr. Director 3,000 30,000 .67
David G. Rittenhouse Director 12,500 125,000 2.78
William R. Rush Director 12,500 125,000 2.78
All directors and executive
officers as a group (8 persons) 67,000 670,000 14.89
ESOP 36,000 360,000 8.00
Management Recognition Plan 18,000 180,000 4.00
-------- ---------- -----
121,000 $1,210,000 26.89%
======== ========== =====
THE COMPANY
The Company was formed as a Maryland corporation on March 5, 1998 at our
direction for the purpose of serving as our holding company after the
conversion. Prior to the conversion, the Company has not engaged and is not
expected to engage in any significant operations. The Company has received the
approval of the OTS to acquire control of us upon completion of the conversion.
Upon consummation of the conversion, the only assets the Company is expected to
own are the capital stock we will issue in the conversion, a note receivable
from our ESOP and any proceeds from the offering it retains.
As a holding company, the Company will have greater flexibility than we
would have to diversify its business activities through the formation of
subsidiaries or through acquisition. The Company will be classified as a unitary
savings and loan holding company after the conversion and will be required to
comply with OTS regulations and be subject to examination.
6
The Company's executive offices are located at 8005 Harford Road,
Baltimore, Maryland 21234 and its main telephone number is (410) 665-7900.
NORTHFIELD FEDERAL SAVINGS
We are a federal mutual savings association operating through two offices
in Baltimore County, Maryland. We were founded in 1923 as a federally chartered
savings institution and are a member of the FHLB System. Upon our conversion to
stock form, we will adopt the name "Northfield Federal Savings Bank." Our
deposits are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC") under the SAIF. At December 31, 1997, we had total assets
of $36.1 million, total deposits of $32.6 million and total retained earnings of
$2.9 million.
Our principal business consists of attracting deposits, primarily
certificates of deposit, from the general public and originating residential
mortgage loans, primarily construction/permanent loans on one- to four-family
properties. We also offer commercial real estate and limited types of consumer
loans. We also have a portfolio of purchased commercial leases.
Our executive offices are located at 8005 Harford Road, Baltimore, Maryland
21234 and our main telephone number is (410) 665-7900.
USE OF PROCEEDS
The Company intends to retain 50% of the investable net proceeds from the
stock offering (the net proceeds exclude $1.5 million estimated to be used to
purchase or construct a new main office building). Currently, we expect that in
accordance with applicable OTS regulations and policies, the Company will retain
$752,000, $1,042,500, $1,333,500 and $1,667,500, respectively, at the minimum,
midpoint, maximum and maximum as adjusted, of the Estimated Valuation Range. The
balance will be used to purchase all of the capital stock we will issue in
connection with the conversion. A portion of the net proceeds to be retained by
the Company will be lent to our ESOP to fund its purchase of 8% of the shares
sold in the conversion. On a short-term basis, the balance of the net proceeds
retained by the Company initially will be invested in short-term investments. A
portion of the net proceeds may also be used to fund the purchase of 4% of the
shares for the MRP, which is anticipated to be adopted following the conversion.
See "Pro Forma Data."
The Bank expects to use its portion of the net conversion proceeds as
follows. First, we estimate that approximately $1.5 million will be used to
finance the purchase and construction of a new main office in the same general
area as our current main office is located. We expect that our current main
office would then be converted into a branch office. We also have plans in the
future for the lease or purchase of property to establish a branch in Cecil or
Harford County, Maryland, areas which we consider attractive for future growth.
We estimate spending approximately $120,000 on establishing the branch and
expect that the new branch will cost approximately $40,000 in its first year of
operation. We believe that a new main office building and the establishment of
new branches
7
will help us take advantage of strong loan demand in our market areas. Based on
preliminary estimates, we also expect to spend approximately $750,000 in the
year following conversion to expand our small business lending, which we plan to
commence in the summer of 1998 when we hire a small business lending officer
who has considerable experience in this area. The remainder of the net proceeds
distributed to the Bank will be used to fund our other lending activities, which
are primarily the origination of construction/permanent loans on one-to
four-family residences, multi-family real estate mortgage loans as well as
commercial real estate, home equity and savings account loans. See "Business of
Northfield Federal Savings -- Lending Activities."
The net proceeds may vary because the total expenses of the conversion may
be more or less than those estimated. We expect our estimated expenses to be
$375,000. Our estimated net proceeds will range from $3.5 million to $4.8
million (or up to $5.6 million in the event the maximum of the Estimated
Valuation Range is increased to $6.0 million) (excluding the value of any
Contingent Shares issued). See "Pro Forma Data." The net proceeds will also
vary if the number of shares to be issued in the conversion is adjusted to
reflect a change in our estimated pro forma market value. Payments for shares
made through withdrawals from existing deposit accounts with us will not result
in the receipt of new funds for investment by us but will result in a reduction
of our liabilities and interest expense as funds are transferred from interest-
bearing certificates or accounts.
For a period of one year following the completion of the conversion, we
will not pay any dividends that would be construed as a return of capital nor
take any actions to pursue or propose such dividends.
DIVIDENDS
The payment of dividends is determined and declared by the Company's board
of directors. The board currently intends to establish a policy of paying
regular semi-annual cash dividends on the common stock at an initial annual rate
of 2.0% of the $10.00 per share purchase price of the common stock in the
conversion ($0.20 per share), with the first dividend being declared and paid no
earlier than for the semi-annual period ending June 30, 1999. In addition, from
time to time in an effort to manage capital at a desirable level, the board may
determine to pay special cash dividends. We cannot assure you that special
dividends will be paid, or, if paid, will continue to be paid. See "Historical
and Pro Forma Capital Compliance," "The Conversion -- Effects of Conversion to
Stock Form on Depositors and Borrowers of Northfield Federal Savings --
Liquidation Account" and "Regulation -- Regulation of Northfield Federal Savings
- -- Dividend and Other Capital Distribution Limitations."
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 in part upon the receipt of dividends from us. The Company is
subject, however, to the requirements of Maryland law. Under Maryland law, the
Company may pay a dividend as long as it will not affect the ability of the
Company, after the dividend has been distributed, to pay its debts in the
ordinary course of business or result in its assets being less than the sum of
its liabilities plus the amount that would be needed (if any) to satisfy any
preferential rights upon a dissolution of the Company of any stockholders with
rights ahead of those receiving the dividend.
8
In addition to the foregoing, the portion of our earnings which have been
appropriated for bad debt reserves and deducted for federal income tax purposes
cannot be used by us to pay cash dividends to the Company without the payment of
federal income taxes by us at the then current income tax rate on the amount
deemed distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation -- Federal Taxation" and Note
10 to the Financial Statements. The Company does not contemplate any
distribution by us that would result in a recapture of our bad debt reserve or
otherwise create federal tax liabilities.
MARKET FOR THE COMMON STOCK
The Company has never issued common stock to the public. Consequently,
there is no established market for the common stock. Following completion of
the Offering, the Company intends to list the common stock over-the-counter
through the OTC "Electronic Bulletin Board" under the symbol "______," and the
Company intends to request that Trident Securities, Inc. ("Trident Securities")
undertake to match offers to buy and offers to sell the common stock. Trident
Securities has no obligation to match offers to buy and offers to sell and may
cease doing so at any time. There can be no assurance that timely or accurate
quotations will be available on the OTC "Electronic Bulletin Board." In
addition, the existence of a public trading market will depend upon the presence
in the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither the Company nor any broker or dealer has control. Due
to the relatively small number of shares of common stock being offered in the
conversion and the concentration of ownership, it is unlikely that an active or
liquid trading market will develop or be maintained. Further, the absence of an
active and liquid trading market may make it difficult to sell the common stock
and may have an adverse effect on the price of the common stock. Purchasers
should consider the potentially illiquid and long-term nature of their
investment in the shares offered hereby.
The aggregate price of the common stock is based upon an independent
appraisal of the pro forma market value of the common stock. However, there can
be no assurance that an investor will be able to sell the common stock purchased
in the conversion at or above the purchase price.
9
CAPITALIZATION
The following table presents our historical capitalization as of
December 31, 1997 and the pro forma consolidated capitalization of the Company
after giving effect to the conversion, based upon the sale of the number of
shares shown below and the other assumptions set forth under "Pro Forma Data."
The table does not reflect issuance of any Contingent Shares.
Pro Forma Consolidated Capitalization of
Capitalization the Company at December 31, 1997 Based on the Sale of
of the --------------------------------------------------------------------
Bank at 382,500 Shares 450,000 Shares 517,500 Shares 595,125 Shares
December 31, at $10.00 at $10.00 at $10.00 at $10.00
1997 Per Share Per Share Per Share Per Share
--------------------------------------------------------------------------------------
(In thousands)
Deposits(1)................................... $ 32,622 $ 32,622 $ 32,622 $ 32,622 $ 32,622
Other borrowed funds.......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total deposits and borrowed funds........... $ 32,622 $ 32,622 $ 32,622 $ 32,622 $ 32,622
======== ======== ======== ======== ========
Capital stock:
Preferred stock, $0.01 par value per share:
authorized - 2,000,000 shares; assumed
outstanding - none.......................... -- -- -- -- --
Common stock, $0.01 par value per share
authorized - 8,000,000 shares; shares
to be outstanding - as shown................ -- 4 5 5 6
Paid-in capital(2)........................... -- 3,459 4,120 4,783 5,543
Less: Common stock acquired by ESOP(3)....... -- (306) (360) (414) (476)
Common stock acquired by MRP(4)........ -- (153) (180) (207) (238)
Retained earnings -- substantially
restricted.................................. 2,894 2,894 2,894 2,894 2,894
-------- -------- -------- -------- --------
Total stockholders' equity.................. $ 2,894 $ 5,898 $ 6,479 $ 7,061 $ 7,729
======== ======== ======== ======== ========
- ---------------
(1) Withdrawals from savings accounts for the purchase of stock have not been
reflected in these adjustments. Any withdrawals will reduce pro forma
capitalization by the amount of such withdrawals.
(2) Based upon the estimated net proceeds from the sale of capital stock less
the par value of shares sold.
(3) Assumes 8% of the shares of common stock to be sold in the conversion are
purchased by the ESOP and that the funds used to purchase such shares are
borrowed from the Company. See "Pro Forma Data" for additional details.
(4) Assumes the Company issues 4% of the shares sold in the offering to the
MRP and the purchase price for the shares purchased by the MRP was equal
to the purchase price of $10.00 per share and 20% of the amount
contributed was an amortized expense during such period. As a result of
the MRP, stockholders' interests will be diluted by approximately 4%. See
"Management of Northfield Federal Savings - Proposed Future Stock Benefit
Plans - Management Recognition Plan." Implementation of the MRP within
one year of conversion would require regulatory and stockholder approval
at a meeting of our stockholders to be held no earlier than six months
after the conversion.
10
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table shows our historical capital position relative to our
regulatory capital requirements as of December 31, 1997 and on a pro forma basis
after giving effect to the conversion and based upon the sale of the number of
shares shown below and the other assumptions set forth under "Pro Forma Data."
The table does not reflect the issuance of any Contingent Shares. The
definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to us, see "Regulation -- Regulation of the Bank -- Regulatory
Capital Requirements."
Pro Forma At December 31, 1997 Based on the Sale of/(1)/:
---------------------------------------------------------------------
Minimum of Midpoint of Maximum of
382,500 Shares 450,000 Shares 517,500 Shares
Historical at at $10.00 at $10.00 at $10.00
December 31, 1997 Per Share Per Share Per Share
----------------------- ---------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets (2)
------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Capital under generally accepted
accounting principles................ $ 2,894 8.0% $ 4,167 11.1% $ 4,417 11.6% $ 4,667 12.2%
======= ==== ======= ==== ======= ==== ======= ====
Tangible capital...................... $ 2,894 8.0% $ 4,167 11.1% $ 4,417 11.6% $ 4,667 12.2%
Tangible capital requirement.......... 541 1.5 565 1.5 570 1.5 574 1.5
------- ---- ------- ---- ------- ---- ------- ----
Excess.............................. $ 2,353 6.5% $ 3,602 9.6% $ 3,847 10.1% $ 4,093 10.1%
======= ==== ======= ==== ======= ==== ======= ====
Core capital.......................... $2,894 8.0% $ 4,167 11.1% $ 4,417 11.6% $ 4,667 12.2%
Core capital requirement.............. 1,083 3.0 1,130 3.0 1,139 3.0 1,148 3.0
------- ---- ------- ---- ------- ---- ------- ----
Excess.............................. $ 1,811 5.0% $ 3,037 8.1% $ 3,278 8.6% $ 3,519 9.2%
======= ==== ======= ==== ======= ==== ======= ====
Risk-based capital.................... $ 3,109 17.2% $ 4,382 23.8% $ 4,632 25.1% $ 4,882 26.3%
Risk-based capital requirement........ 1,447 8.0 1,473 8.0 1,477 8.0 1,482 8.0
------- ---- ------- ---- ------- ---- ------- ----
Excess.............................. $ 1,662 9.2% $ 2,909 15.8% $ 3,155 17.1% $ 3,400 18.3%
======= ==== ======= ==== ======= ==== ======= ====
Maximum as adjusted
595,125 Shares
at $10.00
Per Share
-----------------------
Percent of
Amount Assets (2)
------ ----------
Capital under generally accepted
accounting principles................ $ 4,955 12.8%
======= ====
Tangible capital...................... $ 4,955 12.8%
Tangible capital requirement.......... 579 1.5
------- ----
Excess.............................. $ 4,376 11.3%
======= ====
Core capital.......................... $ 4,955 12.8%
Core capital requirement.............. 1,159 3.0
------- ----
Excess.............................. $ 3,796 9.8%
======= ====
Risk-based capital.................... $ 5,170 27.8%
Risk-based capital requirement........ 1,488 8.0
------- ----
Excess.............................. $ 3,682 19.8%
======= ====
- ---------------
(1) Assumes that the Company will retain investable net proceeds of $752,000,
$1,042,500, $1,333,500 and $1,667,550, respectively, at the minimum,
midpoint, maximum and maximum as adjusted, with the remainder to be used
by the Company to purchase all of our capital stock to be issued upon
conversion. Assumes net proceeds distributed to the Company or to us
initially are invested in short-term securities that carry a risk-weight
equal to the ratio of risk-weighted assets to total assets at December
31, 1997. Assumes the ESOP purchases 8% of the shares to be sold in the
conversion and borrows the funds needed to purchase such shares from the
Company. Although repayment of such debt will be secured solely by the
shares purchased by the ESOP, we expect to make discretionary
contributions to the ESOP in an amount at least equal to the principal
and interest payments on the ESOP debt. The approximate amount expected
to be borrowed by the ESOP is not reflected in this table as borrowed
funds but is reflected as a reduction of capital. Assumes a number of
issued and outstanding shares of common stock equal to 4% of the common
stock to be sold in the conversion will be purchased by the MRP after the
conversion. The dollar amount of the common stock possibly to be
purchased by the MRP is based on the price per share in the conversion
and represents unearned compensation and is reflected as a reduction of
capital. Such amounts do not reflect possible increases or decreases in
the value of such stock relative to the price per share in the
conversion. As we accrue compensation expense to reflect the vesting of
such shares pursuant to the MRP, the charge against capital will be
reduced accordingly. Does not reflect a possible increase in capital upon
the exercise of options by participants in the Option Plan, under which
directors, executive officers and other employees could be granted
options to purchase an aggregate amount of common stock equal to 10% of
the shares issued in the conversion (450,000 shares at the midpoint of
the Estimated Valuation Range) at exercise prices equal to the market
price of the common stock on the date of grant. Under the MRP and the
Option Plan, shares issued to participants could be newly issued shares
or, subject to regulatory restrictions, shares repurchased in the market.
The MRP and the Option Plan are required to be approved by the Company's
stockholders and will not be implemented until at least six months after
the conversion. See "Management of Northfield Federal Savings -- Proposed
Future Stock Benefit Plans."
(2) Based on our total assets determined under generally accepted accounting
principles for equity purposes ($36.1 million for all scenarios),
adjusted total assets for the purposes of the tangible and core capital
requirements ($37.7 million, $38.0 million, $38.3 million and $38.6
million, respectively, at December 31, 1997 and on a pro forma basis at
the minimum, midpoint, maximum and maximum as adjusted, of the Estimated
Valuation Range) and risk-weighted assets for the purpose of the risk-
based capital requirement ($18.41 million, $18.5 million, $18.53 million
and $18.6 million, respectively, at December 31, 1997 and on a pro forma
basis at the minimum, midpoint, maximum and maximum as adjusted, of the
Estimated Valuation Range).
11
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, investable net proceeds
are currently estimated to be between $1.5 million and $3.3 million at the
minimum and maximum as adjusted, of the Estimated Valuation Range, based upon
the following assumptions: (i) all of the shares will be sold in the
Subscription or Community Offering; (ii) expenses, including commissions to be
paid to Trident Securities, will amount to $375,000; and (iv) $1.5 million has
been deducted from the net proceeds to reflect the Company's intention to use
such funds to finance the purchase or construction of a new main office
building.
The following table sets forth our historical net earnings and
stockholders' equity prior to the conversion and the pro forma consolidated net
income and stockholders' equity of the Company following the conversion. Pro
forma consolidated net income and stockholders' equity have been calculated as
if the common stock to be issued in the conversion had been sold at January 1,
1997, and the estimated net proceeds had been invested at 5.55%, which was
approximately equal to the one-year U.S. Treasury bill rate at December 31,
1997. The one-year U.S. Treasury bill rate, rather than an arithmetic average
of the average yield on interest-earning assets and average rate paid on
deposits, has been used to estimate income on net proceeds because we believe
that it is a more accurate estimate of the rate that would be obtained on an
investment of net proceeds from the offering. In calculating pro forma income,
an effective state and federal income tax rate of 38% has been assumed,
resulting in an after tax yield of 3.44%. Withdrawals from deposit accounts for
the purchase of shares are not reflected in the pro forma adjustments. As
discussed under "Use of Proceeds," the Company expects to retain a portion of
the net conversion proceeds, part of which will be lent to the ESOP to fund its
purchase of 8% of the shares issued in the conversion. No effect has been given
in the pro forma stockholders' equity calculation for the assumed earnings on
the net proceeds. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares.
No effect has been given in the following table to the possible issuance of
any Contingent Shares. For a detailed discussion of the circumstances under
which these shares would be issued, see "The Conversion -- Contingent Shares."
THE STOCKHOLDERS' EQUITY INFORMATION IS NOT INTENDED TO REPRESENT THE FAIR
MARKET VALUE OF THE COMMON STOCK, OR THE CURRENT VALUE OF OUR ASSETS OR
LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL INFORMATION REGARDING
THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION -- EFFECTS OF CONVERSION TO STOCK
FORM ON DEPOSITORS AND BORROWERS OF NORTHFIELD FEDERAL SAVINGS -- LIQUIDATION
ACCOUNT" AND NOTE 12 TO THE FINANCIAL STATEMENTS. THE PRO FORMA INCOME DERIVED
FROM THE ASSUMPTIONS SET FORTH ABOVE SHOULD NOT BE CONSIDERED INDICATIVE OF THE
ACTUAL RESULTS OF OUR OPERATIONS FOR ANY PERIOD. SUCH PRO FORMA DATA MAY BE
MATERIALLY AFFECTED BY A CHANGE IN THE PRICE PER SHARE OR NUMBER OF SHARES TO BE
ISSUED IN THE CONVERSION AND BY OTHER FACTORS.
12
At or for the Year Ended December 31, 1997
--------------------------------------------------------------
Maximum as
Minimum of Midpoint of Maximum of Adjusted, of
382,500 450,000 517,500 595,125
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
Gross offering proceeds................................... $ 3,825 $ 4,500 $ 5,175 $ 5,951
Less estimated offering expenses.......................... (362) (375) (387) (402)
---------- ---------- ---------- ----------
Estimated net offering proceeds......................... $ 3,463 $ 4,125 $ 4,788 $ 5,549
========== ========== ========== ==========
Less: Common stock acquired by ESOP...................... $ (306) $ (360) $ (414) $ (476)
Common stock acquired by MRP....................... (153) (180) (207) (238)
Estimated cost of new office building.............. (1,500) (1,500) (1,500) (1,500)
---------- ---------- ---------- ----------
Estimated investable net proceeds....................... $ 1,504 $ 2,085 $ 2,667 $ 3,335
========== ========== ========== ==========
Net income:
Historical net income................................... $ 145 $ 145 $ 145 $ 145
Pro forma income on net proceeds........................ 52 72 92 115
Pro forma ESOP adjustment(1)............................ (16) (19) (22) (25)
Pro forma MRP adjustment(2)............................. (19) (22) (26) (30)
---------- ---------- ---------- ----------
Total................................................. $ 162 $ 176 $ 189 $ 205
========== ========== ========== ==========
Net income per share:(3)
Historical net income................................... $ .41 $ .35 $ .30 $ .26
Pro forma income on net proceeds........................ .15 .17 .19 .21
Pro forma ESOP adjustment(1)............................ (.04) (.05) (.05) (.04)
Pro forma MRP adjustment(2)............................. (.05) (.05) (.05) (.05)
---------- ---------- ---------- ----------
Total(3).............................................. $ .47 $ .42 $ .39 $ .38
========== ========== ========== ==========
Number of shares used in calculating earnings
per share............................................... 354,450 417,000 479,550 551,483
========== ========== ========== ==========
Stockholders' equity:(4)
Historical.............................................. $ 2,894 $ 2,894 $ 2,894 $ 2,894
Estimated net offering proceeds(2)...................... 3,463 4,125 4,788 5,549
Less: Common stock acquired by ESOP(1)................ (306) (360) (414) (476)
Common stock acquired by MRP(2)................. (153) (180) (207) (238)
---------- ---------- ---------- ----------
Total................................................. $ 5,898 $ 6,479 $ 7,061 $ 7,729
========== ========== ========== ==========
Stockholders' equity per share:(3)(4)
Historical.............................................. $ 7.57 $ 6.43 $ 5.59 $ 4.86
Estimated net offering proceeds......................... 9.05 9.17 9.25 9.32
Less: Common stock acquired by ESOP(1)................ (.80) (.80) (.80) (.80)
Common stock acquired by MRP(2)................. (.40) (.40) (.40) (.40)
---------- ---------- ---------- ----------
Total................................................. $ 15.42 $ 14.40 $ 13.64 $ 12.98
========== ========== ========== ==========
Offering price as a percentage of pro forma
stockholders' equity per share(4)....................... 64.9% 69.4% 73.3% 77.0%
========== ========== ========== ==========
Ratio of offering price to pro forma
annualized net income per share(4)...................... 21.3 23.8 25.0 27.0
========== ========== ========== ==========
Number of shares used in calculating
equity per share(4)..................................... 382,500 450,000 517,500 595,125
========== ========== ========== ==========
(Footnotes on succeeding page)
13
(footnotes continued from preceding page)
- -------------------------
(1) Assumes the ESOP purchases 8% of the shares sold in the conversion and
the Company lends the ESOP the funds to do so. The approximate amount
expected to be borrowed by the ESOP is reflected as a reduction of
capital. We intend to make annual contributions to the ESOP over a
12 year period in an amount at least equal to the principal and interest
requirement of the debt. The pro forma net income assumes: (i) the ESOP
loan is payable over 12 years, (ii) the average fair value of the ESOP
shares is $10.00 per share in accordance with Statement of Position
("SOP") 93-6 of the American Institute of Certified Public Accountants
("AICPA"), and (iii) the effective tax rate was 38% for such period. The
pro forma stockholders' equity per share calculation assumes all ESOP
shares were outstanding, regardless of whether such shares would have
been released. Because the Company will be providing the ESOP loan, only
principal payments on the ESOP loan are reflected as employee
compensation and benefits expense.
(2) Assumes the Company issues 4% of the shares sold in the offering to the
MRP and the purchase price for the shares purchased by the MRP was equal
to the purchase price of $10.00 per share and 20% of the amount
contributed was an amortized expense during such period. As we accrue
compensation expense to reflect the five-year vesting period of such
shares pursuant to the MRP, the charge against capital will be reduced
accordingly. In calculating the pro forma effect of the MRP, an effective
state and federal income tax rate of 38% has been assumed. Implementation
of the MRP within one year of conversion would require regulatory and
stockholder approval at a meeting of our stockholders to be held no
earlier than six months after the conversion. For purposes of this table,
it is assumed that the MRP will be adopted by the board of directors,
reviewed by the OTS, and approved by the stockholders, and that the MRP
will purchase the shares in the open market within the year following the
conversion. If the shares to be purchased by the MRP are assumed at
January 1, 1997, to be newly issued shares purchased from the Company at
the minimum, midpoint, maximum and maximum as adjusted, of the Estimated
Valuation Range, pro forma stockholders' equity per share would have been
$15.21, $14.23, $13.50, and $12.87 at December 31, 1997, respectively. As
a result of the MRP, stockholders' interests will be diluted by
approximately 4%. See "Management of Northfield Federal Savings-Proposed
Future Stock Benefit Plans - Management Recognition Plan."
(3) Per share data has been computed based on the assumed numbers of shares
sold in the conversion. This treatment is in accordance with SOP 93-6. No
effect has been given to shares to be reserved for issuance pursuant to
the Option Plan.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets over its liabilities. The calculations are based upon
the number of shares issued in the conversion, without giving effect to
SOP 93-6. The amounts shown do not reflect the federal income tax
consequences of the potential restoration to income of the tax bad debt
reserves for income tax purposes, which would be required in the event of
liquidation. The amounts shown also do not reflect the amounts required
to be distributed in the event of liquidation to eligible depositors from
the liquidation account which will be established upon the consummation
of the conversion. Pro forma stockholders' equity information is not
intended to represent the fair market value of the shares, the current
value of our assets or liabilities or the amounts, if any, that would be
available for distribution to stockholders in the event of liquidation.
