FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-48615
PROSPECTUS
UP TO 502,550 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 Savings
Bank." The Company was formed in March 1998 and upon completion of the
conversion will own all of the shares of Northfield Federal Savings Bank. 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 $3,230,000 and
$4,370,000, 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 502,550 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: 323,000 to 502,550
. Offering Expenses: $400,000
. Net Proceeds to the Company
Minimum/Maximum as adjusted: $2,830,000 to $4,625,500
. Net Proceeds Per Share
Minimum/Maximum as adjusted: $8.76 to $9.20
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 September 22, 1998
TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering.......................................... (i)
Summary................................................................................. (iv)
Selected Financial and Other Data....................................................... (vii)
Risk Factors............................................................................ 1
Proposed Purchases by Directors and Officers............................................ 8
The Company............................................................................. 8
Northfield Federal Savings.............................................................. 9
Use of Proceeds......................................................................... 9
Dividends............................................................................... 10
Market for the Common Stock............................................................. 11
Capitalization.......................................................................... 12
Historical and Pro Forma Capital Compliance............................................. 13
Pro Forma Data.......................................................................... 14
The Conversion.......................................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of Operations... 33
Business of Northfield Bancorp, Inc..................................................... 47
Business of Northfield Federal Savings.................................................. 48
Regulation.............................................................................. 68
Taxation................................................................................ 75
Management of the Company............................................................... 77
Management of Northfield Federal Savings................................................ 77
Restrictions on Acquisitions of the Company............................................. 84
Description of Capital Stock............................................................ 89
Legal and Tax Matters................................................................... 91
Experts................................................................................. 91
Additional Information.................................................................. 91
Index to Financial Statements of Northfield Federal Savings............................. 93
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 323,000 and 437,000 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 502,550 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 October 29, 1998. See pages 28 to
29.
Q: HOW MUCH STOCK MAY I PURCHASE?
A: The minimum purchase is 25 shares (or $250). The maximum purchase per
eligible depositor (which includes individuals on joint accounts or having
the same address on our
(i)
records) in the Subscription Offering is 12,500 shares (or $125,000). We may
decrease or increase the maximum purchase limitation without notifying you.
If shares are sold in a Community Offering (or a Syndicated Community Offering),
the maximum number of shares that may be purchased by any party (which includes
individuals on joint accounts or having the same address on our records) in the
Community Offering (or a Syndicated 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, Community and Syndicated Community Offerings) may not exceed the
lesser of $225,000 or 5% of the shares issued in the conversion. See pages 26 to
27.
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 June 30, 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
September 15, 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 22 to 24.
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.
(ii)
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 required to purchase stock. Your deposit
account, certificate accounts and any loans you may have with us will be
not be affected. See pages 20 to 22.
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 pages 8 to 9.
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 60% of which were certificates of deposit at June 30, 1998. At
June 30, 1998, we had total assets of $39 million, deposits of $35 million and
total retained earnings of $3.1 million. See page 9.
THE STOCK OFFERING
The Company is offering between 323,000 and 437,000 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 502,550 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.
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
(iv)
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 22 to 26.
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
August 31, 1998 such value ranged between $3.2 million and $4.4 million (with a
midpoint of $3.8 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 $3.2 million or above $5.0 million (excluding the Contingent Shares), we
will notify you and you will have the opportunity to modify or cancel your
order. See pages 30 to 32.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at 12:00 Noon, Eastern Time, on
Thursday, October 29, 1998. The Community Offering, if any, may terminate at
any time without notice but no later than December 21, 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 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 79 to 83.
(v)
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 to fund the Bank's
lending activities and to expand its office facilities, possibly leasing or
purchasing property to establish a branch in Cecil and/or Harford County,
Maryland. Our business plan also contemplates spending $1.5 million on a new
office building approximately two years following the conversion. Our plans to
establish additional branches and relocate our main office may be impeded due to
the rating we received in our most recent evaluation under the Community
Reinvestment Act of 1997 ("CRA"). See "Risk Factors --Risks Associated with
"Needs to Improve" CRA Rating." In an effort to improve its CRA performance,
the Bank intends to invest $380,000 (which represents 10% of the gross
conversion proceeds at the midpoint of the Estimated Valuation Range) in loans
to first-time low- and moderate-income home buyers. See pages 9 to 10.
DIVIDENDS
Our board of directors intends to adopt a policy of paying regular semi-
annual cash dividends on the common stock at an annual 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 pages 10 to 11.
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 "NFSB." The Company intends to
request Trident Securities, Inc. ("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 11.
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. The information at December 31, 1997 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. The data at June 30, 1998, and for
the six months ended June 30, 1998 and 1997 is unaudited, but in the opinion of
our management reflects all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation. The financial data for
the six months ended June 30, 1998 is not necessarily indicative of the
operating results to be expected for the entire fiscal year.
SELECTED FINANCIAL DATA
The following table sets forth certain information concerning our financial
position at the dates indicated.