Such pro forma data may be materially affected by a change in the number
of shares to be sold in the conversion and by other factors.
14
THE CONVERSION
THE OTS HAS APPROVED THE PLAN OF CONVERSION (THE "PLAN") SUBJECT TO THE
PLAN'S APPROVAL BY OUR MEMBERS AT A SPECIAL MEETING OF MEMBERS, AND SUBJECT TO
THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL.
OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF
THE PLAN BY THE OTS.
General
On December 17, 1997 our board of directors adopted a plan of conversion,
pursuant to which we will convert from a federally chartered mutual savings
association to a federally chartered stock savings bank and become a wholly
owned subsidiary of the Company and will adopt the name "Northfield Federal
Savings Bank." The Plan was amended on March __, 1998. The conversion will
include adoption of the proposed Federal Stock Charter and Bylaws which will
authorize the issuance of capital stock by us. Under the Plan, our capital
stock is being sold to the Company and the common stock of the Company is being
offered to our customers and then to the public.
The OTS has approved the Company's application to become a savings and loan
holding company and to acquire all of our capital stock to be issued in the
conversion. Pursuant to such OTS approval, the Company plans to retain a
portion of the net proceeds from the sale of shares of common stock and to use
the remainder to purchase all of the capital stock we will issue in the
conversion.
The shares are first being offered in a Subscription Offering to holders of
subscription rights. To the extent shares of common stock remain available after
the Subscription Offering, we may offer shares of common stock in a Community
Offering. The Community Offering, if any, may begin any time subsequent to the
beginning of the Subscription Offering. Shares not subscribed for in the
Subscription and Community Offerings may be offered for sale by the Company in a
Syndicated Community Offering. We have the right, in our sole discretion, to
accept or reject, in whole or in part, any orders to purchase shares of common
stock received in the Community and Syndicated Community Offering. See "--
Community Offering" and "-- Syndicated Community Offering."
We must sell common stock in an amount equal to our pro forma market value
as a stock savings institution in order for the conversion to become effective.
We must complete the Community Offering within 45 days after the last day of the
Subscription Offering, unless we extend such period and obtain the approval of
the OTS to do so. The Plan provides that the conversion must be completed
within 24 months after the date of the approval of the Plan by our members.
In the event that we are unable to complete the sale of common stock and
complete the conversion within 45 days after the end of the Subscription
Offering, we may request an extension of the period by the OTS. We cannot
assure you that the extension would be granted if requested, nor can we assure
you that our valuation would not substantially change during any such
extension.
15
If the Estimated Valuation Range of the shares must be amended, we cannot assure
that the OTS would approve such amended Estimated Valuation Range. Therefore, it
is possible that if the conversion cannot be completed within the requisite
period of time, we may not be permitted to complete the conversion. A
substantial delay caused by an extension of the period may also significantly
increase the expense of the conversion. We cannot sell any shares of common
stock unless the Plan is approved by our members.
The completion of the offering is subject to market conditions and other
factors beyond our control. We cannot give you any assurances as to the length
of time following approval of the Plan at the meeting of our members that will
be required to complete the Community Offering or other sale of the shares being
offered in the conversion. If we experience delays, our Estimated Valuation
Range value upon conversion could change significantly, together with
corresponding changes in the offering price and the net proceeds to be realized
by us from the sale of the shares. In the event we terminate the conversion, we
would be required to charge all conversion expenses against current income and
promptly return any funds collected by us in the offering to each potential
investor, plus interest at the prescribed rate.
Effects of Conversion to Stock Form on Depositors and Borrowers of Northfield
Federal Savings
Voting Rights. Currently in our mutual form, our depositor and borrower
members have voting rights and may vote for the election of directors.
Following the conversion, depositors and borrower members will cease to have
voting rights.
Savings Accounts and Loans. The conversion will not affect the balances,
terms and FDIC insurance coverage of savings accounts, nor will the amounts and
terms of loans and obligations of the borrowers under their individual
contractual arrangements with us be affected.
Tax Effects. We have received an opinion from our counsel, Housley
Kantarian & Bronstein, P.C. on the material federal tax consequences of the
conversion. We have filed the opinion as an exhibit to the registration
statement of which this prospectus is a part. The opinion provides, in part,
that,: (i) the conversion will qualify as a reorganization under
Section 368(a)(1)(F) of the Code, and we will not recognize any taxable gain in
either our mutual form or our stock form as a result of the proposed conversion;
(ii) we will not recognize any taxable gain upon the receipt of money from the
Company for our stock, nor will the Company recognize any gain upon the receipt
of money for the common stock; (iii) our assets in either our mutual or our
stock form will have the same basis before and after the conversion; (iv) the
holding period of our assets will include the period during which the assets
were held by us in our mutual form prior to conversion; (v) no gain or loss will
be recognized by the Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members upon the issuance to them of withdrawable savings
accounts in us in the stock form in the same dollar amount as their savings
accounts in us in the mutual form plus an interest in the liquidation account of
us in the stock form in exchange for their savings accounts in us in the mutual
form; (vi) depositors will recognize gain or loss upon the receipt of
liquidation
16
rights and the receipt of subscription rights in the conversion, to the extent
such liquidation rights and subscription rights are deemed to have value, as
discussed below; (vii) the basis of each account holder's savings accounts in us
after the conversion will be the same as the basis of his savings accounts in us
prior to the conversion, decreased by the fair market value of the
nontransferable subscription rights received and increased by the amount, if
any, of gain recognized on the exchange; (viii) the basis of each account
holder's interest in the liquidation account will be zero; and (ix) the holding
period of the common stock acquired through the exercise of subscription rights
shall begin on the date on which the subscription rights are exercised.
With respect to the subscription rights, we have received an opinion of
Ferguson which, based on certain assumptions, concludes that the subscription
rights to be received by Eligible Account Holders and other eligible subscribers
do not have any economic value at the time of distribution or at the time the
subscription rights are exercised, whether or not a public offering takes place.
Such opinion is based on the fact that such rights are: (i) acquired by the
recipients without payment therefor, (ii) non-transferable, (iii) of short
duration, and (iv) afford the recipients the right only to purchase shares at a
price equal to their estimated fair market value, which will be the same price
at which shares for which no subscription right is received in the Subscription
Offering will be offered in the Community Offering. If the subscription rights
granted to Eligible Account Holders or other eligible subscribers are deemed to
have an ascertainable value, receipt of such rights would be taxable only to
those Eligible Account Holders or other eligible subscribers who exercise the
subscription rights in an amount equal to such value (either as a capital gain
or ordinary income), and we could recognize gain on such distribution.
We are also subject to Maryland income taxes and have received an opinion
from Anderson Associates, LLP that the conversion will be treated for Maryland
state tax purposes similar to the conversion's treatment for federal tax
purposes.
Unlike a private letter ruling, the opinions of Housley Kantarian &
Bronstein, P.C., Ferguson and Anderson Associates, LLP have no binding effect or
official status, and we cannot give you any assurance that a court would sustain
the conclusions reached in any of those opinions if contested by the IRS or the
Maryland tax authorities. WE ENCOURAGE ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL
ELIGIBLE ACCOUNT HOLDERS, AND OTHER MEMBERS TO CONSULT WITH THEIR OWN TAX
ADVISERS AS TO THE TAX CONSEQUENCES IN THE EVENT THE SUBSCRIPTION RIGHTS ARE
DEEMED TO HAVE AN ASCERTAINABLE VALUE.
Liquidation Account. In the unlikely event of our complete liquidation in
our present mutual form, each depositor is entitled to equal distribution of any
of our assets, pro rata to the value of his accounts, 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
accounts was to the total value of all deposit accounts in us at the time of
liquidation.
17
Upon a complete liquidation after the conversion, each depositor would have
a claim, as a creditor, of the same general priority as the claims of all other
general creditors of ours. Therefore, except as described below, a depositor's
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. A depositor would not have an interest in the residual value
of our assets above that amount if any.
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
our regulatory capital as reflected in the latest statement of financial
condition in the Prospectus. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if he continues to maintain his deposit account with
us, would be entitled on a complete liquidation of us after conversion, to an
interest in the liquidation account prior to any payment to stockholders. Each
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account held in us on the qualifying date, December 31,
1995. Each Supplemental Eligible Account Holder would have a similar interest
as of the qualifying date, March 31, 1998. The interest as to each deposit
account would be in the same proportion of the total liquidation account as the
balance of the deposit account on the qualifying dates was to the aggregate
balance in all the deposit accounts of Eligible Account Holders and Supplemental
Eligible Account Holders on such qualifying dates. However, if the amount in
the deposit account on any annual closing date of ours is less than the amount
in such account on the respective qualifying dates, then the interest in this
special liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest would cease to exist if
such deposit account were closed. The interest in the special liquidation
account will never be increased despite any increase in the related deposit
account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we, in our converted form, are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
Subscription Rights and the Subscription Offering
In accordance with OTS regulations, non-transferable subscription rights to
purchase shares of the common stock have been granted to all persons and
entities entitled to purchase shares in the Subscription Offering under the
Plan. The number of shares which these parties may purchase will be determined,
in part, by the total number of shares to be issued and by the availability of
the shares for purchase under the categories set forth in the Plan. If the
Community Offering, as described below, extends beyond 45 days following the
completion of the Subscription Offering, we will resolicit subscribers and
permit them to increase, decrease or rescind their orders. Subscription
priorities have been established for the allocation of stock to the extent that
shares are available after satisfaction of all subscriptions of all persons
having prior rights and subject to the maximum and minimum purchase limitations
set forth in the Plan and as described below under " -- Limitations on Purchases
of Shares." The following priorities have been established:
18
Category 1: Eligible Account Holders. Each depositor qualifying as an
Eligible Account Holder (which collectively encompasses all names on a joint
account) will receive non-transferable subscription rights on a priority basis
to purchase 12,500 shares ($125,000); provided, however, that stock purchases in
the conversion by any person, when aggregated with purchases by associates of
and persons acting in concert with that person, may not exceed the lesser of
$225,000 of conversion stock or 5% of the shares of stock issued in the
conversion, excluding Contingent Shares. Under our Plan of Conversion, a person
will not qualify as more than one Eligible Account Holder by virtue of multiple
deposit accounts held in his or her name. If there are insufficient shares to
satisfy the orders of all Eligible Account Holders, shares shall be allocated
among subscribing Eligible Account Holders so as to permit each such account
holder, to the extent possible, to purchase the lesser of 100 shares or the
total amount of his subscription. Any shares remaining shall be allocated among
the subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Eligible Account Holders. Subscription
rights received by officers and directors in this category based on their
increased deposits in us in the one-year period preceding December 31, 1995, are
subordinated to the subscription rights of other Eligible Account Holders. See
" -- Limitations on Purchases and Transfer of Shares."
Category 2: ESOP. The ESOP has been granted subscription rights to purchase
up to 10% of the total shares issued in the conversion.
Although the right of the ESOP to subscribe for shares is subordinate to
the right of the Eligible Account Holders, in the event the offering results in
the issuance of shares above the maximum of the Estimated Valuation Range (i.e.,
more than 517,500 shares), the ESOP has a priority right to fill its
subscription. The ESOP currently intends to purchase up to 8.0% of the common
stock issued in the conversion (excluding any Contingent Allocation Shares which
may be issued). The ESOP may, however, determine to purchase some or all of the
shares covered by its subscription after the conversion in the open market or,
if approved by the OTS, out of authorized but unissued shares in the event of an
over subscription.
Category 3: Supplemental Eligible Account Holders. Each depositor
qualifying as a Supplemental Eligible Account Holder (which collectively
encompasses all names on a joint account) who is not an Eligible Account Holder
will receive non-transferable subscription rights to purchase that number of
shares which is equal to 12,500 shares ($125,000); provided, however, that total
stock purchases in the conversion by any person, when aggregated with purchases
by associates of and persons acting in concert with that person, may not exceed
the lesser of $225,000 of conversion stock or 5% of the shares of stock issued
in the conversion, excluding Contingent Shares. If the allocation made in this
paragraph results in an over subscription, shares shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
account holder, to the extent possible, to purchase the lesser of 100 shares or
the total amount of his subscription. Any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective qualifying
19
deposits as compared to the total qualifying deposits of all subscribing
Supplemental Eligible Account Holders. See "-- Limitations on Purchases and
Transfer of Shares."
The right of Supplemental Eligible Account Holders to subscribe for shares
is subordinate to the rights of the Eligible Account Holders and the ESOP to
subscribe for shares.
Category 4: Other Members. Each Other Member (which collectively
encompasses all names on a joint account) who is not an Eligible Account Holder
or Supplemental Eligible Account Holder, will receive non-transferable
subscription rights to purchase up to 12,500 shares ($125,000) to the extent
such shares are available following subscriptions by Eligible Account Holders,
the ESOP, and Supplemental Eligible Account Holders ; provided, however, that
total stock purchases in the conversion by any person, when aggregated with
purchases by associates of and persons acting in concert with that person, may
not exceed the lesser of $225,000 of conversion stock or 5% of the shares of
stock issued in the conversion, excluding Contingent Shares. In the event there
are not enough shares to fill the orders of the Other Members, the subscriptions
of the Other Members will be allocated so that each subscribing Other Member
will be entitled to purchase the lesser of 100 shares or the number of shares
ordered. Any remaining shares will be allocated among Other Members whose
subscriptions remain unsatisfied on a reasonable basis. See "-- Limitations on
Purchases and Transfer of Shares."
Members in Non-Qualified States. We will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for the shares pursuant to the Plan reside. However, no
person will be offered or allowed to purchase any shares under the Plan if he
resides in a foreign country or in a state with respect to which any of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares under the Plan reside in that state or foreign country; (ii) the
granting of subscription rights or offer or sale of shares of common stock to
those persons would require either us, or our employees to register, under the
securities laws of that state or foreign country, as a broker or dealer or to
register or otherwise qualify our securities for sale in that state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise. We will not make any payment in lieu of the
granting of subscription rights to any person.
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights. Only
the person to whom they are granted may exercise subscription rights and only
for his account. Each person subscribing for shares will be required to certify
that he is purchasing shares solely for his own account and has not entered into
an agreement or understanding regarding the sale or transfer of those shares.
The regulations also prohibit any person from offering or making an announcement
of an offer or intent to make an offer to purchase subscription rights or shares
of common stock prior to the completion of the conversion.
20
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
believed by us to involve the transfer of subscription rights.
Expiration Date. The Subscription Offering will expire at __:__ .m.,
Eastern Time, on ___________, 1998. Subscription rights will become void if not
exercised prior to the Expiration Date.
Community Offering
To the extent that shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of common
stock to certain members of the general public with a preference to natural
persons residing in Baltimore County, Maryland under such terms and conditions
as may be established by the board of directors. In the Community Offering, the
minimum purchase is 25 shares, and no person, together with associates of and
persons acting in concert with such persons, may purchase more than 12,500
shares ($125,000).
WE MAY BEGIN THE COMMUNITY OFFERING AT ANY TIME AFTER THE SUBSCRIPTION
OFFERING HAS BEGUN. THE COMMUNITY OFFERING, ONCE COMMENCED, MAY EXPIRE AT ANY
TIME WITHOUT NOTICE BUT NO LATER THAN __:__ .M., EASTERN TIME, ON ___________,
1998 UNLESS WE EXTEND IT WITH THE PERMISSION OF THE OTS. PURCHASES OF SHARES IN
THE COMMUNITY OFFERING ARE SUBJECT TO OUR RIGHT IN OUR SOLE DISCRETION, TO
ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART EITHER AT THE TIME AND
RECEIPT OF AN ORDER, OR AS SOON AS PRACTICABLE FOLLOWING THE COMPLETION.
In the event Community Offering orders are not filled, we will promptly
refund funds received by us with interest at our passbook rate. In the event an
insufficient number of shares are available to fill all orders in the Community
Offering, the available shares will be allocated on an equitable basis
determined by the board of directors, provided however that a preference will be
given to natural persons residing in Baltimore County, Maryland. If regulatory
approval is received to extend the Community Offering beyond 45 days following
the completion of the Subscription Offering, subscribers will be resolicited.
Shares sold in the Community Offering will be sold at $10.00 per share.
Syndicated Community Offering
The Plan provides that, if necessary, we may offer shares of common stock
not purchased in the Subscription and Community Offerings for sale to the
general public in a Syndicated Community Offering through a syndicate of
selected dealers to be formed and managed by Trident Securities. No individual
purchaser together with any associate or group of persons acting in concert may
purchase more than 12,500 shares ($125,000). Neither Trident Securities nor
any registered broker-dealer will be obligated to take or purchase any shares in
the Syndicated Community Offering, although Trident Securities has agreed to use
its best efforts in the sales of shares in any
21
Syndicated Community Offering. Shares sold in the Syndicated Community Offering
will be sold at the Purchase Price. See "-- Stock Pricing,"
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless the Company extends it with the approval
of the OTS.
Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional limitations to be placed upon the
purchase of the shares in the conversion. The minimum purchase is 25 shares.
No persons, together with associates, or group of persons acting in concert, may
purchase more than 22,500 shares ($225,000), except for the ESOP which may
purchase up to 10% of the shares sold. The OTS regulations governing the
conversion provide that officers and directors and their associates may not
purchase, in the aggregate, more than 35% of the shares issued pursuant to the
conversion.
Depending on market conditions and the results of the offering, the board
of directors may increase or decrease any of the purchase limitations without
the approval of our members and without resoliciting subscribers. In determining
whether to change the maximum purchase limitation, the board would consider
whether prevailing conditions in the market for thrift stock and the progress of
the offering to date suggested a need for such change in order to complete the
offering as planned. If the maximum purchase limitation is increased, persons
who ordered the maximum amount will be notified telephonically or in writing and
will be given the opportunity to increase their orders. In doing so, the
preference categories in the offerings will be followed.
In the event of an increase in the total number of shares offered in the
conversion due to an increase in the Estimated Valuation Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority: (i) to fill the ESOP's subscription of up to 8% of the
Adjusted Maximum number of shares (the ESOP currently intends to subscribe for
8%); (ii) in the event that there is an over subscription by Eligible Account
Holders, to fill unfulfilled subscriptions of Eligible Account Holders exclusive
of the Adjusted Maximum; (iii) in the event that there is an over subscription
by Supplemental Eligible Account Holders, to fill unfulfilled subscriptions to
Supplemental Eligible Account Holders exclusive of the Adjusted Maximum; (iv) in
the event that there is an over subscription by Other Members, to fill
unfulfilled subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unfulfilled subscriptions in the Community Offering to the
extent possible, exclusive of the Adjusted Maximum.
The term "associate" of a person means (i) any corporation or organization
(other than us or a majority-owned subsidiary of ours) of which such person is
an officer or partner or is, directly or indirectly, the beneficial owner of 10%
or more of any class of equity securities, (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person serves as trustee or in a similar fiduciary capacity (excluding tax-
qualified employee stock benefit plans), 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 serves as a director for us or any of our subsidiaries. For example, a
corporation of which a person serves as an officer would be an associate of that
person, and therefore all shares purchased by that corporation would be included
with the number of shares which that person individually could purchase under
the above limitations.
22
The term "officer" may include our chairman of the board, president, vice
presidents in charge of principal business functions, Secretary and Treasurer
and any other person performing similar functions. All references herein to an
officer have the same meaning as used for an officer in the Plan.
The term "residing," as used in relation to the preference afforded natural
persons in Baltimore County, Maryland, means any natural person who occupies a
dwelling within Baltimore County, has an intention to remain within Baltimore
County (manifested by establishing a physical, on-going, non-transitory presence
within Baltimore County), and continues to reside in Baltimore County at the
time of the offering. We may utilize deposit or loan records or such other
evidence provided to us to make the determination whether a person is residing
in Baltimore County. Such determination will be in our sole discretion.
TO ORDER SHARES IN THE CONVERSION, PERSONS MUST CERTIFY THAT THEIR PURCHASE
DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS. IN THE EVENT THAT THE PURCHASE
LIMITATIONS ARE VIOLATED BY ANY PERSON (INCLUDING ANY ASSOCIATE OR GROUP OF
PERSONS AFFILIATED OR OTHERWISE ACTING IN CONCERT WITH SUCH PERSONS), WE WILL
HAVE THE RIGHT TO PURCHASE FROM THAT PERSON AT $10.00 PER SHARE ALL SHARES
ACQUIRED BY THAT PERSON IN EXCESS OF THE PURCHASE LIMITATIONS. IF THE EXCESS
SHARES HAVE BEEN SOLD BY THAT PERSON, WE MAY RECOVER THE PROFIT FROM THE SALE OF
THE SHARES BY THAT PERSON. WE MAY ASSIGN OUR RIGHT EITHER TO PURCHASE THE
EXCESS SHARES OR TO RECOVER THE PROFITS FROM THEIR SALE.
Shares of common stock purchased pursuant to the conversion will be freely
transferable, except for shares purchased by our directors and officers. For
certain restrictions on the shares purchased by directors and officers, see " --
Restrictions on Sales and Purchases of Shares by Directors and Officers." In
addition, under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
Contingent Shares
For a period of 30 days following the closing of the conversion, the
Company's board of directors may determine to issue up to an additional 3% of
the shares issued in the conversion. These shares, the Contingent Shares, may be
issued if necessary in the discretion of the Company's board of directors, to
fill orders resulting from allocation oversights resulting in an
oversubscription, lost or damaged stock order forms which the board determines
legitimately should have been filled during the conversion, or orders initially
rejected but later found to be legitimate. Any Contingent Shares issued will not
be included in the total number of shares for purposes of determining the level
of stock to be purchased by the ESOP, MRP or stock options, and commissions will
not be payable to Trident Securities on these shares. Contingent Shares will be
allocated to a subscriber based on the allocation of shares to persons who had
the same or similar deposit account balance as that subscriber.
23
Ordering and Receiving Shares
Use of Order Forms. Subscription rights to subscribe may only be exercised
by completion of an original order form. Persons ordering shares in the
Subscription Offering must deliver by mail or in person a properly completed and
executed original order form to us prior to the Expiration Date. Order forms
must be accompanied by full payment for all shares ordered. See "-- Payment for
Shares." Furthermore, to ensure your proper allocation of shares in the event
of an oversubscription, you must list all of your eligible accounts in the
appropriate space on the stock order form. Your subscription rights under the
Plan will expire on the Expiration Date, whether or not we have been able to
locate each person entitled to subscription rights. ONCE SUBMITTED,
SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT OUR CONSENT UNLESS THE CONVERSION
IS NOT COMPLETED WITHIN 45 DAYS OF THE EXPIRATION DATE.
Persons and entities not purchasing shares in the Subscription Offering
may, subject to availability, purchase shares in the Community Offering by
returning to us a completed and properly executed order form along with full
payment for the shares ordered.
In the event an order form (i) is not delivered and is returned to us by
the United States Postal Service or we are unable to locate the addressee, (ii)
is not received or is received after the Expiration Date, (iii) is defectively
completed or executed, or (iv) is not accompanied by full payment for the shares
subscribed for (including instances where a savings account or certificate
balance from which withdrawal is authorized is insufficient to fund the amount
of such required payment), the subscription rights for the person to whom such
rights have been granted will lapse as though that person failed to return the
completed order form within the time period specified. We may, but will not be
required to, waive any irregularity on any order form or require the submission
of corrected order forms or the remittance of full payment for subscribed shares
by such date as we specify. The waiver of an irregularity on an order form in
no way obligates us to waive any other irregularity on that, or any irregularity
on any other, order form. Waivers will be considered on a case by case basis.
Photocopies of order forms, payments from private third parties, or electronic
transfers of funds will not be accepted. Our interpretation of the terms and
conditions of the Plan and of the acceptability of the order forms will be
final. We have the right to investigate any irregularity on any order form.
To ensure that each purchaser receives a prospectus at least 48 hours before
the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with the Prospectus.
Payment for Shares. Payment for shares of common stock may be made (i) in
cash, if delivered in person, (ii) by check or money order, or (iii) by
authorization of withdrawal from savings accounts (including certificates of
deposit) maintained with us or (iv) by an IRA not held by us. Appropriate means
by which such withdrawals may be authorized are provided in the order form.
Once such a withdrawal has been authorized, none of the designated withdrawal
amount may
24
be used by the subscriber for any purpose other than to purchase the shares.
Where payment has been authorized to be made through withdrawal from a savings
account, the sum authorized for withdrawal will continue to earn interest at the
contract rate until the conversion has been completed or terminated. Interest
penalties for early withdrawal applicable to certificate accounts will not apply
to withdrawals authorized for the purchase of shares; however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook savings account rate subsequent to
the withdrawal. An executed order form, once received by us, may not be
modified, amended, or rescinded without our consent, unless the conversion is
not completed within 45 days after the conclusion of the Subscription Offering,
in which case subscribers may be given an opportunity to increase, decrease, or
rescind their order.
Payments made in cash or by check or money order, will be placed in a
segregated saving account and will earn interest at our passbook savings account
rate from the date payment is received until the conversion is completed or
terminated. In the event that the conversion is not consummated, all funds
submitted pursuant to the offering will be refunded promptly with interest.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares in the offering, provided that such IRAs are not maintained on deposit
with us. Persons with IRAs maintained with us must have their accounts
transferred to an unaffiliated institution or broker to purchase shares in the
offering. The Stock Information Center can assist you in transferring your
self-directed IRA. Because of the paperwork involved, persons owning IRAs with
us who wish to use their IRA account to purchase stock in the Offering, must
contact the Stock Information Center no later than __________ __, 1998.
Delivery of Stock Certificates. Certificates representing shares of common
stock issued in the conversion will be mailed to the person(s) at the address
noted on the order form, as soon as practicable following consummation of the
conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
FEDERAL REGULATIONS PROHIBIT US FROM LENDING FUNDS OR EXTENDING CREDIT TO
ANY PERSON TO PURCHASE SHARES IN THE CONVERSION.
Marketing Arrangements
We have engaged Trident Securities as our financial advisor in connection
with the offering. Trident Securities has agreed to exercise its best efforts to
assist us in the sale of the shares in the Subscription and Community Offerings.
As compensation, Trident Securities will receive a variable fee of two percent
of the dollar amount of the common stock sold in the conversion, excluding
shares sold to our directors and executive officers and their associates and
shares sold to our ESOP. If shares are offered for sale in a Syndicated
Community Offering, Trident Securities will organize and manage the syndicate of
selected broker-dealers. The commission to be paid to any such selected broker-
dealers will be at a rate to be agreed to jointly by Trident Securities and us.
Fees paid to
25
Trident Securities and to any other broker-dealer may be deemed to be
underwriting fees, and Trident Securities and such broker-dealers may be deemed
to be underwriters. Trident Securities will also be reimbursed for allocable
expenses incurred by them, including legal fees. Trident's reimbursable out-of-
pocket expenses other than legal fees will not exceed $10,000 and its
reimbursable legal fees will not exceed $28,000. We have agreed to indemnify
Trident Securities for reasonable costs and expenses in connection with certain
claims or liabilities which might be asserted against Trident Securities.
The shares will be offered principally by the distribution of this document
and through activities conducted at a Stock Information Center located at our
office. The Stock Information Center is expected to operate during our normal
business hours throughout the offering. A registered representative employed by
Trident Securities will be working at, and supervising the operation of, the
Stock Information Center. Trident Securities will assist us in responding to
questions regarding the conversion and the offering and processing order forms.
Our personnel will be present in the Stock Information Center to assist Trident
Securities with clerical matters and to answer questions related solely to our
business.
Stock Pricing
We have retained Ferguson, an independent economic consulting and appraisal
firm, which is experienced in the evaluation and appraisal of business entities,
including savings institutions involved in the conversion process to prepare an
appraisal of our estimated pro forma market value. We will pay Ferguson a fee
of $20,000 for preparing the appraisal and will reimburse Ferguson for
reasonable out-of-pocket expenses. We have agreed to indemnify Ferguson under
certain circumstances against liabilities and expenses arising out of or based
on any misstatement or untrue statement of a material fact contained in the
information supplied by us to Ferguson.
Ferguson prepared the appraisal in reliance upon the information contained
herein, including the financial statements. The appraisal contains an analysis
of a number of factors including, but not limited to, our financial condition
and operating trends, the competitive environment within which we operate,
operating trends of certain savings institutions and savings and loan holding
companies, relevant economic conditions, both nationally and in the state of
Maryland which affect the operations of savings institutions, and stock market
values of certain savings institutions. In addition, Ferguson has advised us
that it has considered the effect of the additional capital raised by the sale
of the shares on our estimated aggregate pro forma market value.
On the basis of the above, Ferguson has determined, in its opinion, that as
of February 27, 1998 our estimated aggregate pro forma market value was
$4,500,000. OTS regulations require, however, that the appraiser establish a
range of value for the stock to allow for fluctuations in the aggregate value of
the stock due to changing market conditions and other factors. Accordingly,
Ferguson has established the Estimated Valuation Range from $3,825,000 to
$5,175,000 for the offering. The Estimated Valuation Range will be updated
prior to consummation of the conversion
26
and the Estimated Valuation Range may increase to $5,951,250 (excluding the
value of any Contingent Shares which may be issued).
The board of directors has reviewed the independent appraisal, including
the stated methodology of the independent appraiser and the assumptions used in
the preparation of the independent appraisal. The board of directors is relying
upon the expertise, experience and independence of the appraiser and is not
qualified to determine the appropriateness of the assumptions.
In order for stock sales to take place, Ferguson must confirm to the OTS
that, to the best of Ferguson's knowledge and judgment, nothing of a material
nature has occurred which would cause Ferguson to conclude that the Purchase
Price on an aggregate basis was incompatible with Ferguson's estimate of our pro
forma market value of us in converted form at the time of the sale. If,
however, the facts do not justify such a statement, an amended Estimated
Valuation Range may be established.
THE APPRAISAL IS NOT A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING THESE SHARES. IN PREPARING THE APPRAISAL, FERGUSON HAS RELIED UPON
AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL
INFORMATION PROVIDED BY US. FERGUSON DID NOT INDEPENDENTLY VERIFY THE FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY US, NOR DID FERGUSON VALUE
INDEPENDENTLY OUR ASSETS AND LIABILITIES. THE APPRAISAL CONSIDERS US ONLY AS A
GOING CONCERN AND SHOULD NOT BE CONSIDERED AS OUR LIQUIDATION VALUE. MOREOVER,
BECAUSE THE APPRAISAL IS BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS WHICH ARE SUBJECT TO CHANGE, THE MARKET PRICE OF THE COMMON STOCK COULD
DECLINE BELOW $10.00.
Change in Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the completion
of the Subscription and Community Offerings, we may significantly increase or
decrease the number of shares to be issued in the conversion. In the event of
an increase in the valuation, we may increase the total number of shares to be
issued in the conversion. An increase in the total number of shares to be
issued in the conversion would decrease a subscriber's percentage ownership
interest and the pro forma net worth (book value) per share and increase the
pro forma net income and net worth (book value) on an aggregate basis. In the
event of a material reduction in the valuation, we may decrease the number of
shares to be issued to reflect the reduced valuation. A decrease in the number
of shares to be issued in the conversion would increase a subscriber's
percentage ownership interest and the pro forma net worth (book value) per share
and decrease pro forma net income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the conversion
results in an offering which is either less than $3,825,000 or more than
$5,951,250 (excluding the value of any Contingent Shares which may be issued).
27
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, the Company may
not repurchase its shares and during each of the second and third years
following the conversion, the Company may repurchase five percent of the
outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase program upon a determination that (i) the repurchase
program would adversely affect our financial condition, (ii) the information
submitted is insufficient upon which to base a conclusion as to whether the
financial condition would be adversely affected, or (iii) a valid business
purpose was not demonstrated. In addition, SEC rules also govern the method,
time, price, and number of shares of common stock that may be repurchased by the
Company and affiliated purchasers. If, in the future, the rules and regulations
regarding the repurchase of stock are liberalized, the Company may utilize the
rules and regulations then in effect.
Restrictions on Sales and Purchases of Shares by Directors and Officers
Shares purchased by directors and officers of the Company may not be sold
for one year following completion of the conversion. An exception to this rule
is a disposition of shares in the event of the death of the director or officer.
Any shares issued to directors and officers as a stock dividend, stock split, or
otherwise with respect to restricted stock shall be subject to the same
restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
Director and officers of the Company are also subject to restrictions on sales
and purchases under federal securities law. See "Regulation -- Holding Company
Regulation -- Federal Securities Law."
Interpretation and Amendment of the Plan
We are authorized to interpret and amend the Plan. Our interpretations are
final. Amendments to the Plan after the receipt of member approval will not need
further member approval unless required by the OTS.
Conditions and Termination
Completion of the conversion requires (i) the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
28
Other
ALL STATEMENTS MADE IN THIS DOCUMENT ARE HEREBY QUALIFIED BY THE CONTENTS
OF THE PLAN OF CONVERSION, THE MATERIAL TERMS OF WHICH ARE SET FORTH HEREIN.
THE PLAN OF CONVERSION IS ATTACHED TO THE PROXY STATEMENT. COPIES OF THE PLAN
ARE AVAILABLE FROM US AND WE SHOULD BE CONSULTED FOR FURTHER INFORMATION.
ADOPTION OF THE PLAN BY OUR MEMBERS AUTHORIZES US TO INTERPRET, AMEND OR
TERMINATE THE PLAN.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to assist you in understanding our financial condition
and results of operations. The information in this section should also be read
with our Financial Statements and Notes to the Financial Statements elsewhere in
this document.
The Company has recently been formed and accordingly, has no results of
operations. The following discussion relates only to our financial condition
and results of operations.
Our results of operations depend primarily on net interest income, which is
determined by (i) the difference between rates of interest we earn on our
interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest earning assets
and interest-bearing liabilities. Our results of operations are also affected
by non-interest expense, including primarily compensation and employee benefits,
federal deposit insurance premiums and office occupancy costs. Our results of
operations also are affected significantly by general and economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control.
Following the conversion, we believe there will be sufficient demand in our
market area to continue our policy of emphasizing construction and permanent
lending in the one- to four-family real estate loan area. In addition, we hope
to experience continued moderate growth in our other loan portfolios; however,
there is no assurance that we will be able to do so.
Year 2000 Compliance
A great deal of information has been disseminated about the global computer
problem that may occur in the year 2000 which would affect the speed and
accuracy of the data processing that is essential to our operations. We are
conducting a thorough review of our internal systems as well as the efforts of
our outside data processing service provider. The progress of the plan is
monitored by our board of directors. We began testing our internal PC based
applications beginning in February 1998. While we believe that we will need to
replace several outdated teller terminal units, we do not expect to incur
significant costs to replace existing hardware or software. The greatest
potential for problems, however, concerns the data processing provided by our
third party service bureau. The
29
service bureau is providing us with quarterly updates of its compliance progress
and has advised us that it expects to resolve this problem before the year 2000.
We are in the process of developing a contingency plan to deal with the
potential that our service bureau is unable to bring its systems into compliance
by September 30, 1998. We believe that we would be able to engage another
service provider if necessary if our current provider is unable to resolve this
problem in time. There can be no assurance in this regard, however, and it is
possible that as a result we could experience data processing delays, errors or
failures, all of which could have a material adverse impact on our financial
condition and results of operations.
In October 1997, the OTS performed an off-site examination of our year 2000
compliance efforts. In January 1998, the OTS indicated that we have achieved
moderate progress toward achieving year 2000 compliance and that our management
and board have placed adequate emphasis on this issue.
Market Risk Disclosure
Asset/Liability Management. Our assets and liabilities may be analyzed by
examining the extent to which our assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by pursuing certain
strategies designed to decrease the vulnerability of our earnings to material
and prolonged changes in interest rates.
To manage the interest rate risk of this type of loan portfolio, we are
attempting to emphasize loans with shorter terms and variable interest rates and
longer term deposits. Most of the loans in our portfolio, however, have fixed
rates. Unlike many other thrift institutions who offer both adjustable and fixed
rates on single family loans and tend to emphasize adjustable rate loans under
rising interest rate conditions, our policy is to originate all of our one- to
four-family residential loans, representing 81.4% of our total loans at December
31, 1997, with fixed rates. While we plan to emphasize the origination of home
equity and small business loans with shorter terms and variable rates, our
primary loan product will continue to be long term, fixed rate
construction/permanent loans. Our interest rate risk is, therefore, significant,
and our earnings will continue to be vulnerable to a rise in prevailing interest
rates.
30
At December 31, 1997, the average weighted term to maturity of our mortgage loan
portfolio was approximately 23 years and the average weighted term of our fixed
maturity deposits was slightly less than 2 years.
Net Portfolio Value. In recent years, we have measured our interest rate
sensitivity by computing the "gap" between the assets and liabilities which were
expected to mature or reprice within certain time periods, based on assumptions
regarding loan prepayment and deposit decay rates formerly provided by the OTS.
However, the OTS now measures an institution's interest rate risk by computing
the amount by which the net present value of cash flow from assets, liabilities
and off balance sheet items (the institution's net portfolio value or "NPV")
would change in the event of a range of assumed changes in market interest
rates. These computations estimate the effect on an institution's NPV from
instantaneous and permanent 1% to 4% (100 to 400 basis points) increases and
decreases in market interest rates. The following table presents the interest
rate sensitivity of our NPV at December 31, 1997, as calculated by the OTS,
which is based upon quarterly information that we voluntarily provided to the
OTS.
Net Portfolio Value NPV as % of Portfolio Value of Assets
Change ---------------------------------- -------------------------------------
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
-------- -------- -------- -------- --------- ------------------
(Dollars in thousands)
+ 400 bp 152 (3,519) (96)% 0.47% (943) bp
+ 300 bp 990 (2,681) (73) 2.95 (695) bp
+ 200 bp 1,892 (1,778) (48) 5.44 (445) bp
+ 100 bp 2,823 (848) (23) 7.85 (205) bp
0 bp 3,671 9.89
- 100 bp 4,188 518 14 11.05 115 bp
- 200 bp 4,286 616 17 11.18 129 bp
- 300 bp 4,397 726 20 11.34 145 bp
- 400 bp 4,657 987 27 11.83 194 bp
While we cannot predict future interest rates or their effects on our NPV
or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit runoff and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as variable rate
loans, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the loan. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an
31
increased credit risk may result as the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase.
The board of directors reviews our asset and liability policies. The board
of directors meets regularly to review interest rate risk and trends, as well as
liquidity and capital ratios and requirements. The estimated changes of our NPV
set forth above fell within the targets established by our board of directors.
Management administers the policies and determinations of the board of directors
with respect to our asset and liability goals and strategies. We expect that our
asset and liability policies and strategies will continue as described so long
as competitive and regulatory conditions in the financial institution industry
and market interest rates continue as they have in recent years.
32
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to our average
statement of financial condition and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid at the date and for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average monthly
balance of assets or liabilities, respectively, for the periods presented.
Average balances are derived from month-end balances. We do not believe that
the use of month-end balances instead of daily balances has caused any material
difference in the information presented. For the purposes of computing the
average yield, nonaccruing loans have been included in the average
balances.
Year Ended December 31,
---------------------------------------------------------
At December 31, 1997 1996
1997 --------------------------- ----------------------------
---------------- Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ------ ------- -------- ------ ------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Loans..................................... $29,961 7.84% $27,282 $ 2,209 8.10% $23,157 $ 1,928 8.32%
Investment securities available for sale.. -- -- 183 15 8.19 189 15 7.94
Mortgage-backed securities................ 1,955 7.79 2,167 166 7.66 2,057 162 7.88
Other interest-earning assets (1)......... 3,740 6.15 4,003 236 5.90 6,353 352 5.54
------- ------- ------- ------- -------
Total interest-earning assets............ 35,656 7.66 33,635 2,626 7.81 31,756 2,457 7.74
Non-interest-earning assets................. 428 433 527
------- ------- -------
Total assets............................. $36,084 $34,068 $32,283
======= ======= =======
Interest-bearing liabilities:
Savings deposits.......................... $32,269 4.24 $29,854 $ 1,474 4.94 $28,796 $ 1,394 4.84
Short-term borrowings (2)................. 51 3.05 419 19 4.53 77 3 3.90
Total interest-bearing liabilities....... 32,320 4.24 30,273 1,493 4.93 28,873 1,397 4.84
Non-interest bearing liabilities............ 870 891 702
Total liabilities........................ 33,190 31,164 29,575
Retained earnings........................... 2,894 2,904 2,708
Total liabilities and retained earnings.. $36,084 $34,068 $32,283
Net interest income......................... $ 1,133 $ 1,060
Net interest rate spread (3)................ 2.88% 2.90%
Net interest-earning assets................. $ 3,362 $ 2,883
Net interest margin (4)..................... 3.37% 3.34%
Ratio of average interest-earning assets
to average interest-bearing liabilities.... 111.11% 109.99 %
- --------------------
(1) Other interest-earning assets includes interest-bearing deposits and FHLB
of Atlanta stock.
(2) Short-term borrowings includes FHLB advances and advance payments by
borrowers for expenses.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
33
Rate/Volume Analysis
The table shows certain information regarding changes in our interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by old rate); and (ii) changes in rates (change in rate multiplied by
old volume); and (iii) change in rate-volume (changes in rate multiplied by the
changes in volume).
Year Ended December 31,
-------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------- --------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands)
Interest-earning assets:
Loans..................................... $ 341 $(51) $ (9) $ 281 $127 $ (63) $(4) $ 60
Investment securities available for sale.. 1 -- (1) -- -- -- -- --
Mortgage-backed securities................ 9 (4) -- 5 (15) (2) -- (17)
Interest-bearing deposits................. (129) 20 (8) (117) (1) (6) -- (5)
----- ---- ----- ----- ---- ----- ------ ----
Total interest-earning assets........... 222 (35) (18) 169 113 (71) (4) 38
----- ---- ----- ----- ---- ----- ------ ----
Interest-bearing liabilities:
Deposits.................................. 49 29 1 79 49 (5) -- 44
Short-term borrowings (1)................. 17 -- -- 17 (1) -- -- (1)
----- ---- ----- ----- ---- ----- ------ ----
66 29 1 96 48 (5) -- 43
----- ---- ----- ----- ---- ----- ------ ----
Increase (decrease) in net interest
income.................................. $ 156 $(64) $ (19) $ 73 $ 65 $ (66) $(4) $ (5)
===== ==== ===== ===== ==== ===== ====== ====
- ---------------
(1) Includes Federal Home Loan Bank of Atlanta advances and advance payments by
borrowers for expenses.
34
Comparison of Financial Condition at December 31, 1997 and December 31, 1996
Total assets increased by $3.9 million or 12.1% from $32.2 million at
December 31, 1996 to $36.1 million at December 31, 1997. Total liabilities
increased $3.7 million or 12.5%, from $29.5 million at December 31, 1996 to
$33.2 million at December 31, 1997. The increase in assets for the period was
primarily attributable to the growth in our loan portfolio of $6.2 million which
was the result of our capitalizing on strong loan demand in our market area.
Loan growth was funded from a net increase in deposits of $3.5 million, a net
reduction in interest-earning deposits of $1,672,000 and net maturities and
repayments on investment and mortgage-backed securities of $575,000.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
Net Income. Our net income declined $4,000, from $149,000 for the fiscal
year ended December 31, 1996 to $145,000 for the fiscal year ended December 31,
1997. The primary reasons for the decline were an increase of $113,000 in the
provision for losses on loans, a $32,000 loss on the sale of securities during
1997 and an increase in compensation and related expenses of $141,000. These
were offset by a $235,000 decrease in deposit insurance expense due to a special
assessment that all thrift institutions were required to pay in order to
recapitalize the SAIF, the FDIC fund that insures our deposits. The special
assessment amounted to $182,000 which was paid during the quarter ended December
31, 1996. The most significant component in the increase in compensation
during 1997 was a $115,000 charge associated with adoption of our Deferred
Compensation Plan for Directors. See "Management of Northfield Federal Savings
- -- Director Compensation."
Net Interest Income. Our net interest income, which is the difference
between our interest income and our interest expense, increased from $1.06
million for fiscal year 1996 to $1.13 million for fiscal year 1997. The $73,000
increase was due to an increase in the level of interest income we received on
our loan and securities portfolio. Although the average yield on these
portfolios actually declined, the average balance of these assets rose which
accounted for the income growth. Total interest expense also increased during
the fiscal year $97,000 due to an increase in both the volume and the average
cost of our deposits and other borrowings, our two main categories of interest-
bearing liabilities.
Provision for Loan Losses. Financial institutions are required to
establish an allowance for loan losses. The balance of such allowance depends on
the risk in the institution's loan portfolio, its level of problem loans and
general economic conditions, among other factors. Loans which cannot be
collected are charged against the allowance and thereby reduce its balance. An
institution adds to the allowance by making a provision for loan lossses which
is an expense item. During fiscal year 1997, we made a provision for loan
lossses of $123,000 as compared to a $10,000 provision during the previous
fiscal year. This increase was primarily based on the increase in the level of
nonperforming commercial real estate loans and the growth of our commercial
real estate loan portfolio. Future additions to the loan loss allowance will be
based on the analysis of the loan portfolio as described above, and,
accordingly, are not predictible. However, because we expect our portfolio of
commercial real estate loans to increase in the future, future loan loss
provisions are expected to exceed the pre-1997 amounts, though there can be no
assurance in this regard.
35
Noninterest Income. Noninterest income (e.g., gains or losses on the sale
of securities, loan and deposit account fees) decreased from $31,000 for fiscal
year 1996 to a negative $2,000 for fiscal year 1997 due primarily to a $32,000
loss on the sale of available for sale securities in fiscal year 1997 (there
were no comparable losses in fiscal year 1996) and a decrease of $5,000 in fees
earned on deposit accounts. These were offset by increases of $1,300 in fees on
earned loans and $2,100 in other income.
Noninterest Expense. Our noninterest expenses consist mainly of salaries
and employee benefits, rent on our offices, federal deposit insurance premiums,
data processing fees, the expenses associated with our fixtures and equipment
and advertising. For fiscal year 1997, total noninterest expenses were $772,000
as compared to $843,000 for fiscal year 1996. The decline in this expense level
was due mainly to the special SAIF assessment of $182,000 in 1996, offset by a
$141,000 increase in compensation expense primarily due to adoption of our
deferred compensation plan for directors, which amounted to a charge of
$115,000. As a result of the recapitalization of the SAIF, our deposit
insurance premiums declined significantly, resulting in a reduction of $53,000
from 1996 to 1997. We expect our annual deposit insurance premium to remain at
the current level,.064% of total assessable deposits, in future periods though
there can be no assurance in this regard.
Our noninterest expense will increase following the conversion due to
several factors. First, we will incur significant expenses relating to our new
office building and branch office. Our compensation expense will increase due
to added personnel to staff our new branch and to develop our small business
lending program. We will also see added expense associated with the ESOP and,
later on, the MRP. Further, we will experience the costs of being a public
company.
Our deposit insurance premium expense has been reduced as the rate we have
to pay for such insurance was significantly reduced effective January 1, 1997.
Income Tax Expense. Our income tax expense for fiscal year 1997 was
slightly higher for fiscal 1997 as compared to fiscal 1996, rising $1,600.
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time (currently 4%)
depending upon economic conditions and deposit flows, is based upon a percentage
of our deposits and short-term borrowings. The required ratio at December 31,
1997 was 4% and our liquidity ratio for the month ended December 31, 1997 was
8.9%. It is our belief that upon completion of the conversion our liquidity
ratio will increase due to the additional funds we will receive.
Our primary sources of funds are deposits, repayment of loans and mortgage-
backed securities, maturities of investments and interest-bearing deposits,
funds provided from operations and advances from the FHLB of Atlanta. While
scheduled repayments of loans and mortgage-backed securities and maturities of
investment securities are predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by the general level of interest rates,
economic conditions and competition. We use our liquidity resources principally
to fund existing and future loan commitments, to fund maturing certificates of
deposit and demand deposit withdrawals, to invest in other interest-earning
assets, to maintain liquidity, and to meet operating expenses.
36
Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry, and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on our commitments to
make loans and management's assessment of our ability to generate funds.
A major portion of our liquidity consists of cash and cash equivalents,
which include cash and interest-bearing deposits in other banks with a maturity
date of less than ninety days. The level of these assets is dependent upon our
operating, investing, lending and financing activities during any given period.
At December 31, 1997, cash and cash equivalents totaled $2,744,000.
Our primary investing activities include origination of loans and purchase
of mortgage backed securities. During the years ended December 31, 1997 and
1996, purchases of mortgage backed securities totaled $0 and $499,000,
respectively, while loan originations totaled $10,581,000 and $6,494,000. These
investments were funded in part by loan and mortgage backed security repayments
of $4,388,000 and $3,730,000 and an increase in certificates of deposit received
of $3,730,000 and $519,000, for the years ended December 31, 1997 and 1996,
respectively.
At December 31, 1997, we had $395,000 in outstanding commitments to
originate fixed-rate loans with rates that ranged from 7.125% to 11.50% and
non-recourse commercial finance lease commitments outstanding of $64,000 with
rates that ranged from 10.00% to 10.50%. We anticipate that we will have
sufficient funds available to meet our current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less
totaled $7,763,000 at December 31, 1997. Based on historical experience
management believes that a significant portion of such deposits will remain with
us.
We are subject to federal regulations that impose certain minimum capital
requirements. For a discussion on such capital levels, see "Historical and Pro
Forma Capital Compliance" and "Regulation -- Regulation of the Bank --
Regulatory Capital Requirements."
Impact of Inflation and Changing Prices
Our financial statements and the accompanying notes presented elsewhere in
this document, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of our operations. As a
result, interest rates have a greater impact on our 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.
Recent Pronouncements
FASB Statement on Accounting for Stock-Based Compensation. In October 1995,
the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method"
of accounting for an employee stock option whereby compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period. FASB has encouraged all entities to adopt the fair value based
method, however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by Accounting Principles Board ("APB") Opinion
No. 25. Under the intrinsic value based method, compensation cost is the excess
of the market price of the stock at the grant date over the amount an employee
must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995. Pro forma disclosures must
include the effects of all awards granted in fiscal years beginnings after
December 15, 1994. If the proposed Option Plan is adopted we will use the
intrinsic value method. Accordingly, there will be no impact as a result of our
adoption of SFAS No. 123.
37
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996. SFAS No. 125 supersedes SFAS No. 122, Accounting for
Mortgage Servicing Rights. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover substantially all of
its recorded investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. The FASB has
proposed to defer the effective date of SFAS No. 125 until January 1, 1998 for
certain transactions including repurchase agreements, dollar-roll, securities
lending and similar transactions. We adopted SFAS No. 125 on January 1, 1997.
There was no impact on our financial statements of such adoption.
FASB Statement on Earnings Per Share. In February 1997, the FASB issued
SFAS No. 128, "Earnings Per Share." SFAS 128 supersedes APB Opinion No. 15,
"Earnings Per Share" and specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. SFAS No. 128 replaces the presentation of primary
earnings per share with a presentation of basic earnings per share and fully
diluted earnings per share with diluted earnings per share. It also requires
dual presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structures and requires
the reconciliation of the numerator and denominator of the basic earnings per
share computation to the numerator and denominator of the diluted earnings per
share computation. This statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. We will
adopt SFAS No. 128 in the initial period after conversion. We do not believe
the impact of adopting SFAS No. 128 will be material to our financial
statements.
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129. The Statement incorporates the
disclosure requirements of APB Opinion No. 15, "Earnings per Share," and makes
them applicable to all public and nonpublic entities that have issued securities
addressed by the Statement. APB Opinion No. 15 requires disclosure of
descriptive information about securities that is not necessarily related to the
computation of earnings per share. The statement continues the previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinion No. 10, Omnibus Opinion - 1966 and No. 15, Earnings Per
Share and FASB Statement No. 47, Disclosure of Long-
38
Term Obligations, for entities that were subject to the requirements of those
standards. This Statement eliminates the exemption of nonpublic entities from
certain disclosure requirements of Opinion 15 as provided by Statement No. 21,
Suspension of the Reporting of Earnings per Share and Segment Information for
Nonpublic Enterprises. It supersedes specific disclosure requirements of Opinion
10 and 15 and Statement 47 and consolidates them in this Statement for ease of
retrieval and for greater visibility to nonpublic entities. This Statement is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 will be adopted by us in the initial period after December 15,
1997. We do not believe the impact of adopting SFAS No. 129 will be material to
our financial statements.
FASB Statement on Reporting Comprehensive Income. In June 1997, the FASB
issued SFAS No. 130, "Reporting Comprehensive Income," which requires entities
presenting a complete set of financial statements to include details of
comprehensive income that arise in the reporting period. Comprehensive income
consists of net income or loss for the current period and other comprehensive
income, expense, gains and losses that bypass the income statement and are
reported in a separate component of equity, i.e., unrealized gains and losses on
certain investment securities. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. We do not believe that adoption of SFAS No.
130 will have a material adverse effect on our financial position or results of
operations.
FASB Statement on Disclosures Regarding Segments. In June 1997, the FASB
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Statement 131 establishes standards for the way public
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise" but retains the requirement to report information about
major customers. It amends Statement No. 94, "Consolidation of all Majority-
Owned Subsidiaries" to remove the special disclosure requirements for previously
unconsolidated subsidiaries. Statement 131 is effective for financial
statements for periods beginning after December 15, 1997. We do not believe the
impact of adopting SFAS No. 131 will be material to our financial statements.
FASB Statement on Employers Disclosures About Pensions and Other
Postretirement Benefits. In February 1998, the FASB issued SFAS No. 132,
"Employers Disclosures About Pension and Other Postretirement Benefits," which
standardizes disclosure requirements for pensions and postretirement benefits.
This Statement is effective for fiscal years beginning after December 15, 1997.
We do not believe that the adoption of SFAS No. 132 will have a material effect
on our financial statements.
39
BUSINESS OF NORTHFIELD BANCORP, INC.
The Company is not an operating company and has not engaged in any
significant business to date. It was formed on March 5, 1998 as a Maryland-
chartered corporation to be the holding company for Northfield Federal Savings
Bank. The holding company structure and retention of proceeds will facilitate:
(i) diversification into non-banking activities, (ii) acquisitions of other
financial institutions, such as savings institutions, (iii) expansion within
existing and into new market areas and (iv) stock repurchases without adverse
tax consequences. There are no present plans regarding diversification,
acquisitions of other companies or stock repurchases.
Northfield Federal Savings has operated as an independent community
oriented savings institution since 1923. It is our intention to continue to
operate as an independent community oriented savings association following the
conversion.
Since the Company will own only one savings association, it generally will
not be restricted in the types of business activities in which it may engage,
provided that we retain a specified percentage of our assets in housing-related
investments. The Company initially will not conduct any active business and does
not intend to employ any persons other than officers but will utilize our
support staff from time to time.
BUSINESS OF NORTHFIELD FEDERAL SAVINGS
The principal sources of funds for our activities are deposits and payments
on loans. Our deposits totaled $32.6 million at December 31, 1997. Funds are
used principally for the origination of construction and permanent loans secured
on one- to four-family residences which are located in our market area. We also
originate other types of loans, including loans secured by multi-family
residential property, commercial real estate, home equity and savings account
loans. We also purchase commercial leases from a local leasing company, as well
as investment and mortgage-backed securities. Our principal source of revenue is
interest received on loans and investments and our principal expense is interest
paid on deposits.
Market Area
We consider our primary market area to be Baltimore, Harford and Cecil
County, Maryland. The economy of our market area has historically been based on
industry such as steel, shipyards and automobile assembly.
The principal sources of employment in Baltimore, Harford and Cecil
Counties are the services, retail trade and manufacturing industries. The 1996
median household income is estimated to be $40,481 for Baltimore County, $50,300
for Harford County and $43,000 for Cecil County. In the period from 1990 to
1996, Baltimore County's population increased 4.28% compared to the State of
Maryland at 6.40% and the United States at 6.67%. During the same period, the
populations of Harford and Cecil County grew 12.8% and 8.5%, respectively. Based
on projected increases in population and households in these market areas over
the next several years, we believe that the Bank's market areas can support
future lending growth, though there can be no assurance in this regard.
Lending Activities
Most of our loans are construction/permanent loans on one- to four-family
residences. We also make multi-family real estate mortgage loans as well as
commercial real estate, home equity and savings account loans. We also purchase
commercial leases from a local leasing company.
40
The following table sets forth information concerning the types of loans
held by us at the dates indicated.
At December 31,
------------------------------------------
1997 1996
------------------ ------------------
Amount % Amount %
------ --- ------ ---
(Dollars in thousands)
Real estate loans:
One- to four-family residential
mortgage loans.................. $ 25,740 81.35% $ 19,439 77.18%
Construction loans............... 2,105 6.65 2,462 9.78
Commercial real estate loans..... 2,805 8.87 2,195 8.71
Commercial loans collateralized
by lease finance receivables.... 741 2.34 1,018 4.04
Consumer loans:
Home equity lines of credit...... 177 .56 -- --
Loans secured by deposits........ 74 .23 74 .29
------ ------ ------ ------
Total loans................ 31,642 100.00% 25,188 100.00%
====== ======
Less:
Undisbursed portion of loans
in process...................... 1,197 1,028
Deferred loan
origination fees................ 268 219
Allowance for losses............. 216 100
-------- --------
Loan portfolio, net......... $ 29,961 $ 23,841
======== ========
41
The following table sets forth the estimated maturity of our loan portfolio
at December 31, 1997. The table does not include the effects of possible
prepayments or scheduled repayments. All mortgage loans are shown as maturing
based on the date of the last payment required by the loan agreement.
Due After Due After
Due During the Year Ending 3 Through 5 Through
December 31, 5 Years After 10 Years After
1998 1999 2000 December 31, 1997 December 31, 1997
------- ------- ------- ----------------- -----------------
(In Thousands)
Real estate loans:
One- to four-family............... $ 371 $ 4 $ 48 $ 377 $ 1,165
Construction...................... 1,038 1,067 -- -- --
Commercial real estate............ 137 2 -- 314 852
Commercial loans collateralized
by lease finance receivables..... 120 154 372 95 --
Consumer loans:
Home equity lines of credit....... 177 -- -- -- --
Loans secured by deposits......... 74 -- -- -- --
------- ------- ------- ------- -------
Total.......................... $ 1,917 $ 1,227 $ 420 $ 786 $ 2,017
======= ======= ======= ======= =======
Due After
10 Through Due After 15
15 Years After Years After
December 31, 1997 December 31, 1997 Total
----------------- ----------------- --------
Real estate loans:
One- to four-family............... $ 2,909 $ 20,866 $ 25,740
Construction...................... -- -- 2,105
Commercial real estate............ 1,010 490 2,805
Commercial loans collateralized
by lease finance receivables..... -- -- 741
Consumer loans:
Home equity lines of credit....... -- -- 177
Loans secured by deposits......... -- -- 74
-------- -------- --------
Total.......................... $ 3,919 $ 21,356 $ 31,642
======== ======== ========
The next table sets forth at December 31, 1997, the dollar amount of all
loans due one year or more after December 31, 1997 which have predetermined
interest rates and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
(In thousands)
Real estate loans:
One- to four-family............... $ 25,369 $ --
Construction...................... 1,067 --
Commercial real estate............ 2,668 --
Commercial loans collateralized by
lease finance receivables......... 621 --
Consumer loans:
Home equity lines of credit....... -- --
Loans secured by deposits......... -- --
--------- ---------
Total......................... $ 29,725 $ --
========= =========
42
Residential Construction Loans. Our most significant loan product is
lending to finance the construction of one- to four-family residential property
to the individuals who will be the owners and occupants upon completion of
construction. Construction/permanent loans account for a majority of our single
family loan originations. We have historically emphasized these loans and have
established a reputation in our market areas for this type of lending. We
believe that we can continue to respond to the demand for these loans by
borrowers engaged in building and development of single family residential
properties in the growing communities of our market areas. Virtually all of
these loans are structured to be converted to permanent loans at the end of the
construction phase. Borrowers are required to pay interest during the
construction period. Loan proceeds are disbursed according to a draw schedule
and we inspect the progress of the construction before additional funds are
disbursed. The interest rate we charge is fixed during the construction phase
(based on the prime rate) and fixed thereafter, and these loans generally have
30 year terms.
While we believe we have substantial experience in construction lending,
this type of lending involves a higher degree of credit risk than long term
financing of residential properties. Our risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction and the estimated cost of construction. If
the estimate of construction cost and the marketability of the property upon
completion of the project prove to be inaccurate, we may be compelled to advance
additional funds to complete the construction. Furthermore, if the final value
of the completed property is less than the estimated amount, the value of the
property might not be sufficient to assure the repayment of the loan.
Our underwriting criteria are designed to evaluate and minimize the risks
of each construction loan. Among other things, we consider the amount of the
borrower's equity in the project, independent valuations and reviews of cost
estimates and pre-construction sale, the builder's financial report and the
reputation of the borrower. In addition, we review the builder's financial
reports and other information. We have longstanding relationships with several
builders in our area and do most of our construction lending with them.
One- to Four-Family Residential Loans. We also originate standard one- to
four-family residential mortgage loans secured by property located in our
primary market area. These are made in amounts up to 80% of the lesser of the
appraised value or purchase price, with private mortgage insurance or additional
collateral required on loans with a loan to-value ratio in excess of 80%.
Although, all of our one- to four-family loans are underwritten to conform with
secondary market standards, we originate such loans with the intention that they
will be held in our portfolio rather than sold in the secondary mortgage market.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable
in the event the borrower transfers ownership of the property securing the
mortgage loan without our consent.
43
Commercial Real Estate Loans. Our commercial real estate loans are secured
primarily by office buildings and multi-family residential investment
properties. Some of our commercial real estate loans are participations with
other financial institutions in our market area. Commercial real estate loans
are made in amounts of up to 75% of the appraised value of the property. Our
commercial real estate loans generally have variable rates with terms of five
years and amortization schedules of up to 30 years. At December 31, 1997, the
largest of our commercial real estate loans was an $886,000 loan participation,
of which our interest totaled $333,000. This loan was secured by an office
building.
Commercial real estate lending, which accounted for approximately 8.9% of
our loan portfolio at December 31, 1997, entails significant additional risks
compared to single-family residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, we generally limit this type of lending to our market area and to
borrowers who are otherwise well known to us.
Commercial Leases. For over ten years, we have purchased commercial
finance leases from a local leasing company. These leases are primarily on
office equipment. We purchase the lease but all servicing is conducted by the
seller. The average length of the individual leases ranges from 3.5 to four
years and the average size ranges from $1,500 to $5,000. At December 31, 1997,
our portfolio of commercial leases totaled $741,000 or 2.3% of total loans. In
recent years, we have come under regulatory criticism based on violation of the
OTS's loans to one borrower regulation. We are in the process of bringing the
program into compliance with the loans to one borrower regulation. Our
portfolio includes both recourse and non-recourse purchases, but in accordance
with OTS comments, we will in the future purchase on a recourse basis only.
Following the conversion, we will be back into compliance with the loans to one
borrower regulation.
Commercial leases are subject to the same risk of default as direct
commercial loans. Although these loans provide for higher interest rates and
shorter terms than permanent single family residential real estate loans, they
involve more credit risk because of the type and nature of the collateral.
Commercial business loans are typically made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business, and
repayment is therefore substantially dependent on the success of the business
itself.
Since the program began, we have experienced losses of $7,700 in connection
with these leases, all involving non-recourse purchases. As indicated above, we
intend to purchase on a recourse basis only in the future. Currently, we are
not purchasing these leases. Following the conversion, we expect to increase the
level of these leases to the amount allowed by the loans to one borrower
regulation, which we estimate will be approximately $1.0 million after receipt
of the conversion proceeds. Management believes that these commercial leases
represent a sound and profitable investment and will seek to maintain its
relationship with the local leasing company following the conversion.
44
Consumer Loans. Our consumer loans consist of home equity lines of credit
and savings account loans. We began offering home equity lines of credit in
December 1996. These loans are secured by a real estate mortgage with our
security interest in the borrower's primary residence. These are variable rate
loans indexed to the prime rate with terms of 20 years. Our savings account
loans are made for up to 90% of the balance on deposit in savings accounts or
certificates of deposit. These loans are secured by an interest in the
borrower's account.
Small Business Lending. In the summer of 1998, we plan to initiate a small
business loan program in which we originate loans with Small Business
Administration ("SBA") guarantees. SBA generally guarantees between 80% and 90%
of the loan balance. However, the SBA imposes some limitations on the interest
rate and loan origination fees charged. We currently expect that our commercial
business lending activities will encompass loans with a variety of purposes and
forms of security, including loans to finance accounts receivable, inventory and
equipment. We intend to market these loans to small local sole proprietorships
and other small businesses. The interest rates we charge on these loans are
variable.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. We feel that these risks are mitigated in
the case of our commercial business lending activities since our commercial
business loan program will involve loans with SBA guarantees.
Loan Approval Authority and Underwriting. Our President may approve all
commercial leases that we purchase up to $25,000 and all home equity lines of
credit up to that amount. All other loans are approved by our board of
directors.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
other estimate of value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are prepared by outside fee appraisers
who are approved by the board of directors.
Either title insurance or a title opinion is generally required on all real
estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.
45
Loan Originations, Purchases and Sales. The following table sets forth
certain information with respect to our loan originations. We did not purchase
or sell any loans during the periods.
Year Ended December 31,
-------------------------
1997 1996
------------ -----------
(In thousands)
Net loans, beginning of period...................... $23,841 $21,695
Origination by type:
- -------------------
Real estate loans:
One- to four-family.............................. $ 9,621 $ 6,366
Commercial real estate........................... 439 142
Consumer loans:
Loans secured by deposits........................ 50 8
Home equity lines of credit...................... 505 --
------- -------
Total loans originated.................... 10,615 6,516
Purchases:
- ---------
Loan participations.............................. 350 --
Commercial loans collateralized by lease finance
receivables................................... 340 207
------- -------
Repayments.......................................... (4,843) (4,329)
Decrease (increase) in other items, net............. (342) (248)
------- -------
Net increase in loans receivable, net......... 6,120 2,146
------- -------
Net loans, end of period............................ $29,961 $23,841
======= =======
All of the loans we originate are intended to be held in our portfolio
rather than sold in the secondary mortgage market. Our one- to four-family
residential loans do, however, conform to secondary market guidelines. We may,
therefore, decide to sell loans in the secondary market in the future. We
occasionally purchase loan participations from other financial institutions.
These participation interest purchases are reflected in the above table.
Generally, the purchase of participation interests involves the same risks as
would the origination of the same types of loans as well as the additional risk
that results from the fact that we have less control over the origination and
subsequent administration of such loans.
Loan Commitments. Written commitments are given to prospective borrowers
on all approved real estate loans. Generally, the commitment requires
acceptance within 30 days of the date of issuance. At December 31, 1997,
commitments to cover originations of mortgage loans were $395,000. We believe
that virtually all of our commitments will be funded.
46
Loans to One Borrower. The maximum amount of loans which we may make to any
one borrower may not exceed the greater of $500,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our loan-to-one borrower limit was approximately $500,000
at December 31, 1997. At December 31, 1997, our largest loan outstanding had a
balance of $500,000.
Nonperforming and Problem Assets
Loan Delinquencies. Generally when a mortgage loan becomes 30 days past
due, a notice of nonpayment is sent to the borrower. Additional notices and
letters from us are sent if the loan remains delinquent after 45, 60 and 75
days. If the loan continues in a delinquent status for 90 days past due and no
repayment plan is in effect, a notice of right to cure default is sent to the
borrower giving 30 additional days to bring the loan current before foreclosure
is commenced. Our board meets regularly to determine when foreclosure
proceedings should be initiated. The customer will be notified when foreclosure
is commenced. At December 31, 1997, our loans past due between 30 and 89 days
totaled $110,000.
Loans are reviewed on a monthly basis and are generally placed on a non-
accrual status when the loan becomes more than 90 days' delinquent or when, in
our opinion, the collection of additional interest is doubtful. Interest accrued
and unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent interest payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
47
Nonperforming Assets. The following table sets forth information regarding
our nonperforming loans. As of the dates indicated, we had no loans categorized
as troubled debt restructurings within the meaning of SFAS 15 and no real estate
owned.
At December 31,
-------------------
1997 1996
------ ------
(In thousands)
Loans accounted for on a non-accrual basis: (1)
Real estate loans:
One- to four-family.................................... $ -- $ --
Commercial real estate................................. 135 270
----- -----
Total real estate loans............................. 135 270
Commercial loans collateralized by lease finance
receivables............................................ -- --
Consumer loans:
Loans secured by deposits.............................. -- --
Home equity lines of credit........................... -- --
Automobile............................................. -- --
Other consumer......................................... -- --
----- -----
Total............................................... 135 270
----- -----
Accruing loans delinquent 90 days or more:
Real estate:
One- to four-family.................................... $ -- $ --
Commercial real estate................................. 279 (2) --
Commercial loans collateralized by lease finance
receivables............................................... -- --
Consumer loans............................................. -- --
Loan secured by deposits............................... -- --
Home improvement....................................... -- --
Automobile............................................. -- --
Other consumer......................................... -- --
----- -----
Total............................................... 279 (2) --
----- -----
Total nonperforming loans........................ 414 270
===== =====
Total non-performing loans as a percentage of total net
loans..................................................... 1.31% 1.07%
===== =====
Total non-performing assets as a percentage of total
assets.................................................... 1.15% .84%
===== =====
- ------------------
(1) In January 1998, these loans were fully repaid.
(2) This balance represents a loan participation on which the borrower
experienced cash flow difficulties on the collateral, several commercial
properties, and became 180 days delinquent. In February 1998, the borrower
resumed regular payments on the loan but the loan, has not yet been brought
current.
During the year ended December 31, 1997, we would have recorded additional
interest income of approximately $5,772 on nonaccrual loans if such loans had
been current throughout the period. We included income of $9,442 on such
nonaccrual loans during the year. We had no loans which were not classified as
nonaccrual, 90 days past due or restructured, but where known information causes
us to have serious concerns as to the ability of these borrowers to comply with
their current loan terms.
48
Classified Assets. OTS regulations provide for a classification system for
problem assets of savings associations which covers all problem assets. Under
this classification system, problem assets of savings associations such as ours
are classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
savings association 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 may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General 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 a savings association classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. A savings association's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining a savings association's regulatory capital. Specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At December 31, 1997, $339,000 of our assets were classified as special
mention, none were classified as doubtful, $135,000 of our assets were
classified as substandard and none were classified as loss. At December 31,
1997, a $83,000 specific reserve had been established for the amounts classified
as loss.
Foreclosed Real Estate. Real estate acquired by us as a result of
foreclosure is recorded as "real estate owned" until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less estimated disposal
costs. Any write down of real estate owned is charged to operations. At December
31, 1997, we did not have any real estate owned.
Allowance for Loan Losses. Our policy is to provide for losses on
unidentified loans in our loan portfolio. A provision for loan losses is charged
to operations based on management's evaluation of the losses that may be
incurred in our loan portfolio. The evaluation, including a review of all loans
on which full collectibility of interest and principal may not be reasonably
49
assured, considers: (i) our past loan loss experience, (ii) known and inherent
risks in our portfolio, (iii) adverse situations that may affect the borrower's
ability to repay, (iv) the estimated value of any underlying collateral, and (v)
current economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance
for loan losses at a level that we consider adequate for the inherent risk of
loss in our loan portfolio, actual losses could exceed the balance of the
allowance for loan losses and additional provisions for loan losses could be
required. In addition, our determination as to the amount of its allowance for
loan losses is subject to review by the OTS, as part of its examination process.
After a review of the information available, the OTS might require the
establishment of an additional allowance.
The following table sets forth an analysis of our allowance for loan losses
for the periods indicated.
Year Ended December 31,
-------------------------
1997 1996
-------- --------
(Dollars in thousands)
Balance at beginning of period............. $ 100 $ 90
Charge-offs
- -----------
Real estate loans:
One- to four-family....................... -- --
Commercial real estate.................... -- --
-------- --------
Total real estate loans................. -- --
Commercial loans collateralized by lease
finance receivables.................... (7) --
-------- --------
(7) --
-------- --------
Consumer loans:
Loan secured by deposits................. -- --
Home equity lines of credit.............. -- --
Automobile............................... -- --
Other consumer........................... -- --
-------- --------
Recoveries................................. -- --
-------- --------
Net recoveries (charge-offs)............... (7) --
-------- --------
Additions charged to operations............ 123 10
-------- --------
Balance at end of period................... $ 216 $ 100
======== ========
Allowance for loan losses to total
non-performing loans at end of period..... 52.17% 37.04%
======== ========
Allowance for loan losses to net loans
at end of period.......................... .72% .42%
======== ========
Net loans charge-offs...................... (7) --
-------- --------
Provision for loan losses.................. 123 10
-------- --------
Ratio of net charge-offs to average
loans outstanding during the period....... .03% --
======== ========
50
The following table illustrates the allocation of the allowance for loan
losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
December 31,
-------------------------------------------
1997 1996
--------------------- --------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
------ ----------- ------ -----------
(Dollars in thousands)
Real estate loans:
One- to four-family.............. $ 96 81.35% $ 45 77.18%
Construction..................... -- 6.65 -- 9.78
Commercial real estate loans..... 60 8.87 -- 8.71
Commercial loan collateralized
by lease finance receivables.. 60 2.34 55 4.04
Consumer loans................... -- .79 -- .29
----- ------ ------ ------
Total allowance for loan losses $ 216 100.00% $100 100.00%
===== ====== ====== ======
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation --
Regulation of Northfield Federal Savings -- Federal Home Loan Bank System" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The level of liquid assets
varies depending upon several factors, including: (i) the yields on investment
alternatives, (ii) our judgment as to the attractiveness of the yields then
available in relation to other opportunities, (iii) expectation of future yield
levels, and (iv) our projections as to the short-term demand for funds to be
used in loan origination and other activities. We classify our investment
securities as "held to maturity", "available-for-sale" or "trading" in
accordance with SFAS No. 115. At December 31, 1997, our investment portfolio
policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) mortgage-backed securities, (iv) certificates of deposit, and (v) federal
funds, including FHLB overnight and term deposits.
Mortgage-Backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. Our
mortgage-backed securities portfolio consists of participations or pass-through
certificates issued by the Federal Home Loan Mortgage Corporation (the "FHLMC"),
the Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA"). GNMA certificates are guaranteed as to principal
and interest by the full
51
faith and credit of the United States, while FHLMC and FNMA certificates are
guaranteed by those agencies only. Our mortgage-backed securities portfolio was
classified as "held to maturity" at December 31, 1997.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the
life of the underlying mortgages.
The Bank also has a $395,000 investment in a real estate mortgage
investment conduits (REMIC"). REMICs are securities derived by reallocating the
cash flows from mortgage-backed securities or pools of mortgage loans in order
to create multiple classes, or tranches, of securities with coupon rates and
average lives that differ from the underlying collateral as a whole. At December
31, 1997, our REMIC had a weighted average life of two years. It is a fixed
rate instrument currently paying principal in accordance with a predetermined
schedule with an average yield of 7%.
REMICs are subject to repayment by the mortgagors of the underlying
collateral at any time. Such prepayment may subject our REMIC to yield and price
volatility. To assess this volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires us to test the REMIC quarterly to determine whether
it is a high-risk or nonhigh-risk security. At December 31, 1997, the REMIC
met the criteria established by the policy to be designated as nonhigh-risk
securities for continued classification as a suitable investment.
The following table sets forth the carrying (i.e., amortized cost) value of
our investment securities and mortgage-backed securities, at the dates
indicated.
At December 31,
--------------------------
1997 1996
---------- ----------
(In thousands)
Available for sale:
Lord Abbett U.S. Government Securities Fund....... $ -- $ 197
Held to Maturity:
Interest-bearing deposits in other banks.......... 3,514 5,186
Mortgage-backed securities........................ 1,955 2,333
Federal Home Loan Bank of Atlanta stock........... 226 226
------- -------
Total............................................ $ 5,695 $ 7,942
======= =======
52
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for our investment portfolio at December 31,
1997.
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------- ------------------- --------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- --------- -------- --------- ---------- --------- -------- ---------
(Dollars in thousands)
Securities held to maturity:
Interest-bearing deposits.. $3,257 6.03% $158 7.51% $ 99 5.50% $ -- --%
Mortgage-backed securities. 120 5.48 60 7.98 317 8.55 1,458 7.81
FHLB stock................. -- -- -- 226 7.25
------ ---- ---- ------
Total................ $3,377 6.01% $218 7.64% $416 7.82% $1,684 7.73%
====== ==== ==== ======
Total Investment Portfolio
-----------------------------
Weighted
Carrying Market Average
Value Value Yield
-------- ------ --------
(Dollars in thousands)
Securities held to maturity:
Interest-bearing deposits.. $3,514 $3,514 6.08%
Mortgage-backed securities. 1,955 2,011 7.79
FHLB stock................. 226 226 7.25
------ ------
Total................ $5,695 $5,751 6.71%
====== ======
53
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and, to a much lesser extent, maturities of
investment securities and mortgage-backed securities, borrowings and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally from
within our primary market area through the offering of a selection of deposit
instruments including regular savings accounts, money market accounts, and term
certificate accounts. IRA accounts are also offered. Deposit account terms
vary according to the minimum balance required, the time period the funds must
remain on deposit, and the interest rate. The interest rates paid by us on
deposits are set weekly at the direction of our senior management. Interest
rates are determined based on our liquidity requirements, interest rates paid by
our competitors, and our growth goals and applicable regulatory restrictions and
requirements. We do not accept brokered deposits.
At December 31, 1997, our deposits were represented by the various types of
savings programs described below.
Interest Minimum Minimum Percentage of
Rate (1) Term Category Amount Balances Total Savings
- -------- ------- -------- ------- -------- -------------
(Dollars in thousands)
3.23% None Passbook accounts $ 25 $ 2,605 7.99%
2.53 None Demand and NOW accounts 25 2,079 6.37
4.12 None Money market accounts 1,000 7,816 23.96
Certificates of Deposit
-----------------------
5.34 6 months Fixed-Term, Fixed-Rate 100 1,954 5.99
5.43 12 months Fixed-Term, Fixed-Rate 100 2,394 7.34
5.45 18 months Fixed-Term, Fixed-Rate 100 446 1.37
5.75 30 months Fixed-Term, Fixed-Rate 100 196 .60
5.92 36 months Fixed-Term, Fixed-Rate 100 447 1.37
6.46 48 months Fixed-Term, Fixed-Rate 100 147 .45
6.63 60 months Fixed-Term, Fixed-Rate 100 1,590 4.87
6.97 72 months Fixed-Term, Fixed-Rate 100 4,418 13.54
6.17 Other 1,000 8,516 26.11
6.19 --------- ------
4.24 Total certificates of deposit 20,108 61.64
--------- ------
Total deposits $ 32,608 99.96%
========= ======
Accrued interest on deposits 14 .04
--------- ------
Total savings on deposits $ 32,622 100.00%
========= ======
- ------------------
(1) Indicates weighted average interest rate at December 31, 1997.
54
The following table sets forth information about our average deposit
balances and interest rates during the periods indicated.
At December 31,
------------------------------------------
1997 1996
---------------- ----------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
(Dollars in thousands)
Now accounts...................... $ 1,740 2.89% $ 1,628 2.76%
Money market deposits............. 7,779 3.89 8,104 3.57
Passbook savings.................. 2,587 2.97 2,701 2.99
Certificates of deposit........... 17,748 5.88 16,363 5.98
------ ------
Total.......................... $ 29,854 4.94 $ 28,796 4.84
======== ========
At December 31,
-----------------------
1997 1996
------ ------
Rate (In thousands)
----
4.00 - 5.99%........... $ 10,996 $ 10,314
6.00 - 7.99%........... 9,112 6,062
8.00 - 9.99%........... -- 2
-------- --------
$ 20,108 $ 16,378
======== ========
The following table sets forth the amount and maturities of our time
deposits at December 31, 1997.
Amount Due
-----------------------------------------------------------
Less Than One to Two to After
Rate One Year Two Years Three Years Three Years Total
- ---- -------- --------- ----------- ----------- -----
(In thousands)
4.00 - 5.99%....... $ 7,075 $ 2,461 $ 454 $ 1,006 $ 10,996
6.00 - 7.99%....... 688 3,321 3,061 2,042 9,112
------- ------- ------- ------- --------
$ 7,763 $ 5,782 $ 3,515 $ 3,048 $ 20,108
======= ======= ======= ======= ========
The following table sets forth our savings activity for the periods
indicated:
Balance at Balance at
December 31, % of Increase December 31, % of
1997 Deposits (Decrease) 1996 Deposits
------------ -------- ---------- ------------ --------
(Dollars in thousands)
Demand and NOW accounts.... $ 2,079 6.37% $ (45) $ 2,124 7.29%
Money market deposit....... 7,816 23.96 (158) 7,974 27.39
Passbook savings accounts.. 2,605 7.99 (22) 2,627 9.03
Certificates of deposit.... 18,652 57.18 4,555 14,097 48.42
Jumbo certificates......... 1,456 4.46 (825) 2,281 7.83
Accrued interest on
deposits.................. 14 .04 1 13 .04
------- ------- ------ ------- -------
$32,622 100.00% $3,506 $29,116 100.00%
======= ======= ====== ======= =======
The following table indicates the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31, 1997.
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
Three months or less..................... $ 100
Over three through six months............ --
Over six through 12 months............... --
Over 12 months........................... 1,356
-------
Total.................................. $ 1,456
=======
55
Savings Deposit Activity
The following table sets forth our savings activities for the periods
indicated.
Year Ended December 31,
-------------------------
1997 1996
-------- --------
(In thousands)
Opening balance.................................... $ 29,103 $ 29,162
Net increase (decrease) before interest credited... 2,027 (1,464)
Interest credited.................................. 1,477 1,405
-------- --------
Ending balance.................................... $ 32,607 $ 29,103
======== ========
Net increase(decrease)............................. $ 3,504 $ (59)
======== ========
Percent increase (decrease)........................ 12.04% (.20)%
======== ========
Borrowings. Advances (borrowings) may be obtained from the FHLB of Atlanta
to supplement our supply of lendable funds. Advances from the FHLB of Atlanta
are typically secured by a pledge of our stock in the FHLB of Atlanta, a portion
of our first mortgage loans and other assets. Each FHLB credit program has its
own interest rate, which may be fixed or adjustable, and range of maturities.
At December 31, 1997, we had no borrowings from the FHLB of Atlanta.
At or for the
Year Ended December 31,
------------------------
1997 1996
------ ------
(Dollars in thousands)
Amounts outstanding at end of period:
FHLB advances............................. $ -- $ --
Other short-term borrowings............... -- --
Weighted average rate paid on:
Other short-term borrowings............... -- --
Maximum amount of borrowings outstanding
at any month end:
FHLB advances............................. $ 1,600 $ --
Other short-term borrowings............... -- --
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances............................. $ 350 $ --
Other short-term borrowings............... -- --
Approximate weighted average rate paid on:
Other short-term borrowings............... -- --
56
Competition
We compete for deposits with other insured financial institutions such as
commercial banks, thrift institutions, credit unions, finance companies, and
multi-state regional banks in our market area. Loan competition varies
depending upon market conditions. Our competition in originating real estate
loans comes primarily from commercial banks, thrift institutions, credit unions
and mortgage bankers, many of whom have greater resources than we have.
Properties
The following table sets forth certain information regarding our offices and
other material property. For a discussion of planned changes in our properties,
see "Use of Proceeds."
Book Value at Deposits at
Year Owned or December 31, Approximate December 31,
Opened Leased 1997 (1) Square Footage 1997
------ -------- ---------- -------------- ------------
(Deposits in thousands)
Main Office:
1844 E. Joppa Road 1983 Leased (2) $ 14,550 3,150 $ 17,467
Baltimore, Maryland
Branch Office:
8705 Harford Road
Baltimore, Maryland 1923 Owned 25,824 750 15,167
Executive Offices:
8005 Harford Road
Baltimore, Maryland 1998 Leased (3) N/A 2,915 --
- ---------------
(1) Cost less accumulated depreciation and amortization.
(2) Present lease expires 08/31/98 and has been renewed through 03/31/03.
(3) Lease commenced March 10, 1998 and will expire on June 10, 2000.
The book value of the Bank's investment in premises and equipment totaled
$40,374 at December 31, 1997. See Note 5 of Notes to Consolidated Financial
Statements.
Personnel
At December 31, 1997, we had eight full-time and two part-time employees.
None of our employees are represented by a collective bargaining group. We
believe that our relationship with our employees is good.
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
57
REGULATION
Set forth below is a brief description of certain laws which relate to us.
The description is not complete and is qualified in its entirety by references
to applicable laws and regulations.
General
As a federally chartered, SAIF-insured savings institution, we are subject
to extensive regulation by the OTS and the FDIC. Our lending activities and
other investments must comply with various federal and state statutory and
regulatory requirements, and the OTS periodically examines us for compliance
with various regulatory requirements. The FDIC also has authority to conduct
periodic examinations of us. We must file reports with the OTS describing our
activities and our financial condition and we must obtain approvals from
regulatory authorities before entering into certain transactions such as the
conversion or mergers with other financial institutions. We are also subject to
certain reserve requirements promulgated by the Board of Governors of the
Federal Reserve System ("Federal Reserve System"). Our relationship with our
depositors and borrowers is also regulated to a great extent by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of our mortgage documents. This supervision and regulation
are primarily intended to protect 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 regulations,
whether by the OTS, the FDIC or any other government agency, could have a
material adverse impact on our operations.
Regulation of Northfield Federal Savings
Insurance of Deposit Accounts. The FDIC maintains two separate funds for
the insurance of deposits up to prescribed statutory limits. The Bank Insurance
Fund ("BIF") insures the deposits of commercial banks and the SAIF insures the
deposits of savings associations. We are a member of the SAIF. The FDIC is
authorized to establish separate annual assessment rates for deposit insurance
for members of the BIF and the SAIF. The FDIC may increase assessment rates for
either fund if necessary to restore the fund's ratio of reserves to insured
deposits to its target level within a reasonable time and may decrease such
assessment rates if such target level has been met. The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under this system,
assessments are set within a range, based on the risk the institution poses to
its deposit insurance fund. This risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures in the past years, the reserves of the SAIF fell below the level
required by law. As a result, deposit insurance premiums for deposits insured
by the BIF (which met its required reserve level) were substantially less than
premiums for
58
deposits such as ours which are insured by the SAIF. In order to recapitalize
the SAIF and to eliminate the BIF-SAIF premium disparity, in November 1996 the
FDIC imposed a one-time special assessment equal to $0.657 per $100 of SAIF-
assessable deposits held at March 31, 1995, on institutions with deposits
insured by the SAIF. We recognized this special assessment of $182,000 during
fiscal 1996.
As a result, beginning January 1, 1997, our annual deposit insurance
premium was reduced from 0.23% to .064% of total assessable deposits. However,
BIF institutions still pay lower assessments than comparable SAIF institutions
because BIF institutions pay only 20% of the rate being paid by SAIF
institutions on their deposits with respect to obligations issued by the
Financing Corp., a federally chartered corporation which provided some of the
financing required to resolve the thrift crisis in the 1980s.
The recapitalization plan also provides for the merger of the SAIF and BIF
to be effective January 1, 1999, assuming no savings institutions exist under
federal law at that time. Under separate proposed legislation, Congress is
considering the elimination of the federal thrift charter and the separate
federal regulation of thrifts. As a result, we might have to convert to a
different financial institution charter and be regulated under federal law as a
national bank or under Maryland law as a state chartered commercial bank,
including being subject to the more restrictive activity limitations imposed on
national banks. We cannot predict the impact of our conversion to, or
regulation as, a bank until the legislation requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to at
least 1.5 % of total adjusted assets, (2) core capital equal to at least 3.0% of
total adjusted assets, and (3) risk-based capital equal to at least 8.0% of
total risk-weighted assets. In addition, the OTS may require that a savings
institution that has a risk-based capital ratio less than 8.0%, a ratio of Tier
1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital
to adjusted total assets of less than 4.0% (3.0% if the institution has received
the highest rating on its most recent examination) take certain actions to
increase its capital ratios. If the institution's capital is significantly
below the minimum required levels or if it is unsuccessful in increasing its
capital ratios, the OTS may significantly restrict its activities.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders'
equity (including retained earnings), non-cumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries,
certain non-withdrawable accounts and pledged deposits of mutual savings
associations and qualifying supervisory goodwill, less non-qualifying intangible
assets, certain mortgage servicing rights and certain investments. Tier 1 has
the same definition as core capital.
Risk-based capital equals the sum of core capital plus supplementary
capital. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term
59
preferred stock, and the portion of the allowance for loan losses not designated
for specific loan losses. Overall, supplementary capital is limited to 100% of
core capital. A savings institution must calculate its risk-weighted assets by
multiplying each asset and off-balance sheet item by various risk factors as
determined by the OTS, which range from 0% for cash to 100% for delinquent
loans, property acquired through foreclosure, commercial loans, and other
assets. At December 31, 1997, we were in compliance with all regulatory capital
requirements as is shown on the table below.
Percent
Amount of Assets
------- ---------
(Dollars in thousands)
Tangible capital................ $ 2,894 8.02%
Tangible capital requirement.... 541 1.50
------- -----
Excess........................ $ 2,353 6.52%
======= =====
Core capital.................... $ 2,894 8.02%
Core capital requirement........ 1,082 3.00
------- -----
Excess........................ $ 1,812 5.02%
======= =====
Risk-based capital.............. $ 3,109 17.19%
Risk-based capital requirement.. 1,447 8.00
------- -----
Excess........................ $ 1,662 9.19%
======= =====
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A
savings institution will be considered to have a "normal" level of interest rate
risk exposure if the decline in its net portfolio value after an immediate 200
basis point increase or decrease in market interest rates (whichever results in
the greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less
than $300 million in assets and a risk-based capital ratio above 12% are
generally exempt from filing the interest rate risk schedule with their Thrift
Financial Reports. However, the OTS may require any exempt
60
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers. Due to our size and risk-based capital level, we are
exempt from the interest rate risk component.
At December 31, 1997, we were "well-capitalized" under applicable
regulations.
Dividend and Other Capital Distribution Limitations. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration of
dividends to the Company. The OTS may prohibit the payment of dividends by us to
the Company. In addition, we may not declare or pay a cash dividend on our
capital stock if the effect would be to reduce our regulatory capital below the
amount required for the liquidation account to be established at the time of the
conversion. See "The Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Northfield Federal Savings -- Liquidation Account."
OTS regulations limit upon all capital distributions by savings
institutions, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to stockholders of another institution in a cash-
out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all of its fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100.0% of its net income 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 income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of
December 31, 1997, we qualified as a Tier 1 institution.
In the event our capital falls below our fully phased-in requirement or the
OTS notifies us that we are in need of more than normal supervision, we would
become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose to make a capital distribution, and Tier 2 institutions that propose to
make a capital distribution in excess of the noted safe harbor level, must
obtain OTS approval prior to making such distribution. 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. The OTS has
proposed rules relaxing certain approval and notice requirements for well-
capitalized institutions.
A savings institution is prohibited from making a capital distribution if,
after making the distribution, the savings institution would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
61
Qualified Thrift Lender Test. Savings institutions must meet a Qualified
Thrift Lender test. We must maintain at least 65% of our portfolio assets (total
assets less intangible assets, property we use in conducting our business and
liquid assets in an amount not exceeding 20% of total assets) in Qualified
Thrift Investments to satisfy the test. Qualified Thrift Investments consist
primarily of residential mortgage loans and mortgage-backed and other securities
related to domestic, residential real estate or manufactured housing. The
shares of stock we own in the FHLB of Atlanta also qualify as Qualified Thrift
Investments. Subject to an aggregate limit of 20% of portfolio assets, we may
also count the following as Qualified Thrift Investments: (i) 50% of the dollar
amount of residential mortgage loans originated for sale, (ii) investments in
the capital stock or obligations of any service corporation or operating
subsidiary as long as such subsidiary derives at least 80% of its revenues from
domestic housing related activities, (iii) 200% of the dollar amount of loans
and investments to purchase, construct or develop "starter homes," subject to
certain other restrictions, (iv) 200% of the dollar amount of loans for the
purchase, construction or development of domestic residential housing or
community centers in "credit needy" areas or loans for small businesses located
in such areas, (v) loans for the purchase, construction or development of
community centers, (vi) loans for personal, family, household or educational
purposes, subject to a maximum of 10% of portfolio assets, and (vii) shares of
FHLMC or FNMA stock.
If we satisfy the test, we will continue to enjoy full borrowing privileges
from the FHLB of Atlanta. If we do not satisfy the test we may lose our
borrowing restrictions and be subject to activities and branching restrictions
applicable to national banks. Compliance with the Qualified Thrift Lender test
is determined on a monthly basis in nine out of every 12 months. As of December
31, 1997, we were in compliance with our Qualified Thrift Lender requirement
with approximately 98.79% of our assets invested in Qualified Thrift
Investments.
Transactions With Affiliates. Generally, transactions between a savings
institution and its affiliates are subject to certain limitations. Such
transactions must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Our
affiliates include the Company and any company which would be under common
control with us. In addition, a savings institution may not extend credit to
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of any affiliate that is not a subsidiary. The OTS
has the discretion to treat subsidiaries of savings institution as affiliates on
a case-by-case basis.
Loans to Directors, Executive Officers and Principal Stockholders. Loans
from us to our directors, executive officers and, subsequent to the conversion,
our principal stockholders may not be made on terms more favorable than those
afforded to other borrowers. In addition, we cannot make loans in excess of
certain levels to directors, executive officers or 10% or greater stockholders
(or any of their affiliates) unless the loan is approved in advance by a
majority of our board of
62
directors with any "interested" director not voting. We are also prohibited from
paying any overdraft of any of our executive officers or directors. We are also
subject to certain other restrictions on the amount and type of loans to
executive officers and directors and must annually report such loans to our
regulators.
Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1997, our required liquid
asset ratio was 4% and our actual ratio was 8.9%. Monetary penalties may be
imposed upon institution for violations of liquidity requirements.
Federal Home Loan Bank System. We are a member of the FHLB of Atlanta,
which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
funds deposited by savings institutions and proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB of
Atlanta in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year, or 1/20 of our advances from the FHLB of Atlanta, whichever is
greater. At December 31, 1997, we had $226,000 in FHLB stock, at cost, which
was in compliance with this requirement.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1997, our reserve met the minimum level required by the Federal Reserve
System.
Holding Company Regulation
General. The Company will be required to register and file reports with the
OTS and will be subject to regulation and examination by the OTS. In addition,
the OTS will have enforcement authority over the Company and any non-savings
institution subsidiaries. This will permit the OTS to restrict or prohibit
activities that it determines to be a serious risk to us. This regulation is
intended primarily for the protection of our depositors and not for the benefit
of you, as stockholders of the Company.
63
The Company will also be required to file certain reports with, and comply
with the rules and regulations of the SEC under the federal securities laws.
Activities Restrictions. Since the Company will only own one savings
institution, it will be able to diversify its operations into activities not
related to banking, but only so long as we satisfy the Qualified Thrift Lender
Test. If the Company controls more than one savings institution, it would lose
the ability to diversify its operations into non-banking related activities,
unless such other savings institutions each also qualify as a Qualified Thrift
Lender and were acquired in a supervised acquisition. See "-- Qualified Thrift
Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other savings institution or savings and
loan holding company, substantially all the assets thereof or in excess of 5% of
the outstanding shares of another savings institution or savings and loan
holding company. The Company's directors and officers or persons owning or
controlling more than 25% of the Company's stock, must also obtain approval of
the OTS before acquiring control of any savings institution or savings and loan
holding company.
The OTS may only approve acquisitions that will result in the formation of
a multiple savings and loan holding company which controls savings institutions
in more than one state if: (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
in the state of the institution to be acquired as of March 5, 1987; (ii) the
acquiror is authorized to acquire control of the savings institution pursuant to
the emergency acquisition provisions of the Federal Deposit Insurance Act; or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
Federal Securities Law. The Company has filed with the SEC a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
for the registration of the common stock. Upon completion of the conversion,
the common stock will be registered with the SEC under the Exchange Act and,
under OTS regulations, generally may not be deregistered for at least three
years thereafter. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
The registration under the Securities Act of the common stock does not
cover the resale of such shares. Shares of the common stock purchased by persons
who are not affiliates of the Company may generally be resold without
registration. Shares purchased by an affiliate of the Company will be subject to
certain resale restrictions. An affiliate is a person who directly, or
indirectly through one or more intermediaries, controls, or controlled by, or is
under common control with the Company. As long as the Company meets the current
public information requirements, each affiliate of the Company who complies with
the other conditions would be able to sell a limited number of shares based upon
the number of shares outstanding and the average trading volume for the common
stock.
64
TAXATION
Federal Taxation
We are subject to the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), in the same general manner as other corporations.
However, prior to August 1996, savings institutions such as us, which met
certain definitional tests and certain other conditions prescribed by the Code
could benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The amount of
the bad debt deduction that a qualifying savings institution could claim for tax
purposes with respect to additions to its reserve for bad debts for "qualifying
real property loans" could be based upon our actual loss experience (the
"experience method") or as a percentage of our taxable income (the "percentage
of taxable income method"). Historically, we used the method that would allow
us to take the largest deduction.
In August 1996, the Code was revised to equalize the taxation of savings
institutions and banks. Savings institutions, such as us, no longer have a
choice between the percentage of taxable income method and the experience method
in determining additions to bad debt reserves. Thrifts with $500 million of
assets or less may still use the experience method, which is generally available
to small banks currently. Larger thrifts may only take a tax deduction when a
loan is actually charged off. Any reserve amounts added after 1987 will be
taxed over a six year period beginning in 1996; however, bad debt reserves set
aside through 1987 are generally not taxed. A savings institution may delay
recapturing into income its post-1987 bad debt reserves for an additional two
years if it meets a residential-lending test. This law is not expected to have
a material impact on us. At December 31, 1997, we had $136,602 of post-1987 bad-
debt reserves.
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution (including distributions
made on dissolution or liquidation), unless we include the amount in income,
along with the amount deemed necessary to pay the resulting federal income tax.
If such amount is used for any purpose other than bad debt losses, including a
dividend distribution or a distribution in liquidation, it will be subject to
federal income tax at the then current rate.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMT is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, our AMT is increased by an amount equal to 75% of the amount by which our
adjusted current earnings exceeds our AMT (determined without regard to this
adjustment and prior to reduction for net operating losses). In tax years
beginning after December 31, 1997 a "small" corporation will not be subject to
the AMT because its tentative minimum tax will be treated as zero. For a tax
year beginning in 1998, a corporation that has had average annual gross receipts
of corporation. Once a corporation is recognized as a small corporation, it will
continue to be exempt from AMT as long as its average annual gross receipts for
the prior 3-year period is not in excess of $7,500,000. If a corporation ceases
to be a small corporation, the AMT will apply prospectively only.
65
The Company may exclude from its income 100% of dividends received from us
as a member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company owns more than 20% of the
stock of a corporation paying a dividend. The above exclusion amounts, with the
exception of the affiliated group figure, were reduced in years in which we
availed our self of the percentage of taxable income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS in the last
ten years.
State Taxation
We will continue to be subject to Maryland corporation income tax which is
7%. The Company is incorporated under Maryland law.
MANAGEMENT OF THE COMPANY
Our board of directors consists of the same individuals who serve as
directors of Northfield Federal Savings. Our articles of incorporation and
bylaws require that directors be divided into three classes, as nearly equal in
number as possible. Each class of directors serves for a three-year period,
with approximately one-third of the directors elected each year. Our officers
will be elected annually by the board and serve at the board's discretion.
The following individuals will serve as executive officers of the Company.
Name Position(s) with the Company
---- ----------------------------
G. Ronald Jobson President and Chief Executive Officer
John P. Sabol, Jr. Vice President/Treasurer/Chief Financial Officer
J. Thomas Hoffman Secretary
66
MANAGEMENT OF NORTHFIELD FEDERAL SAVINGS
Directors and Executive Officers
Our board of directors is composed of six members, each of whom serves for
a term of three years. Our proposed stock charter and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Each class of directors serves for a three-year period, with approximately one-
third of the directors elected each year. Our officers are elected annually by
our board and serve at the board's discretion.
The following table sets forth information with respect to our directors and
executive officers, all of whom will continue to serve in the same capacities
after the conversion.
Age as of Positions(2) Director Term
Name December 31, 1997 with the Bank Since Expires
- ---- ----------------- ------------- ----- -------
Gary R. Bozel 40 Chairman of the 1985 2001
Board
G. Ronald Jobson 61 President, 1994 2000
Chief Executive
Officer and Director
J. Thomas Hoffman 50 Secretary and 1983 2000
Director
E. Thomas Lawrence, Jr. 43 Director 1994 1999
David G. Rittenhouse 81 Director 1974 1999
William R. Rush 41 Director 1983 2001
Executive Officers Who Are Not Directors
- ----------------------------------------
Anthony B. Quigley 60 Vice President
John P. Sabol, Jr. 32 Vice President,
Chief Financial
Officer and Treasurer
The business experience for the past five years of each of the directors
and executive officers is as follows:
Gary R. Bozel is a self-employed certified public accountant practicing in
Towson, Maryland. He has served as our Chairman of the Board since 1996 and
served as our President from 1993 to 1996. He is a member of the board of
directors and finance committee of the Towson Golf and Country Club.
67
G. Ronald Jobson has been our President and Chief Executive Officer since
1996. From 1984 to that time, he served as our Executive Vice President and
Chief Executive Officer. He is active with the Country Club of Maryland and
Parkville American Legion Post 184.
J. Thomas Hoffman serves as our Secretary and is a self-employed sales
consultant of financial products in Towson, Maryland. Mr. Hoffman is also a
registered representative with John Hancock Financial Distributors Services,
Inc., and is a member of the Parkville Optimist Club and Towson Business
Association.
E. Thomas Lawrence, Jr., is a painting contractor with Preferred Painting &
Wall Covering Services, Inc., located in Fallston, Maryland; from 1972 to July
1995 he was Vice President of Painting Services, Inc. in Baltimore, Maryland.
David G. Rittenhouse is the chief executive officer of the Rittenhouse Fuel
Company, a heating oil, heat and air conditioning servicer located in Baltimore,
Maryland.
William R. Rush is a teacher and director of summer programs at the
McDonogh School. Prior to 1997, Mr. Rush was a real estate appraiser and owner
of a bar and restaurant in Parkville, Maryland. He is a member of the Maryland
Association of Physical Education, Health, Recreation & Dance, the Maryland
State Youth Soccer Association and Senior Olympics.
Anthony B. Quigley has been employed by us since 1984 and currently serves
as our Vice President, Security Officer and Savings Compliance Officer. He is a
member of the Glen Burnie Park Improvement Association and the Holy Trinity
Roman Catholic Church.
John P. Sabol, Jr. has been employed with us since February 1993. He
began his employment with us as a management trainee and, in November 1997, was
appointed as our Vice President and Chief Financial Officer. He is a member of
the Financial Managers Society.
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the board
and through activities of its committees. During the year ended December 31,
1997, the board of directors held 26 regular meetings and two special meetings.
No director attended fewer than 75% of the total meetings of the board of
directors and committees on which such director served during the year ended
December 31, 1997.
Director Compensation
Our board meets twice per month. Each of the directors is paid an annual
fee of $5,400. Total aggregate fees paid to the current directors, including a
$6,000 year-end bonus paid to each director, for the year ended December 31,
1997 were $68,635.
68
Deferred Compensation Plan. We adopted the Northfield Federal Savings
Deferred Compensation Plan, effective December 24, 1997 for our directors and
select executive officers. On the effective date, we established a bookkeeping
account in the name of each participant. On December 31, 1997, each director's
account was credited with an amount equal to the product of (i) $2,500, and (ii)
the director's full years of service as a director, up to 10 years. In
recognition of their accrued years of service for us, the accounts of Messrs.
Bozel, Hoffman, Jobson, Lawrence, Rittenhouse and Rush were credited with
$25,000, $25,000, $7,500, $7,500, $25,000 and $25,000, respectively. Under the
plan, before each calendar year begins, each non-employee director may elect to
defer receipt of all or part of his future fees and any other participant may
elect to defer receipt of up to 25% of his salary or 100% of his bonus
compensation for the year. Deferred amounts are credited at the end of the
calendar year to the participant's account. All amounts credited to
participants' accounts are fully vested at all times. Until distributed in
accordance with the terms of the plan, each participant's account will be
credited with a rate of return equal to our highest rate of interest paid on our
one-year certificates of deposit. Following the conversion, each participant
may prospectively elect to have his account credited with either the highest
return paid by us on our one-year certificates of deposit or the total return on
the common stock of our holding company.
Each participant may elect to receive plan benefits in a lump sum or in
equal annual payments over a period of years designated by the participant. In
the absence of an election the participant will receive payments in five
substantially equal installments. In the event of a participant's death, the
balance of his plan account will be paid in a lump sum (unless the participant
elects to continue the previously designated distribution method) to his
designated beneficiary, or if none, his estate.
Any compensation accrued under the plan will be paid from our general
assets. We have established a trust in order to hold assets with which to pay
compensation. Trust assets would be subject to claims of our general creditors.
In the event a participant prevails over us in a legal dispute as to the terms
or interpretation of the plan, he would be reimbursed for his legal and other
expenses. Upon the implementation of the plan, we recognized compensation
expense totaling $115,000 to provide for participants' initial account balances.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
December 31, 1997. No other employee earned in excess of $100,000 for the year
ended December 31, 1997.
Annual Compensation
---------------------------------
Other Annual All Other
Name Year Salary Bonus Compensation(1) Compensation(2)
- ---- ---- ------ ----- --------------- ---------------
G. Ronald Jobson 1997 $ 58,000 $ 8,000 $ 11,400 $ 6,515
- -----------
(1) Consists of director fees.
(2) Consists of 401-k Plan contribution ($3,300) and country club fees
($3,215).
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Employment Agreement. We have entered into an employment agreement with our
President, Ronald Jobson. Mr. Jobson's base salary under the employment
agreement is $75,000. The employment agreement has a term of 12 months. The
agreement is terminable by us for "just cause" as defined in the agreement. If
we terminate Mr. Jobson without just cause or if Mr. Jobson terminates his
employment for "good reason", Mr. Jobson will be entitled to a continuation of
his salary for a period of 12 months following the date of termination. The
employment agreement also contains a provision stating that in the event of the
termination of employment in connection with any change in control of the
Company or us within the first 12 months of the agreement, Mr. Jobson will be
paid a lump sum amount equal to his base salary for the remainder of the 12
month period and 1.99 times his base salary for a 12 month period. If the
termination in connection with a change in control occurs between the first and
second years of the agreement, Mr. Jobson will be paid a lump sum equal to his
base salary for the remainder of the 12 month period and .99 times his base
salary for a 12 month period. If the termination in connection with a change in
control occurs at any other time, Mr. Jobson will be paid his base salary for
the remainder of the 12 month period. If such payments had been made under the
agreement as of March 31, 1998, such payments would have equaled approximately
$_______. The aggregate payments that would have been made to Mr. Jobson would
be an expense to us, thereby reducing our net income and our capital by that
amount. The agreement may be renewed annually by our board of directors upon a
determination of satisfactory performance within the board's sole discretion. If
Mr. Jobson shall become disabled during the term of the agreement, he shall
continue to receive payment of 100% of the base salary and benefits through the
date of termination. Such payments shall not be reduced by any other benefit
payments made under other disability program in effect for our employees. If Mr.
Jobson's employment terminates, he will be entitled to purchase from us family
medical insurance through any group health plan maintained by us.
Employee Stock Ownership Plan. We have established the ESOP for the
exclusive benefit of participating employee of ours, to be implemented upon the
completion of the conversion. Participating employees are employees who have
completed one year of service with us (including at least 1,000 hours of
service) and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash.
In accordance with the Plan, the ESOP may borrow funds with which to acquire up
to 8.0% of the common stock to be issued in the conversion. The ESOP intends to
borrow funds from the Company. The loan is expected to be for a term of 12
years at an annual interest rate equal to the prime rate plus one percentage
point, adjusted annually on each January 1st. Presently it is anticipated that
the ESOP will purchase up to 8.0% of the common stock to be issued in the
offering (36,000 shares based on the midpoint of the Estimated Valuation Range).
The loan will be secured by the shares purchased. Shares purchased with such
loan proceeds will be held in a suspense account for allocation among
participants as the loan is repaid. We anticipate contributing approximately
$______ annually (based on a 36,000 purchase) to the ESOP to meet principal
obligations under the ESOP loan, as proposed. It is anticipated that all such
contributions will be tax-deductible. This loan is expected to be fully repaid
in approximately 12 years.
Shares sold above the maximum of the Estimated Valuation Range (i.e., more
than 517,500 shares) may be sold to the ESOP before satisfying remaining
unfilled orders of Eligible Account Holders to fill the ESOP's subscription or
the ESOP may purchase some or all of the shares covered by its subscription
after the conversion in the open market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation,
excluding bonuses. All participants must be employed at least 500 hours in a
plan year in order to receive an allocation. Participants will become 20%
vested in their ESOP account balances for each year of service beginning with
the first year of service, up to a maximum of 100% for five years of service.
Vesting will be accelerated upon retirement, death, disability, change in
control of the Company, or termination of the ESOP. Forfeitures will be
reallocated to participants on the same basis as other contributions in the plan
year. Benefits will be payable in the form of a lump sum upon retirement,
death, disability or separation from service. Our contributions to the ESOP are
discretionary and may cause a reduction in other forms of compensation.
Therefore, benefits payable under the ESOP cannot be estimated.
70
In the event of a change in control of us, the outstanding balance of any
loans used to finance the purchase of shares by the ESOP will be payed off
through a transfer or sale of shares held as collateral under such loan, with
any remaining shares allocated to participant accounts pro rata based on their
account balances. Participants terminating employment on or after the change in
control will be entitled to receive a cash payment from the Company equal to the
amount, if any, which would have been allocated to the participant's account
immediately following the change in control but was precluded from allocation
based on allocation limits applicable under federal tax laws.
The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the board of directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
Proposed Future Stock Benefit Plans
Stock Option Plan. We intend to adopt a stock option plan (the Option
Plan) following the conversion, subject to approval by the Company's
stockholders, at a stockholders' meeting which we currently expect to be held no
sooner than one year after the conversion. However, the Company may hold a
stockholders' meeting as soon as six months after the conversion to adopt the
Option Plan. If the Option Plan is adopted during the first year following the
conversion, the Option Plan would be in compliance with the OTS conversion
regulations in effect. See "-- Restrictions on Stock Benefit Plans." If the
Option Plan is implemented more than one year after the conversion, which we
expect, the Option Plan will comply with OTS regulations and policies that are
applicable at such time. If the Option Plan is implemented within one year
after the conversion, in accordance with OTS regulations, a number of shares
equal to 10% of the aggregate shares of common stock to be issued in the
offering (i.e., 45,000 shares based upon the sale of 450,000 shares at the
midpoint of the Estimated Valuation Range) would be reserved for issuance by the
Company upon exercise of stock options to be granted to our officers, directors
and employees from time to time under the Option Plan. The purpose of the
Option Plan would be to provide additional performance and retention incentives
to certain officers, directors and employees by facilitating their purchase of a
stock interest in the Company. Under the OTS conversion regulations, the Option
Plan, would provide for a term of 10 years, after which no awards could be made,
unless earlier terminated by the board of directors pursuant to the Option Plan
and the options would vest over a five year period (i.e., 20% per year),
beginning one year after the date of grant of the option. Options would expire
no later than 10 years from the date granted and would expire earlier if the
Option Committee so determines or in the event of termination of employment.
Options would be granted based upon several factors, including seniority, job
duties and responsibilities, job performance, our financial performance and a
comparison of awards given by other savings institutions converting from mutual
to stock form.
71
The Company would receive no monetary consideration for the granting of
stock options under the Option Plan. It would receive the option price for each
share issued to optionees upon the exercise of such options. Shares issued as a
result of the exercise of options will be either authorized but unissued shares
or shares purchased in the open market by the Company. However, no purchases in
the open market will be made that would violate applicable regulations
restricting purchases by the Company. The exercise of options and payment for
the shares received would contribute to the equity of the Company.
Management Recognition Plan. We intend to adopt the MRP following the
conversion, the objective of which is to enable us to retain personnel and
directors of experience and ability in key positions of responsibility. The
Company expects to hold a stockholders' meeting no sooner than one year after
the conversion in order for stockholders to vote to approve the MRP, but may
elect instead to hold a stockholders' meeting as early as six months after the
conversion. If the MRP is implemented within one year after the conversion, in
accordance with applicable OTS regulations, the shares granted under the MRP
will be in the form of restricted stock vesting over a five year period (i.e.,
20% per year) beginning one year after the date of grant of the award.
Additionally, the number of shares to be granted could not exceed 4% of the
shares sold in the conversion if the MRP is adopted during the first year
following conversion. If the MRP is implemented more than one year after the
conversion, the MRP will comply with such OTS regulations and policies that are
applicable at such time. Compensation expense in the amount of the fair market
value of the common stock granted will be recognized pro rata over the years
during which the shares are payable. Until they have vested, such shares may
not be sold, pledged or otherwise disposed of and are required to be held in
escrow. Any shares not so allocated would be voted by the MRP Trustees. Awards
would be granted based upon a number of factors, including seniority, job duties
and responsibilities, job performance, our performance and a comparison of
awards given by other institutions converting from mutual to stock form. The
MRP would be managed by a committee of non-employee directors (the "MRP
Trustees"). The MRP Trustees would have the responsibility to invest all funds
contributed by us to the trust created for the MRP (the "MRP Trust").
We expect to contribute sufficient funds to the MRP so that the MRP Trust
can purchase, in the aggregate, up to 4% of the amount of common stock that is
sold in the conversion. The shares purchased by the MRP would be authorized but
unissued shares or would be purchased in the open market. Whether such shares
will be purchased in the open market or newly issued of the Company, and the
timing of such purchases, will depend on market and other conditions and the
alternative uses of capital available to the Company. In the event the market
price of the common stock is greater than $10.00 per share, our contribution of
funds will be increased. Likewise, in the event the market price is lower than
$10.00 per share, our contribution will be decreased. In recognition of their
prior and expected services to us and the Company, as the case may be, the
officers, other employees and directors responsible for implementation of the
policies adopted by the board of directors and our profitable operation will,
without cost to them, be awarded stock under the MRP. Based upon the sale of
450,000 shares of common stock in the offering at the midpoint of the Estimated
Valuation Range, the MRP Trust is expected to purchase up to 18,000 shares of
common stock.
72
Restrictions on Stock Benefit Plans. OTS regulations provide that in the
event we implement stock option or management and/or employee stock benefit
plans within one year from the date of conversion, such plans must comply with
the following restrictions: (i) the plans must be fully disclosed in the
prospectus, (ii) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
conversion, (iii) or restricted stock plans such as the MRP, the shares may not
exceed 3% of the shares issued in the conversion (4% for institutions with 10%
or greater tangible capital), (iv) the aggregate amount of stock purchased by
the ESOP in the conversion may not exceed 10% (12% for well-capitalized
institutions utilizing a 4% management recognition plan), (v) no individual
employee may receive more than 25% of the available awards under the Option Plan
or the MRP, (vi) directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan, (vii) all
plans must be approved by a majority of the total votes eligible to be cast at
any duly called meeting of the Company's stockholders held no earlier than six
months following the conversion, (viii) for stock option plans, the exercise
price must be at least equal to the market price of the stock at the time of
grant, (ix) for restricted stock plans such as the MRP, no stock issued in a
conversion may be used to fund the plan, (x) neither stock option awards nor
restricted stock awards may vest earlier than 20% as of one year after the date
of stockholder approval and 20% per year thereafter, and vesting may be
accelerated only in the case of disability or death (or if not inconsistent with
applicable OTS regulations in effect at such time, in the event of a change in
control), (xi) the proxy material must clearly state that the OTS in no way
endorses or approves of the plans, and (xii) prior to implementing the plans,
all plans must be submitted to the Regional Director of the OTS within five days
after stockholder approval with a certification that the plans approved by the
stockholders are the same plans that were filed with and disclosed in the proxy
materials relating to the meeting at which stockholder approval was received.
Certain Related Transactions
During the year ended December 31, 1997, certain of our officers and
directors had loans from us totaling approximately $618,000. All of such loans
were made in the ordinary course of business, were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more
than the normal risk of collectibility or present other unfavorable features.
RESTRICTIONS ON ACQUISITIONS OF THE COMPANY
The following discussion is a general summary of the material provisions of
the articles of incorporation and bylaws of the Company and certain other
Maryland corporate law and regulatory provisions, which may be deemed to have
such an anti-takeover effect. The description of these provisions is
necessarily general and we refer you, in each case, to the articles of
incorporation and bylaws of the Company which are incorporated herein by
reference. See "Available Information" as to how to obtain a copy of these
documents.
73
While our board of directors is not aware of any effort that might be made
to obtain control of the Company after conversion, our board of directors
believes that it is appropriate to include certain provisions as part of the
Company's articles of incorporation and bylaws to protect the interests of the
Company and its stockholders from hostile takeovers ("anti-takeover"provisions)
which the board of directors might conclude are not in the best interests of us
or our stockholders. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the board of directors but
which individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over the 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.
Provisions of the Company's Articles of Incorporation and Bylaws
Restriction on Acquisition of Common Stock; Limitations on Voting Rights.
The charter of the Company provides that, for a period of five years after
completion of the conversion, no person may directly or indirectly, acquire or
offer to acquire beneficial ownership of more than 10% of any class of equity
security outstanding of the Company (the "Limit"), unless the "continuing" board
of directors has first approved by a two-thirds vote the offer or acquisition.
Any shares acquired in violation of this restriction will not be counted as
shares outstanding for voting purposes, nor will the holder be entitled to vote
such shares. After five years from the date of conversion, should any party
acquire the beneficial ownership of shares in excess of 10%, the record holders
of more than 10% of any outstanding class of equity security of the Company who
obtained such shares without the requisite approval would be entitled to cast
only one-hundredth (1/100) of a vote for each share owned in excess of 10%, and
the aggregate voting power of such holders shall be allocated proportionately
among such record holders. A person is a beneficial owner of a security if he
has the power to vote or direct the voting of all or part of the voting rights
of the security, or has the power to dispose of or direct the disposition of the
security. The Company's articles of incorporation further provide that this
provision limiting voting rights may only be amended upon the vote of 80% of the
outstanding shares of voting stock.
Election of Directors. The Company's articles of incorporation provide that
the board of directors of the Company will be divided into three staggered
classes, with directors in each class elected for three-year terms. As a result
of this provision, it would take two annual elections to replace a majority of
the Company's board. The Company's articles of incorporation provide that the
size of the board of directors may be increased or decreased only if two-thirds
of the directors then in office concur in such action. The articles of
incorporation also provide that any vacancy occurring in the board of directors,
including a vacancy created by an increase in the number of directors, shall be
filled for the remainder of the unexpired term by a majority vote of the
directors then in office. Finally, the articles of incorporation and the bylaws
impose certain notice and information requirements in connection with the
nomination by stockholders of candidates for election to the board of directors
or the proposal by stockholders of business to be acted upon at an annual or
special meeting of stockholders.
74
The articles of incorporation provide that a director may only be removed
for cause by the affirmative vote of at least 80% of the shares of the Company
entitled to vote generally in an election of directors cast at a meeting of
stockholders called for that purpose.
Restrictions on Call of Special Meeting. The articles of incorporation of
the Company provide that a special meeting of stockholders may be called only
pursuant to a resolution adopted by a majority of the board of directors, or a
committee of the board. Stockholders may call a special meeting only if 25% of
the outstanding shares entitled to vote on the matter for which the meeting is
called.
Absence of Cumulative Voting. The Company's articles of incorporation
provides that stockholders may not cumulate their votes in the election of
directors.
Authorized Shares. The articles of incorporation authorizes the issuance of
8,000,000 shares of common stock and 2,000,000 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 the
exercise of 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 its 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 of the Company and thereby assist management to retain
its position. The Company's board currently has no plans for the issuance of
additional shares, other than the possible issuance of additional shares
pursuant to stock benefit plans.
Procedures for Certain Business Combinations. The articles of
incorporation require the affirmative vote of at least 80% of the outstanding
shares of the Company in order for the Company to engage in or enter into
certain "Business Combinations," as defined therein, with any "Related Party"
(as defined below) or any affiliates of the "Related Party", unless the proposed
transaction has been approved in advance by a two-thirds vote of the Company's
board of directors, excluding those who were not directors prior to the time the
"Related Party" became the "Related Party." Absent this provision, only the
approval of a majority of the shares outstanding would be required.
The term "Related Party" is defined to include any person and the
affiliates and associates of the person (other than the Company or its
subsidiary) who beneficially owns, directly or indirectly, 10% or more of the
outstanding shares of voting stock of the Company. Any amendment to this
provision requires the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors.
75
Amendment to Articles of Incorporation and Bylaws. Amendments to the
Company's articles of incorporation must be approved by the Company's board of
directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock of the Company entitled to vote in the election of
directors is generally required for certain provisions (i.e., provisions
relating to restrictions on the acquisition and voting of greater than 10% of
the common stock; number, classification, election and removal of directors;
amendment of bylaws; call of special stockholder meetings; director liability;
certain business combinations; power of indemnification; and amendments to
provisions relating to the foregoing in the articles of incorporation).
The bylaws may be amended by a majority vote of the board of directors or
the affirmative vote of the holders of at least 80% of the outstanding shares of
the Company entitled to vote in the election of directors cast at a meeting
called for that purpose.
Maryland General Corporation Law
The Maryland General Corporation Law contains several provisions designed
to provide Maryland corporations with additional protections against hostile
takeovers.
The Maryland Business Combination Statute restricts certain transactions
between a Maryland corporation and a holder, directly or indirectly, of 10% or
more of the corporation's outstanding voting stock (an "interested
stockholder"). For a period of five years following the date that a stockholder
becomes an interested stockholder, Maryland's Business Combination Statute
prohibits the following types of transactions between the corporation and the
interested stockholder (unless certain conditions, described below, are met):
(i) mergers or consolidations; (ii) sales, leases, exchanges or other
dispositions other than in the ordinary course of business or pursuant to a
dividend, in any twelve-month period, of assets having an aggregate book value
of 10% or more of the total market value of the outstanding stock of the
corporation or of its net worth; (iii) issuances or transfers by the corporation
or any subsidiary thereof of any equity securities of the corporation or any
subsidiary thereof having a market value of 5% or more of the total market value
of the outstanding stock of the corporation to any interested stockholder or
affiliate of any interested stockholder; (iv) the adoption of a proposal or plan
of liquidation or dissolution of the corporation in which anything other than
cash will be received by an interested stockholder or any affiliate of any
interested stockholder; (v) any reclassification of securities, or
recapitalization of the corporation, or any merger, consolidation, or share
exchange of the corporation with any of its subsidiaries which has the effect of
increasing by 5% or more of the total number of outstanding shares, the
proportionate amount of the outstanding shares of any class of equity securities
of the corporation or any subsidiary thereof which is owned by an interested
stockholder or any affiliate of an interested stockholder; and (vi) the receipt
by any interested stockholder or any affiliate thereof of the benefit, directly
or indirectly, (except proportionately as a stockholder) of any loan, advance,
guarantee, pledge, or other financial assistance or any tax credit or other tax
advantage provided by the corporation or any of its subsidiaries. Additionally,
after the five-year prohibition on business combinations has expired, a business
combination must (i) be recommended by the board of
76
directors and approved by (a) 80% of the votes entitled to be cast, and (b) two-
thirds of the votes cast by disinterested stockholders, or (ii) meet the
rigorous fair price requirements of the Statute, or (iii) qualify for one of the
statutory exemptions. This restriction does not apply if before such person
becomes an interested stockholder, the board of directors approves the
transaction in which the interested stockholder becomes an interested
stockholder or approves the business combination, or a statutory exemption
applies. A Maryland corporation may exempt itself from the requirements of the
statute in its articles of incorporation. However, our holding company has not
exempted itself from the provisions of this Statute.
The Maryland Control Share Acquisition Statute prohibits a person who
acquires over specified limits of shares of our holding company (that is, 20%,
33 1/3 or 50% of its outstanding shares) from voting those shares in excess of
each specified limited unless two-thirds of our holding company's disinterested
stockholders vote to approve voting rights for the excess shares. A Maryland
corporation may include a provision in its articles of incorporation or bylaws
exempting the corporation from Maryland's Control Share Acquisition Statute.
Our holding company, however, has not exempted itself from the provisions of
Maryland's Control Share Acquisition Statute.
Benefit Plans
In addition to the provisions of the Company's articles of incorporation
and bylaws described above, certain benefit plans of ours adopted in connection
with the conversion contain provisions which also may discourage hostile
takeover attempts which the boards of directors might conclude are not in the
best interests for us or our stockholders. For a description of the benefit
plans and the provisions of such plans relating to changes in control, see
"Management of Northfield Federal Savings -- Proposed Future Stock Benefit
Plans."
Regulatory Restrictions
For three years following conversion, OTS regulations prohibit any person,
without the prior approval of the OTS, from acquiring or making an offer to
acquire more than 10% of the stock of any converted savings institution if such
person is, or after consummation of such acquisition would be, the beneficial
owner of more than 10% of such stock. 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 matter submitted to a vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of
77
the voting shares of a savings association or the power to control in any manner
the election of a majority of the directors of such institution.
Federal law also 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 association unless at least 60 days prior written notice has been
given to the OTS and the OTS has not objected to the proposed acquisition.
Control is defined for this purpose as the power, directly or indirectly, to
direct the management or policies of a savings association or to vote more than
25% of any class of voting securities of a savings association. Under federal
law (as well as the regulations referred to below) the term "savings
association" includes state-chartered and federally chartered SAIF-insured
institutions, federally chartered savings and loans and savings banks whose
accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an insured
institution, a person, other than a company, must give 60 days notice to the OTS
and have received no OTS objection to such acquisition of control, and a company
must apply for and receive OTS approval of the acquisition. Control, involves a
25% voting stock test, control in any manner of the election of a majority of
the institution's directors, or a determination by the OTS that the acquiror has
the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of an institution's voting stock, if the acquiror also is subject
to any one of either "control factors," constitutes a rebuttable determination
of control under the regulations. The determination of control may be rebutted
by submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 8,000,000 shares of the common stock,
$0.01 par value per share, and 2,000,000 shares of preferred stock, $0.01 par
value per share. The Company currently expects to issue up to 595,125 shares of
common stock in the conversion. The Company does not intend to issue any shares
of preferred stock in the conversion, nor are there any present plans to issue
such preferred stock following the conversion. Each share of common stock will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. THE COMMON STOCK OF THE COMPANY WILL
REPRESENT NONWITHDRAWABLE CAPITAL AND WILL NOT BE INSURED BY US, THE FDIC, OR
ANY OTHER GOVERNMENT AGENCY.
78
Common Stock
Voting Rights. Each share of the common stock will have the same relative
rights and will be identical in all respects with every other share of the
common stock. The holders of the common stock will possess exclusive voting
rights in the Company, except to the extent that shares of Preferred Stock
issued in the future may have voting rights, if any. Each holder of the common
stock will be entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the common stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the common stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any Preferred Stock
which may be issued in the future; and (iv) any interests in the liquidation
account established upon the conversion for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders who continue to have their
deposits with us.
Dividends. From time to time, dividends may be declared and paid to the
holders of the common stock, who will share equally in any such dividends. For
information about cash dividends, see "Dividends" and "Taxation."
Restrictions on Acquisition of the Common Stock. See "Restrictions on
Acquisition of the Company" for a discussion of the limitations on acquisition
of shares of the common stock.
Other Characteristics. Holders of the common stock will not have preemptive
rights with respect to any additional shares of the common stock which may be
issued. Therefore, the board of directors may sell shares of capital stock of
the Company without first offering such shares to existing stockholders of the
Company. The common stock is not subject to call for redemption, and the
outstanding shares of common stock when issued and upon receipt by the Company
of the full purchase price therefor will be fully paid and non-assessable.
Serial Preferred Stock
None of the 2,000,000 authorized shares of preferred stock of the Company
will be issued in the conversion. After the conversion is completed, the board
of directors of the Company will be authorized to issue serial preferred stock
and to fix and state voting powers, designations, preferences or other special
rights of such shares and the qualifications, limitations and restrictions
thereof, subject to regulatory approval but without stockholder approval. If
and when issued, the serial preferred stock is likely to rank prior to the
common stock as to dividend rights, liquidation preferences, or both, and may
have full or limited voting rights. The board of directors, without stockholder
approval, can issue serial preferred stock with voting and conversion rights
which could adversely affect the voting power of the holders of the common
stock. The board of directors has no present intention to issue any of the
serial preferred stock.
79
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by Housley
Kantarian & Bronstein, P.C., Washington, D.C. Certain legal matters for
Trident Securities may be passed upon by Thacher Proffitt & Wood, Washington,
D.C. The federal income tax consequences of the conversion have been passed upon
for us by Housley Kantarian & Bronstein, P.C., Washington, D.C. The Maryland
income tax consequences of the conversion have been passed upon for us by
Anderson Associates, LLP.
EXPERTS
The financial statements of Northfield Federal Savings as of December 31,
1997 and 1996, and for the years then ended, have been included herein in
reliance upon the report of Anderson Associates, LLP, independent certified
public accountants, appearing elsewhere herein, and upon authority of said firm
as experts in accounting and auditing.
Ferguson has consented to the publication herein of a summary of its
letters to us setting forth its opinion as to the estimated pro forma market
value of us in the converted form and its opinion setting forth the value of
subscription rights and to the use of its name and statements with respect to it
appearing in this document.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement on Form SB-2
under the Securities Act of 1933, as amended, with respect to the common stock
offered in this document. As permitted by the rules and regulations of the SEC,
this document does not contain all the information set forth in the registration
statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The SEC also maintains an internet address ("Web site") that
contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is "http: //www. sec. gov." The
statements contained in this document as to the contents of any contract or
other document filed as an exhibit to the Form SB-2 describe the material
features of such contract or document but are, of necessity, brief descriptions
and are not necessarily complete; each such statement is qualified by reference
to such contract or document.
Northfield Federal Savings has filed an Application for Conversion with the
OTS with respect to the conversion. Pursuant to the rules and regulations of
the OTS, this document 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 Southeast Regional Office of
the OTS, 1475 Peachtree Street, N.E., Atlanta, Georgia 30309 without charge.
A copy of the articles of incorporation and the bylaws of the Company are
available without charge from Northfield Federal Savings.
80
NORTHFIELD FEDERAL SAVINGS
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report F-1
Statements of Financial Condition as of December 31, 1997 and 1996 F-2
Statements of Operations for the Years Ended December 31, 1997 and 1996 F-3
Statements of Retained Earnings for the Years Ended December 31, 1997 and
1996 F-4
Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 F-5
Notes to Financial Statements F-7
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
Separate financial statements for the Company have not been included since it
will not engage in material transactions until after the conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses or contingent liabilities.
81
[LETTERHEAD OF ANDERSON ASSOCIATES, LLP]
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Northfield Federal Savings
Baltimore, Maryland
We have audited the statements of financial condition of Northfield Federal
Savings as of December 31, 1997 and 1996, and the related statements of
operations, retained earnings and cash flows for each of the two years in the
two year 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Northfield Federal Savings
as of December 31, 1997 and 1996, and the results of its operations and cash
flows for each of the two years in the two year period ended December 31, 1997
in conformity with generally accepted accounting principles.
/s/ Anderson Associates, LLP
February 12, 1998
Baltimore, Maryland
F-1
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
December 31,
------------
1997 1996
---- ----
Assets
------
Cash $ 116,900 $ 172,850
Interest bearing deposits in other banks 3,513,650 5,186,074
Securities available for sale (Note 2) - 196,772
Mortgage backed securities - held to maturity 1,955,008 2,333,119
(fair value $2,010,934 - 1997 and
$2,378,256 - 1996) (Note 3)
Loans receivable, net (note 4) 29,961,032 23,841,394
Accrued interest receivable - loans 149,536 127,180
- investments 25,000 41,157
- mortgage backed
securities 12,693 15,194
Premises and equipment, at cost, less
accumulated depreciation (Note 5) 40,374 52,301
Federal Home Loan Bank of Atlanta stock
at cost (Note 6) 226,400 226,400
Deferred income taxes (Note 10) 26,279 -
Prepaid income taxes (Note 10) - 782
Prepaid expenses and other assets 57,544 34,846
----------- -----------
Total assets $36,084,416 $32,228,069
=========== ===========
Liabilities and Retained Earnings
---------------------------------
Liabilities
- -----------
Deposit accounts (Note 7) $32,621,766 $29,115,850
Advance payments by borrowers for expenses 371,262 316,973
Deferred income taxes (Note 10) - 57,612
Income taxes payable (Note 10) 62,964 2,600
Other liabilities 134,667 5,329
----------- -----------
Total liabilities 33,190,659 29,498,364
Commitments and contingencies - Notes 4 and 5
Retained earnings (substantially restricted) (Note 9) 2,893,757 2,749,226
Net unrealized loss on investment securities
net of tax - (19,521)
----------- -----------
Total retained earnings 2,893,757 2,729,705
----------- -----------
Total liabilities and retained earnings $36,084,416 $32,228,069
=========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
F-2
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
STATEMENTS OF OPERATIONS
------------------------
Years Ended
December 31,
------------
1997 1996
---- ----
Income
- ------
Interest and fees on loans (Note 4) $2,209,375 $1,927,726
Interest on securities available for sale 14,888 15,216
Interest on mortgage backed securities 166,235 161,432
Other interest income 235,958 352,631
---------- ----------
Total interest income 2,626,456 2,457,005
Interest Expense
- ----------------
Interest on deposits (Note 7) 1,473,588 1,394,152
Interest on short-term borrowings 19,973 2,556
---------- ----------
Total interest expense 1,493,561 1,396,708
---------- ----------
Net interest income 1,132,895 1,060,297
Provision for losses on loans (Note 4) 123,270 10,000
---------- ----------
Net interest income after provision
for losses on loans 1,009,625 1,050,297
Non-Interest Income (Loss)
- --------------------------
Loss on sale of securities available for sale (32,321) -
Fees on loans 8,366 7,101
Fees on deposits 14,033 18,978
All other income 7,504 5,359
---------- ----------
Net non-interest income (loss) (2,418) 31,438
Non-Interest Expenses
- ---------------------
Compensation and related expenses 469,637 328,285
Occupancy 63,201 59,397
Deposit insurance 15,238 250,195
Service bureau expense 56,637 55,651
Furniture, fixtures and equipment expense 28,075 31,673
Advertising 30,013 22,412
Other 108,702 95,662
---------- ----------
Total non-interest expenses 771,503 843,275
---------- ----------
Income before tax provision 235,704 238,460
Provision for income tax (Note 10) 91,173 89,581
---------- ----------
Net income $ 144,531 $ 148,879
========== ==========
The accompanying notes to financial statements
are an integral part of these statements.
F-3
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
STATEMENTS OF RETAINED EARNINGS
-------------------------------
FOR YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
-------------------------------------------------------
Net Unrealized
Loss on Investment
Retained Securities Net
Earnings of Tax Total
-------- ------------------ -----
Balance - December 31, 1995 $2,600,347 $(13,946) $2,586,401
Net change in unrealized loss on - (5,575) (5,575)
investment securities
Net income for year ended
December 31, 1996 148,879 - 148,879
---------- -------- ----------
Balance - December 31, 1996 2,749,226 (19,521) 2,729,705
Net change in unrealized loss on
investment securities - 19,521 19,521
Net income for year ended
December 31, 1997 144,531 - 144,531
---------- -------- ----------
Balance - December 31, 1997 $2,893,757 $ - $2,893,757
========== ======== ==========
The accompanying notes to financial statements
are an integral part of these statements.
F-4
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31,
---------------------------
1997 1996
---- ----
Operating Activities
- --------------------
Net income $ 144,531 $ 148,879
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
-----------------------------------------
Net amortization of premiums and accretion of
discounts on certificates of deposit 7,358 11,111
Stock dividends on investments (14,637) (15,216)
Loss on sale of securities available for sale 32,321 -
Net amortization of premiums and accretion of
discounts on mortgage backed securities 2,244 2,272
Loan fees deferred 77,225 59,520
Amortization of deferred loan fees (27,831) (42,971)
Provision for losses on loans 123,270 10,000
(Increase) decrease in accrued interest on loans (22,356) 18,863
Decrease in accrued interest on investments 16,157 16,924
Decrease in accrued interest on mortgage
backed securities 2,501 4,785
Provision for depreciation 18,049 23,299
Increase in deferred income taxes (96,173) (24,888)
Decrease in prepaid income taxes 782 75,664
(Increase) decrease in prepaid expenses and
other assets (22,698) 12,426
Increase (decrease) in accrued interest payable 1,615 (8,351)
Increase in income taxes payable 60,364 2,600
Increase (decrease) in other liabilities 129,338 (25,974)
------------ -----------
Net cash provided by operating activities 432,060 268,943
Cash Flows from Investing Activities
- ------------------------------------
Proceeds from maturing certificates of deposit 970,154 755,037
Purchases of certificates of deposit (150,000) -
Proceeds from sale of securities available for sale 210,891 -
Purchases of mortgage backed securities - (499,063)
Principal collected on mortgage backed securities 375,867 317,970
Longer term loans originated (10,580,784) (6,493,718)
Principal collected on longer term loans 4,012,325 3,412,231
Net decrease in short-term loans 276,157 908,611
Purchases of premises and equipment (6,122) (9,552)
------------ -----------
Net cash used by investing activities (4,891,512) (1,608,484)
F-5
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31,
------------------------
1997 1996
---- ----
Cash Flows from Financing Activities
- ------------------------------------
Net decrease in demand deposits, money market,
passbook accounts and advance payments by
borrowers for taxes and insurance $ (171,777) $ (525,232)
Net increase in certificates of deposit 3,730,367 518,741
---------- -----------
Net cash provided (used) by financing
activities 3,558,590 (6,491)
---------- -----------
Decrease in cash and cash equivalents (900,862) (1,346,032)
Cash and cash equivalents at beginning of year 3,645,304 4,991,336
---------- -----------
Cash and cash equivalents at end of year $2,744,442 $ 3,645,304
========== ===========
Reconciliation of cash and cash equivalents:
Cash $ 116,900 $ 172,850
Interest bearing accounts in other banks 3,513,650 5,186,074
---------- -----------
3,630,550 5,358,924
Less - Certificates of deposit maturing in
90 days or more included in interest
bearing accounts in other banks (886,108) (1,713,620)
----------
Cash and cash equivalents $2,744,442 $ 3,645,304
========== ===========
Supplemental disclosures of cash flows information:
Cash paid during year for:
Interest $1,491,949 $ 1,405,078
Income taxes $ 126,200 $ 68,193
The accompanying notes to financial statements
are an integral part of these statements.
F-6
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 1 - Summary of Significant Accounting Policies
------------------------------------------
Business
--------
The Association's primary business activity is the acceptance of
deposits from the general public in its market area and using the
proceeds for investments and loan originations. The Association is
subject to competition from other financial institutions. The
Association is subject to the regulations of certain federal agencies
and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
-----------------------------------------
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the statement of financial condition and revenues and expenses
for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the
allowance for loan losses. See the discussion below of the
determination of that estimate.
Securities Available for Sale
-----------------------------
Securities available for sale are carried at fair value and
consisted of certain equity securities. Unrealized holding gains and
losses, net of tax, are presented as a separate component of retained
earnings. Gains and losses on the sale of securities available for sale
are determined using the specific identification method.
Mortgage Backed Securities
--------------------------
Mortgage backed securities, including real estate mortgage
investment conduits ("REMICs"), are stated at cost, adjusted for
amortization of premium or discount on purchase, since management has
the intention and ability to hold them to maturity. Amortization is
computed using a method which approximates level yield over the life of
the security. Gains and losses on the sale of investments and mortgage
backed securities are determined using the specific identification
method. See Note 3 for discussion of prepayment risk and recoverability
of mortgage backed securities.
F-7
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Loans Receivable
----------------
Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balance adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
An allowance for loan losses is provided through charges to income
in an amount that management believes will be adequate to absorb losses
on existing loans that may become uncollectible, based on evaluations
of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that
may affect the borrowers' ability to pay. Determining the amount of the
allowance for loan losses requires the use of estimates and
assumptions. Management believes the allowance for losses on loans is
adequate. While management uses available information to estimate
losses on loans, future additions to the allowances may be necessary
based on changes in economic conditions, particularly in the State of
Maryland. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Association's
allowances for losses on loans. Such agencies may require the
Association to recognize additions to the allowances based on their
judgments about information available to them at the time of their
examination. Statement of Financial Accounting Standards ("SFAS") No.
114, as amended by SFAS No. 118 addresses the accounting by creditors
for impairment of certain loans. It is generally applicable for all
loans except large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, including residential mortgage
loans and consumer installment loans. It also applies to all loans that
are restructured in a troubled debt restructuring involving a
modification of terms. SFAS No. 114 requires that impaired loans be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. A loan is considered impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of
the loan agreement.
Accrual of interest is discontinued and previously accrued interest
is reversed against interest income on loans, including impaired loans,
if they are past due as to maturity or payment of principal or interest
for a period of more than ninety days, unless such loans are well-
secured and in the process of collection. When a payment is received on
a loan on non-accrual status including impaired loans the amount
received is allocated to principal and interest in accordance with the
contractual terms of the loan. Loans are returned to accrual status
when principal and interest payments are current, full collection of
principal and interest is reasonably assured and there is a sustained
period of repayment performance (generally six months) by the borrower,
in accordance with the contractual terms of principal and
interest.
F-8
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Premises and Equipment
----------------------
Land is carried at cost, premises and equipment are carried at cost
less accumulated depreciation. Depreciation is computed on the
straight-line method, based on the useful lives of the respective
assets.
Income Taxes
------------
Deferred income taxes are recognized for temporary differences
between the financial reporting basis and income tax basis of assets
and liabilities based on enacted tax rates expected to be in effect
when such amounts are realized or settled. Deferred tax assets are
recognized only to the extent that it is more likely than not that such
amounts will be realized based on consideration of available evidence.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Statement of Cash Flows
-----------------------
In the statement of cash flows, cash and equivalents include cash
and interest bearing deposits in other banks with a maturity date of
less than ninety days.
Reclassification
----------------
Certain prior year's amounts have been reclassified to conform to
the current year's presentation.
Note 2 - Securities Available for Sale
-----------------------------
The Association had no securities available for sale at December 31,
1997. At December 31, 1996, the securities available for sale consisted
of the Association's investment in Lord Abbett U.S. Government
Securities Fund at a cost of $228,575, a gross unrealized loss of
$31,803 and fair value of $196,772.
The Association recognized a loss of $32,321 during the year ended
December 31, 1997 due to the full redemption of securities in the Lord
Abbett U.S. Government Securities Fund. No gains or losses were
realized during the year ended December 31, 1996.
F-9
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 3 - Mortgage Backed Securities
--------------------------
Mortgage backed securities at December 31, 1997 and 1996 consist of
the following:
1997 1996
----------- -----------
GNMA participating certificates $ 815,950 $1,018,329
FNMA participating certificates 46,305 50,525
FHLMC participating certificates 701,770 766,108
REMIC 395,071 500,000
---------- ----------
1,959,096 2,334,962
Net - unamortized premiums and discounts (4,088) (1,843)
---------- ----------
$1,955,008 $2,333,119
========== ==========
The amortized cost and fair value of mortgage backed securities are
as follows as of December 31, 1997 and 1996, respectively.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
December 31, 1997
-------------------------------------------------------
GNMA participating certificates $ 812,201 $49,580 $ - $ 861,781
FNMA participating certificates 46,305 1,048 - 47,353
FHLMC participating certificates 701,431 4,941 2,748 703,624
REMIC 395,071 3,105 - 398,176
---------- ------- ---------- ----------
$1,955,008 $58,674 $ 2,748 $2,010,934
========== ======= ========== ==========
December 31, 1996
-------------------------------------------------------
GNMA participating certificates $1,014,748 $49,024 $ - $1,063,772
FNMA participating certificates 50,525 1,957 - 52,482
FHLMC participating certificates 767,846 1,302 12,571 756,577
REMIC 500,000 5,425 - 505,425
---------- ------- ---------- ----------
$2,333,119 $57,708 $12,571 $2,378,256
========== ======= ========== ==========
No gains or losses were realized during the years ended December 31,
1997 and 1996.
Certain mortgage backed securities including REMICs are subject to
significant prepayments risks. In periods of declining interest rates
mortgages may be repaid more rapidly than anticipated resulting in
greater amortization of premiums and reduced yields. In addition, the
Association may be unable to reinvest at an interest rate comparable to
the rate on the prepaying mortgage backed security. In contrast, in
periods of increasing interest rates, market values of mortgage backed
securities, including
F-10
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 3 - Mortgage Backed Securities - Continued
--------------------------
REMICs, will decline. Since principal payments on REMICs do not
commence upon purchase of the investment, REMICs are more susceptible
to market value fluctuations. Cash flows from the REMICs include
interest only for one or more years and principal and interest payments
thereafter provided by mortgage backed securities guaranteed by FHLMC
or GNMA and backed by residential mortgages. All interest payments on
the Association's REMICs are at fixed rates. Management anticipates
full recoverability to the principal balance of REMICs.
Note 4 - Loans Receivable
----------------
Loans receivable at December 31, 1997 and 1996 consist of the
following:
1997 1996
------------ ------------
One to four family residential mortgage
loans $25,739,458 $19,439,391
Construction loans 2,104,575 2,461,800
Commercial real estate loans 2,805,693 2,195,236
Commercial loan collateralized by lease
finance receivables 741,226 1,017,913
Home equity line of credit loans 177,141 -
Loans secured by deposits 74,142 73,612
----------- -----------
31,642,235 25,187,952
Less
----
Undisbursed portion of loans in process (1,197,270) (1,027,520)
Deferred loan origination fees (268,433) (219,038)
Allowance for losses on loans (215,500) (100,000)
----------- -----------
(1,681,203) (1,346,558)
----------- -----------
$29,961,032 $23,841,394
=========== ===========
Residential lending is generally considered to involve less risk
than other forms of lending, although payment experience on these loans
is dependent to some extent on economic and market conditions in the
Association's lending area. Commercial and construction loan repayments
are generally dependent on the operations of the related properties or
the financial condition of its borrower or guarantor. Accordingly,
repayment of such loans can be more susceptible to adverse conditions
in the real estate market and the regional economy.
A substantial portion of the Association's loans receivable are
mortgage loans secured by residential and commercial real estate
properties located in the state of Maryland. Loans are extended only
after evaluation by management of customers' creditworthiness and other
relevant factors on a case-by-case basis. The Association generally
does not lend more than 90% of the appraised value of a property and
requires private mortgage insurance on residential mortgages with loan-
to-value ratios in excess of 80%. In addition, the Association
generally obtains personal guarantees of repayment from borrowers
F-11
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 4 - Loans Receivable - Continued
----------------
and/or others for construction, commercial and multifamily residential
loans and disburses the proceeds of construction and similar loans only
as work progresses on the related projects.
The commercial loan collateralized by lease finance receivables
represents a loan to a leasing company collateralized by leases
receivable to individuals and businesses secured by personal property
and is primarily dependent upon the financial condition of the borrower
and lessors for repayment.
The following is a summary of the allowance for loan losses for the
years ended December 31:
Balance at December 31, 1995 $ 90,000
Provision for losses on loans 10,000
--------
Balance at December 31, 1996 100,000
Provision for losses on loans 123,270
Charge-offs (7,770)
--------
Balance at December 31, 1997 $215,500
========
A loan is considered impaired when it is probable that the
Association will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans are summarized
as follows for the years ended December 31:
1997 1996
-------- --------
Average recorded investment $270,000 $270,000
Aggregate recorded investment $135,000 $270,000
Allowance for loan losses 1,350 2,700
Interest income recognized during
impairment 9,442 21,513
The Association was not committed to advance any additional amounts
on the above loans at December 31, 1997.
The Association had no non-accrual loans that were not subject to
SFAS No. 114.
The following table presents a summary of the activity with respect
to loans to directors and officers for the years ended December 31,
1997 and 1996, respectively.
1997 1996
--------- ---------
Balance outstanding - beginning of year $498,213 $535,925
New loans 153,900 -
Principal repayments (34,161) (37,712)
-------- --------
Balance outstanding - end of year $617,952 $498,213
======== ========
F-12
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 4 - Loans Receivable - Continued
----------------
The Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financial needs of its customers. Mortgage loan commitments, exclusive
of loans in process not reflected in the accompanying statements at
December 31, 1997, approximate $394,800. These commitments are for
mortgage loans with fixed rates between 7.125% and 11.50% at December
31, 1997. Non-recourse leasing loan commitments not reflected in the
accompanying statements at December 31, 1997 are approximately $64,000
with fixed rates between 10.00% and 10.50%.
The credit risk involved in these financial instruments is
essentially the same as that involved in extending loan facilities to
customers. No amount has been recognized in the statement of financial
condition at December 31, 1997, as a liability for credit loss.
Note 5 - Premises and Equipment
----------------------
Premises and equipment at December 31, 1997 and 1996 are as follows:
1997 1996 Useful Lives
---------- ---------- -------------
Land $ 15,000 $ 15,000 -
Office building and improvements 49,497 49,497 5 to 35 years
Furniture, fixtures and equipment 228,757 222,635 5 to 15 years
--------- ---------
293,254 287,132
Less - accumulated depreciation (252,880) (234,831)
--------- ---------
$ 40,374 $ 52,301
========= =========
The Association has entered into a long-term lease for the premises
of its main office. Rental expense under the lease for the property for
the years ended December 31, 1997 and 1996 was $39,500 and $34,167,
respectively. At December 31, 1997, the minimum rental commitments
under noncancellable operating leases are as follows:
Year Ended December 31,
-----------------------
1998 $ 40,333
1999 42,000
2000 42,000
2001 42,000
2002 42,000
2003 28,000
--------
$236,333
========
F-13
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 6- Investment in Federal Home Loan Bank of Atlanta Stock
-----------------------------------------------------
The Association is required to maintain an investment in the stock
of the Federal Home Loan Bank of Atlanta ("FHLB") in an amount equal to
at least 1% of the unpaid principal balances of the Association's
residential mortgage loans or 1/20 of its outstanding advances from the
FHLB, whichever is greater. Purchases and sales of stock are made
directly with the FHLB at par value.
Note 7 - Deposit Accounts
----------------
Deposit accounts at December 31, 1997 and 1996 consist of the
following:
1997 1996
------------------ ------------------
Amount % Amount %
--------- - --------- -
Demand and NOW accounts including
non-interest bearing deposits of
$338,633 in 1997 and $277,778
in 1996 $ 2,078,419 6.37% $ 2,123,746 7.29%
Money markets 7,816,045 23.96 7,973,913 27.39
Passbook savings 2,604,543 7.99 2,627,415 9.03
Certificates of deposit 20,108,422 61.64 16,378,055 56.25
----------- ------- ----------- ------
32,607,429 99.06 29,103,129 99.06
Accrued interest on deposits 14,337 .04 12,721 .04
----------- ------- ----------- ------
$32,621,766 100.00% $29,115,850 100.00%
=========== ======= =========== ======
Certificates of deposit mature as follows at December 31:
1998 $ 7,763,351
1999 5,782,167
2000 3,515,330
2001 1,618,777
2002 1,195,899
2003 232,898
-----------
Total $20,108,422
===========
Interest expense on deposits is summarized as follows for the year
ended December 31:
1997 1996
---- ----
NOW accounts $ 50,263 $ 44,959
Money markets 302,996 289,428
Savings 76,881 80,670
Certificates of deposit 1,043,448 979,095
----------- ----------
$ 1,473,588 $ 1,394,152
=========== ==========
F-14
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 7 - Deposit Accounts - Continued
----------------
The Association had deposits of $100,000 or more of approximately
$1,456,188 and $2,281,290 at December 31, 1997 and 1996, respectively.
Deposit Insurance Reform. Currently, there are two deposit
insurance funds maintained by the Federal Deposit Insurance Corporation
("FDIC"), the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"). The Association's deposits are insured by
SAIF. Legislation has been passed concerning the Deposit Insurance
Reform that required the Association to pay a one-time assessment of
.657% of insured deposits at March 31, 1995, which was approximately
$181,500. The Association's SAIF deposit insurance premiums have been
reduced to .064% of insured deposits beginning January 1, 1997 from the
rate of .23% of insured deposits. BIF and SAIF may be merged on January
1, 1999.
Note 8 - Employee Benefit Plan and Deferred Compensation
-----------------------------------------------
The Association has a 401(k) Plan which requires, under certain
conditions, a contribution of up to 5% of eligible employees' total
compensation. The total expense related to this Plan for the year ended
December 31, 1997 and 1996 was $23,769 and $23,483, respectively.
During the year ended December 31, 1997, the Association entered
into a Deferred Compensation Agreement with all of the current
directors. The Association recorded an expense during the year ended
December 31, 1997 of $115,000 and additional liability under this
Agreement is being accrued by charges to operating expense during the
term of employment.
Note 9 - Retained Earnings
-----------------
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.
F-15
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 9 - Retained Earnings - Continued
-----------------
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 total and Tier I capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Association meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the
Federal Deposit Insurance Corporation has 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 total risk-based, Tier I risk-based
and Tier I leverage ratios at least 100 to 200 basis points above those
ratios set forth in the table. There have been no conditions or events
since that notification that management believes have changed the
Association's category.
The following table presents the Association's capital position
based on the December 31, 1997 financial statements.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- --------------------- -----------------------
Amount % Amount % Amount %
------ --- ------ --- ------- ---
Tangible (1) $2,893,757 8.02% $ 541,266 1.50% $ N/A N/A %
Tier I capital (2) 2,893,757 15.99% N/A N/A % 1,085,520 6.00%
Core (1) 2,893,757 8.02% 1,082,532 3.00% 1,804,221 5.00%
Risk-weighted (2) 3,109,257 17.19% 1,447,360 8.00% 1,809,200 10.00%
(1) To adjusted total assets
(2) To risk-weighted assets.
Current Requirements
--------------------
Total retained earnings $ 2,893,757
-----------
Tangible and core capital 2,893,757
General valuation allowance 215,500
-----------
Risk-based capital $ 3,109,257
===========
Total assets $36,084,416
-----------
Tangible and adjusted tangible assets $36,084,416
===========
Risk-weighted assets $18,092,000
===========
F-16
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 10- Income Taxes
------------
The income tax provision consists of the following for the years
ended December 31:
1997 1996
---- ----
Current expense $187,346 $114,469
Deferred expense (benefit) (96,173) (24,888)
-------- --------
Total tax expense $ 91,173 $ 89,581
======== ========
The income tax provision is reconciled to the amount computed to the
statutory federal income tax rate as follows for December 31:
1997 1996
----------------- -----------------
Amount Rate Amount Rate
------ ---- ------ ----
Statutory federal income tax rate $80,139 34.00% $81,076 34.00%
State tax net of federal income tax
benefit 11,059 4.69 10,720 4.50
Surtax exemption - - (2,384) (1.00)
Other (25) (.01) 169 .07
------- ----- ------- -----
$91,173 38.68% $89,581 37.57%
======= ===== ======= =====
The tax effects of temporary differences between financial reporting
basis and income tax basis of assets and liabilities are as follows at
December 31:
1997 1996
---- ----
Deferred Tax Assets:
Deferred loan origination fees $ 27,571 $ 42,354
Deferred compensation 44,413 -
Unrealized loss on investment securities 32,160 44,442
Allowance for loan losses 83,226 38,620
--------- ---------
187,370 125,416
Deferred Tax Liabilities:
Federal Home Loan Bank of Atlanta stock
dividend (32,595) (32,595)
Depreciation (3,510) (6,765)
Excess of tax bad debt reserve over
base year (52,756) (65,945)
Conversion from accrual to cash method
of accounting (72,230) (77,723)
--------- ---------
(161,091) (183,028)
--------- ---------
Net deferred tax assets (liabilities) $ 26,279 $ (57,612)
========= =========
F-17
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 10- Income Taxes - Continued
------------
The Association was allowed a special bad debt deduction limited
generally to 8% of otherwise taxable income for the year beginning
December 1, 1987 through December 31, 1995. Beginning January 1, 1996
the percentage of taxable income method of computing the Association's
tax bad debt deduction is no longer allowed and the amount by which the
tax reserve for bad debts exceeds such amount at December 31, 1987 must
be recaptured over a six year period. A tax liability has been
established for the recapture. If the amounts which qualified as
deductions for federal income tax purposes prior to December 31, 1987
are later used for purposes other than to absorb loan losses, including
distributions in liquidations, they will be subject to federal income
tax at the then current corporate rate. Retained earnings at December
31, 1997 and 1996 include $579,687, for which no provision for federal
income tax has been provided. The unrecorded deferred income tax
liability on the above amount was approximately $223,875.
Note 11 - Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
The estimated fair values of the Association's financial
instruments are summarized below. The fair values of a significant
portion of these financial instruments are estimates derived using
present value techniques prescribed by the FASB and may not be
indicative of the net realizable or liquidation values. Also, the
calculation of estimated fair values is based on market conditions at
a specific point in time and may not reflect current or future fair
values.
The carrying amount is a reasonable estimate of fair value for
interest bearing deposits in other banks due to the short-term nature
of that investment. Fair value is based upon net asset values for
investment securities, bid prices published in financial newspapers
for mortgage backed securities were used to estimate fair value for
these investments. The carrying amount of Federal Home Loan Bank of
Atlanta stock is a reasonable estimate of fair value. Loans receivable
were discounted using a single discount rate, comparing the current
rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities, except for
adjustable rate mortgages which were considered to be at market rates.
These rates were used for each aggregated category of loans as
reported on the Office of Thrift Supervision Quarterly Report. The
fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered on deposits of similar remaining
maturities.
F-18
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 11 - Disclosures About Fair Value of Financial Instruments - Continued
-----------------------------------------------------
December 31,
-----------------------------------------------
1997 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ----------- --------- -----------
(Amounts in Thousands)
Financial Assets
- ----------------
Interest bearing deposits
in other banks $ 3,514 $ 3,514 $ 5,186 $ 5,186
- - 197 197
Mortgage backed securities 1,955 2,011 2,333 2,378
Federal Home Loan Bank of Atlanta stock 226 226 226 226
Loans receivable 29,961 31,772 23,841 23,770
Financial Liabilities
- ---------------------
Savings $ 2,605 $ 2,605 $ 2,627 $ 2,627
NOW and money market deposit accounts 9,894 9,894 10,098 10,098
Certificates of deposit 20,108 20,222 16,378 16,527
Advance payment by borrowers for
expenses 371 371 317 317
Note 12 - Plan of Conversion
------------------
On December 17, 1997, the Board of Directors adopted a Plan of
Conversion ("Plan"), whereby the Association will convert from a
federally chartered mutual savings and loan to a federally chartered
stock savings bank. The Plan is subject to approval of regulatory
authorities and the Association's members at a special meeting. The
stock of the Association will be issued to a holding company formed in
connection with the conversion. The capital stock will be offered at a
price to be determined by the Board of Directors based upon an
appraisal to be made by an independent appraisal firm. The exact
number of shares to be offered will be determined by the Board of
Directors in conjunction with that appraisal. A Subscription Offering
of shares of common stock will be offered initially to Eligible
Account Holders, Employee Stock Benefit Plans of the Association,
supplemental Eligible Account Holders and other members. Any shares of
common stock not sold in the Subscription Offering will be sold in a
Community Offering.
At the time of the conversion, the Association will establish a
Liquidation Account in an amount equal to its capital as of the date
of the latest statement of financial condition appearing in the final
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.
F-19
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 12 - Plan of Conversion - Continued
------------------
In the unlikely event of a complete liquidation of the
Association, and only in such event, each Eligible Account Holder and
Supplemental Eligible Account Holder would receive from the
Liquidation Account, a liquidation distribution based on the
proportionate share of the then total remaining qualifying deposits.
Under the regulations of the Office of Thrift Supervision
("OTS"), the Association will not be permitted to pay dividends on its
stock after the conversion if its regulatory capital would thereby be
reduced below the amount then required for the forementioned
Liquidation Account or the Association's regulatory capital
requirements. Federal regulations also preclude any repurchase of the
stock for three years after the conversion except for an offer made on
a pro rata basis to all stockholders of the Association and with the
prior approval of the OTS. The Association may, however, make capital
distributions up to 100% of its net income plus the amount that would
reduce by one-half its surplus capital ratio at the beginning of the
calendar year, subject to the aforementioned restrictions, and the
Association has not been notified that it is in need of more than
normal supervision. As of December 31, 1997, the Association has not
been notified that it requires more than normal supervision.
The costs associated with the conversion are expected to be
deferred and deducted from the proceeds from the sale of stock. If the
conversion does not occur, related expenses will be deducted from
current income. Costs of $22,712 were incurred through December 31,
1997.
Note 13 - Recent Accounting Pronouncements
--------------------------------
FASB Statement on Accounting for Stock-Based Compensation - In
October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123. SFAS No. 123 defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period. FASB has encouraged all entities
to adopt the fair value based method, however, it will allow entities
to continue the use of the "intrinsic value based method" prescribed
by Accounting Principles Board ("APB") Opinion No. 25. Under the
intrinsic value based method, compensation cost is the excess of the
market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option
plans have no intrinsic value at the grant date and, as such, no
compensation cost is recognized under APB Opinion No. 25. Entities
electing to continued use of the accounting treatment of APB Opinion
No. 25 must make certain pro forma disclosures as if the fair value
based method had been applied. The accounting requirements of SFAS No.
123 are effective for transactions entered into in fiscal years
beginning after December 15, 1995. Pro forma disclosures must include
the effects of all awards granted in fiscal years beginnings after
December 14, 1994. If the proposed Option Plan is adopted management
will use the intrinsic value method. Accordingly, there will be no
impact as a result of the Association's adoption of SFAS No. 123.
F-20
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 13 - Recent Accounting Pronouncements - Continued
--------------------------------
FASB Statement on Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - In June 1996,
FASB issued SFAS No. 125, which will be effective, on a prospective
basis, for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. SFAS
No. 125 supersedes SFAS No. 122, Accounting for Mortgage Servicing
Rights. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components
approach that focuses on control. SFAS No. 125 extends the "available
for sale" and "trading" approach of SFAS No. 115 to non-security
financial assets that can be contractually prepaid or otherwise
settled in such a way that the holder of the asset would not recover
substantially all of its recorded investment. In addition, SFAS No.
125 amends SFAS No. 115 to prevent a security from being classified as
held to maturity if the security can be prepaid or settled in such a
manner that the holder of the security would not recover substantially
all of its recorded investment. The extension of the SFAS No. 115
approach to certain non-security financial assets and the amendment to
SFAS No. 115 are effective for financial assets held on or acquired
after January 1, 1997. FASB has proposed to defer the effective date
of SFAS No. 125 until January 1, 1998 for certain transactions
including repurchase agreements, dollar-roll, securities lending and
similar transactions. Management adopted SFAS No. 125 on January 1,
1997. There was no impact on the Association's financial statements of
such adoption.
FASB Statement on Earnings Per Share - In February 1997, FASB
issued SFAS No. 128, "Earnings Per Share". SFAS 128 supersedes APB
Opinion No. 15, "Earnings Per Share" and specifies the computation,
presentation and disclosure requirements for earnings per share for
entities with publicly held common stock or potential common stock.
SFAS No. 128 replaces the presentation of primary earnings per share
with a presentation of basic earnings per share and fully diluted
earnings per share with diluted earnings per share. It also requires
dual presentation of basic and diluted earnings per share on the face
of the income statement for all entities with complex capital
structures and requires the reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim
periods. SFAS No. 128 will be adopted by the Association in the
initial period after December 15, 1997. Management does not believe
the impact of adopting SFAS No. 128 will be material to the
Association's financial statements.
F-21
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 13 - Recent Accounting Pronouncements - Continued
--------------------------------
FASB Statement on Disclosure of Information About Capital
Structure - In February 1997, FASB issued SFAS No. 129. The Statement
incorporates the disclosure requirements of APB Opinion No. 15,
"Earnings per Share", and makes them applicable to all public and
nonpublic entities that have issued securities addressed by the
Statement. APB Opinion No. 15 requires disclosure of descriptive
information about securities that is not necessarily related to the
computation of earnings per share. The Statement continues the
previous requirements to disclose certain information about an
entity's capital structure found in APB Opinion No. 10, Omnibus
Opinion -1996 and No. 15, Earnings Per Share and FASB Statement No.
47, Disclosure of Long-Term Obligations, for entities that were
subject to the requirements of those standards. This Statement
eliminates the exemption of nonpublic entities from certain disclosure
requirements of Opinion 15 as provided by Statement No. 21, Suspension
of the Reporting of Earnings per Share and Segment Information for
Nonpublic Enterprises. It supersedes specific disclosure requirements
of Opinion 10 and 15 and Statement 47 and consolidates them in this
Statement for ease of retrieval and for greater visibility to
nonpublic entities. This Statement is effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129
will be adopted by the Association in the initial period after
December 15, 1997. Management does not believe the impact of adopting
SFAS No. 129 will be material to the Association's financial
statements.
FASB Statement on Reporting Comprehensive Income - In June 1997,
FASB issued SFAS No. 130, "Reporting Comprehensive Income", which
requires entities presenting a complete set of financial statements to
include details of comprehensive income that arise in the reporting
period. Comprehensive income consists of net income or loss for the
current period and other comprehensive income, expense, gains and
losses that bypass the income statement and are reported in a separate
component of equity, i.e., unrealized gains and losses on certain
investment securities. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Management does not believe that
adoption of SFAS No. 130 will have a material adverse effect on the
Association's financial position or results of operations.
FASB Statement on Disclosures Regarding Segments - In June 1997,
FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information". Statement 131 establishes standards for the
way public enterprises are to report information about operating
segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 supersedes FASB
Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise" but retains the requirement to report information about
major customers. It amends Statement No. 94, "Consolidation of all
Majority-Owned Subsidiaries" to remove the special disclosure
requirements for previously unconsolidated subsidiaries.
F-22
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 13 - Recent Accounting Pronouncements - Continued
--------------------------------
Statement 131 is effective for financial statements for periods
beginning after December 15, 1997. Management does not believe the
impact of adopting SFAS No. 131 will be material to the Association's
financial statements.
FASB Statement on Employers Disclosures About Pensions and Other
Postretirement Benefits - In February 1998, FASB issued SFAS No. 132
which standardizes disclosure requirements for pensions and
postretirement benefits. This Statement is effective for fiscal years
beginning after December 15, 1997. Management believes the adoption of
this Statement will not have a material effect on the financial
statements of the Association.
F-23
GLOSSARY
Bank Northfield Federal Savings Bank, a federally chartered stock
savings bank
BIF Bank Insurance Fund of the FDIC
Common Stock The common stock, $.01 par value per share, of Northfield
Bancorp, Inc.
Community Offering Offering for sale to certain members of the general public
of any shares of common stock not subscribed for in the
Subscription Offering, including the possible offering of
common stock in a Syndicated Community Offering
Company Northfield Bancorp, Inc.
Conversion Simultaneous conversion of Northfield Federal Savings to a
stock savings bank, the issuance of the stock savings bank's
outstanding capital stock to the Company and the Company's
offer and sale of common stock
Eligible Account Savings account holders of Northfield Federal Savings with
Holders account balances of at least $50.00 as of the close of
business on December 31, 1995
ESOP Employee Stock Ownership Plan
Estimated Estimated pro forma market value of the common stock ranging
Valuation Range from $3,825,000 to $5,175,000
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date __:__.m., Eastern Time, on ___________, 1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Federal Reserve The Board of Governors of the Federal Reserve System
System
Ferguson Ferguson & Company
A-1
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
MRP Management recognition plan to be adopted no earlier than
six months after the conversion
NASD National Association of Securities Dealers, Inc.
NOW account Negotiable order of withdrawal account
NPV Net portfolio value
Offering Subscription, Community and Syndicated Community Offerings,
collectively
Option Plan Stock option plan to be adopted no earlier than six months
after the conversion
Order Form Form for ordering stock accompanied by a certification
concerning certain matters
Other Members Savings account holders (other than eligible account holders
and supplemental eligible account holders) and certain
borrowers (borrowers whose loans were outstanding on
________ __, 199__ and continue to be outstanding) who are
entitled to vote at the Special Meeting due to the existence
of a savings account or a borrowing, respectively, on the
Voting Record Date for the Special Meeting
OTC Electronic An electronic stock data system operated by Nasdaq
Bulletin Board
OTS Office of Thrift Supervision
A-2
Plan of Plan of Northfield Federal Savings to convert from a
Conversion federally chartered mutual savings association to a
federally chartered stock savings bank, with the name
"Northfield Federal Savings Bank," and the issuance of the
Bank's outstanding capital stock to the Company and the
issuance of the Company's stock to the public
Purchase Price $10.00 per share price of the common stock
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards adopted by FASB
Special Meeting Special Meeting of members of Northfield Federal Savings
called for the purpose of approving the Plan of Conversion
Subscription Offering of non-transferable rights to subscribe for the
Offering common stock, in order of priority, to Eligible Account
Holders, tax-qualified employee plans, Supplemental Eligible
Account Holders and Other Members
Supplemental Depositors, who are not Eligible Account Holders of
Eligible Northfield Federal Savings, with account balances of at
Account Holders least $50.00 on March 31, 1998
Syndicated Offering of shares of common stock remaining after the
Community Offering Subscription Offering and undertaken prior to the end and as
part of the Community Offering, and which may, at our
discretion be made to the general public on a best efforts
basis by a selling group of broker-dealers
Trident Securities Trident Securities, Inc.
Voting Record The close of business on ___________, 1998, the date for
Date determining members entitled to vote at the Special Meeting
A-3
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this document In connection with
the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by Northfield
Federal Savings, the Company, or Trident Securities. This document does not
constitute an offer to sell, or the solicitation of an offer to buy, any of the
securities offered hereby to any person in any jurisdiction In which such offer
or solicitation would be unlawful. Neither the delivery of this document by
Northfield Federal Savings, the Company, or Trident Securities nor any sale made
hereunder shall in any circumstances create an implication that there has been
no change in the of Northfield Federal Savings or the Company, since any of the
dates as of which information is furnished herein or since the date hereof.
NORTHFIELD BANCORP, INC.
Up to 595,125 Shares
Common Stock
PROSPECTUS
TRIDENT SECURITIES, INC.
Dated ___________, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until the later of __________, 1998 (90 days after the date of this Prospectus),
all dealers that buy, sell or trade these securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligations of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XVII of the Company's Articles of Incorporation sets forth
circumstances under which directors, officers, employees and agents of the
Company may be indemnified against liability which they may incur in their
capacities, as follows:
ARTICLE XVII
INDEMNIFICATION
A. The Corporation shall indemnify, to the fullest extent permissible
under the Maryland General Corporation Law, any individual who is or was a
director, officer, employee or agent of the Corporation, and any individual who
serves or served at the Corporation's request as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan, in any proceeding in which the
individual is made a party as a result of his service in such capacity.
B. (1) Reasonable expenses incurred by any person identified in
paragraph A of this Article XVII who is a party to a proceeding will be paid or
reimbursed by the Corporation in advance of the final disposition of the
proceeding upon receipt by the Corporation of: (i) a written affirmation by
such person of his good faith belief that the standard of conduct necessary for
indemnification by the Corporation as authorized in this Article XVII has been
met; and (ii) a written undertaking by or on behalf of such person to repay the
amount if it shall ultimately be determined that the standard of conduct has not
been met.
(2) The undertaking required by subparagraph (ii) of paragraph (1)
of this subsection shall be an unlimited general obligation of such person but
need not be secured and may be accepted without reference to financial ability
to make the repayment.
C. Nonexclusive. The indemnification and advance payment of expenses
------------
provided by paragraphs A and B shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
D. Continuation. The indemnification and advancement of expenses
------------
provided by this Article XVII shall be deemed to be a contract between the
Corporation and the persons entitled to indemnification thereunder, and any
repeal or modification of this Article XVII shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts. The indemnification and
advance payment provided by paragraphs A and B shall continue as to a person who
has ceased to hold a position named in paragraph A and shall inure to his heirs,
executors and administrators.
E. Insurance. The Corporation shall purchase and maintain insurance
---------
on behalf of any person who holds or who has held any position named in
paragraph A, against any liability incurred by him in any such position, or
arising out of his status as such, whether or not the Corporation would have
power to indemnify him against such liability under paragraphs A and B.
F. Intention and Savings Clause. It is the intention of this Article
----------------------------
XVII to provide for indemnification to the fullest extent permitted by the
General Corporation Law of the State of Maryland, and this Article XVII shall be
interpreted accordingly. If this Article XVII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent
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of the Corporation as to costs, charges, and expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement with respect to any
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation, to the
full extent permitted by any applicable portion of this Article XVII that shall
not have been invalidated and to the full extent permitted by applicable law. If
the General Corporation Law of the State of Maryland is amended, or other
Maryland law is enacted, to permit further or additional indemnification of the
persons defined in this Article XVII.A, then the indemnification of such persons
shall be to the fullest extent permitted by the General Corporation Law of the
State of Maryland, as so amended, or such other Maryland law.
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.
In addition, Article XVI of the Company's Articles of Incorporation sets
forth the limits of a director's liability to the Company or its stockholders as
follows:
ARTICLE XVI
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
An officer or director of the Corporation, as such, shall not be liable to
the Corporation or its stockholders for money damages, except (i) to the extent
that it is proved that the person actually received an improper benefit or
profit in money, property or services for the amount of the benefit or profit in
money, property or services actually received; (ii) to the extent that a
judgment or other final adjudication adverse to the person is entered in a
proceeding based on a finding in the proceeding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding; or (iii) to the
extent otherwise required by Maryland law. If Maryland law is amended or enacted
after the date of filing of these Articles to further eliminate or limit the
personal liability of officers and directors, then the liability of officers and
directors of the Corporation shall be eliminated or limited to the fullest
extent permitted by Maryland 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.
Pursuant to its Charter and Tennessee law, the Company is permitted to
purchase and maintain insurance on behalf of an individual who is or was a
director, officer, employee, or agent of the Company. Northfield Federal
currently maintains such a policy and it is intended that the Company will
become a party to such policy.
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ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
* Legal Fees and Expenses....................... $ 82,000
* Printing, Word Processing, Postage and Mailing 50,000
* Appraisal and Business Plan Fees and Expenses. 25,000
* Accounting Fees and Expenses.................. 40,000
* Blue Sky Filing Fees and Expenses
(including counsel fees)...................... 6,000
* Transfer Agent Fees and Stock Certificates.... 6,000
* Conversion Agent Fees......................... 6,000
* Federal Filing Fees (OTS and SEC)............. 25,000
* Underwriter=s Expenses........................ 38,000
* Other Expenses................................ 29,200
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** Total......................................... $307,200
========
______________
* Estimated
** Does not include $67,800 in estimated underwriting fees. Calculation of
the underwriting fees assumes that the midpoint of the Estimated Valuation
Range is sold in the Conversion, 8% of the stock is sold to the ESOP,
67,000 shares are sold to directors and officers of Northfield Federal, and
the remaining shares are sold in the Subscription and Community Offerings.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) LIST OF EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
* 1.1 Form of Sales Agency Agreement with Trident Securities, Inc.
* 1.2 Engagement Letter with Trident Securities, Inc.
2 Plan of Conversion as amended
* 3.1 Articles of Incorporation of Northfield Bancorp, Inc.
* 3.2 Bylaws of Northfield Bancorp, Inc.
* 4 Form of Common Stock Certificate of Northfield Bancorp, Inc.
* 5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Housley Kantarian & Bronstein, P.C.
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*8.2 Form of State Tax Opinion of Anderson Associates, LLP
*8.3 Opinion of Ferguson & Company as to the value of subscription rights for tax purposes
*10.1 Form of Northfield Bancorp, Inc. 19__ Stock Option Plan
*10.2 Form of Northfield Bancorp, Inc. Management Recognition Plan
*10.3 Northfield Federal Savings Deferred Compensation Plan
10.4 Form of Employment Agreement between Northfield Federal Savings and G. Ronald Jobson
*23.1 Consent of Housley Kantarian & Bronstein, P.C. (in opinions filed as Exhibits 5 and 8.1)
23.2 Consent of Anderson Associates, LLP
23.3 Consent of Ferguson & Company
24 Power of Attorney (reference is made to the signature page of the Form SB-2)
*27 Financial Data Schedule
99.1 Proposed Form of Stock Order Form and Form of Certification
*99.2 Proxy Statement for Special Meeting of Members of Northfield Federal Savings; Form of Proxy
*99.3 Form of Miscellaneous Solicitation and Marketing Materials
*99.4 Appraisal Report
______________
Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sells securities, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
set forth in the registration statement (or the most recent post-effective
amendment thereof);
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(iii) To include any additional or changed material information on
the plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new registration statement of the securities offered, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To file a post-effective amendment or remove from registration any of
the securities that remain unsold at the end of the offering.
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 registrant pursuant to the foregoing provisions, or otherwise,
the registrant 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
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant 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 registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions 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.
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
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Baltimore, State of Maryland, on May 5, 1998.
NORTHFIELD BANCORP, INC.
By: /s/ G. Ronald Jobson
--------------------
G. Ronald Jobson
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Title Date
---------- ----- ----
/s/ G. Ronald Jobson President, Chief Executive May 5, 1998
- -----------------------------
G. Ronald Jobson Officer and Director
(Principal Executive Officer)
/s/ John P. Sabol, Jr. * Vice President and Chief May 5, 1998
- -----------------------------
John P. Sabol, Jr. Financial Officer (Principal
Accounting and Financial Officer)
/s/ Gary R. Bozel * Chairman of the Board May 5, 1998
- -----------------------------
Gary R. Bozel
/s/ J. Thomas Hoffman * Director May 5, 1998
- -----------------------------
J. Thomas Hoffman
/s/ E. Thomas Lawrence, Jr. * Director May 5, 1998
- -----------------------------
E. Thomas Lawrence, Jr.
/s/ David G. Rittenhouse * Director May 5, 1998
- -----------------------------
David G. Rittenhouse
/s/ William R. Rush * Director May 5, 1998
- -----------------------------
William R. Rush
* By: /s/ G. Ronald Jobson
------------------------
G. Ronald Jobson
Attorney-in-Fact