AT
JUNE 30, AT DECEMBER 31,
-------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
Total assets......................................................... $38,987 $36,084 $32,228
Cash................................................................. 222 117 173
Interest-bearing deposits in other banks............................. 4,699 3,514 5,186
Securities available for sale........................................ -- -- 197
Mortgage-backed securities........................................... 2,145 1,955 2,333
Loans receivable - net............................................... 31,106 29,961 23,841
Federal Home Loan Bank of Atlanta stock.............................. 273 226 226
Deposit accounts..................................................... 35,030 32,622 29,116
Total retained earnings - substantially restricted................... 3,087 2,894 2,729
SUMMARY OF OPERATIONS
The following table sets forth certain information concerning our results
of operations for the periods shown.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ---------------------
1998 1997 1997 1996
------- ------- ------ ------
(IN THOUSANDS)
Interest income...................................................... $ 1,451 $ 1,249 $ 2,626 $2,457
Interest expense..................................................... 848 707 1,493 1,397
------- ------- ------- ------
Net interest income.................................................. 603 542 1,133 1,060
Provision for loan losses............................................ -- 5 123 10
------- ------- ------- ------
Net interest income after provision
for loan losses..................................................... 603 537 1,010 1,050
Noninterest income (loss)............................................ 16 15 (2) 31
Noninterest expense.................................................. 314 290 772 843
------- ------- ------- ------
Income before taxes.................................................. 305 262 236 238
Income tax expense................................................... 112 96 91 89
------- ------- ------- ------
Net income $ 193 $ 166 $ 145 $ 149
======= ======= ======= ======
(Vii)
KEY OPERATING RATIOS
The table below sets forth certain performance ratios for us for the
periods indicated.
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- -----------------------------
1998 1997 1997 1996 1995
------- -------- ------- ------ ------
PERFORMANCE RATIOS:
Return on assets (ratio of net earnings
to average total assets).................... 1.02% 1.00% .43% .46% .85%
Return on equity (ratio of net earnings
to average equity).......................... 12.80 11.75 4.99 5.50 10.47
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 109.83 1111.40 11.11 109.99 109.33
Ratio of net interest income, after provision
for loan losses and noninterest expense..... 191.43 1185.17 30.83 124.56 161.31
Net interest rate spread....................... 2.80 2.82 2.88 2.90 3.08
Net interest margin............................ 3.24 3.32 3.37 3.34 3.50
ASSET QUALITY RATIOS:
Nonperforming loans to total loans
at end of period............................ .83 .27 1.31 1.07 .50
Nonperforming loans to total assets............ .70 .24 1.15 .84 .35
Nonperforming assets to total assets
at end of period............................ .70 .24 1.15 .84 .35
Allowance for loan losses to nonperforming
loans at end of period...................... 73.53 131.25 52.17 37.04 79.65
Allowance for loan losses to total loans, net.. .64 .40 .72 .42 .41
CAPITAL RATIOS:
Equity to total assets at end of period........ 7.92 8.65 8.02 8.47 8.04
Average equity to average assets............... 7.98 8.55 8.52 8.39 8.07
OTHER DATA:
Number of full service offices................. 2 2 2 2 2
(viii)
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 81.33% of our total loans at June 30, 1998, 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, 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 June 30, 1998, the market value of our mortgage-backed securities portfolio
(the primary component of our investment portfolio) exceeded the carrying value
of such investments by $55,000.
RECENT STOCK MARKET VOLATILITY
Publicly traded stocks, including stocks of financial institutions, have
recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded. In several cases, common stock issued by
recently converted financial institutions has traded at a price that is below
the price at which such shares were sold in the initial offerings of those
companies. The purchase price of our common stock in the offering is based on
the independent appraisal by Ferguson & Company. After our shares begin
trading, the trading price of our common stock will be determined by the
marketplace, and may be influenced by many factors, including prevailing
interest rates, investor perceptions of the Company and general industry and
economic conditions. Due to possible continued market volatility and to other
factors, including certain Risk Factors discussed in this document, there can be
no assurance that, following the conversion, the trading price of our common
stock will be at or above the $10.00 per share initial offering price. See
"--Lack of Active Market for Common Stock."
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 will incur significant expenses in the event that our plans
to establish a new branch office in Harford and/or Cecil County, Maryland
materialize. Our compensation expense may increase due to added personnel to
staff any new branch. 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.
Finally, our business plan contemplates spending $1.5 million on a new office
building approximately two years following the conversion. 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 June 30, 1997 and 1998 our
return on average equity was 11.75% and 12.8%, 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. See "Business of Northfield Federal Savings -- Lending Activities."
RISKS ASSOCIATED WITH "NEEDS TO IMPROVE" CRA RATING
We are periodically examined by the OTS for our record of meeting the
credit needs of our local communities pursuant to the CRA. See "Regulation --
Community Reinvestment Act." In our last CRA evaluation, we received a rating
of "Needs to Improve." In response to this rating, our board of directors
approved and we have implemented a CRA action plan which calls for, among other
things, expanding our lending to low- and moderate-income borrowers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- CRA Compliance." While our board and management are committed to
improving our CRA rating as soon as possible, there can be no assurance that our
efforts will in fact result in enhanced CRA performance or an improvement in our
rating.
Impact on Planned Uses of Proceeds. The OTS is required to take a "Needs
to Improve" rating into account in the agency's evaluation of, among other
things, applications to relocate a main office or branch or to establish new
branches. Accordingly, our "Needs to Improve" rating may prevent or delay our
plans to lease or purchase new branch offices and longer term, to build a new
main office.
Other Risks. Our "Needs to Improve" CRA rating may have additional
detrimental effects on our operations. A "Needs to Improve" rating often
prevents an institution from using expedited regulatory application procedures
and is generally viewed by regulatory authorities as an impediment to approving
regulatory applications filed by an institution. For example, the OTS and other
federal banking regulators may consider our CRA rating in any potential merger
or acquisition application and use the CRA rating as a basis for denying any
such application. Finally, community groups and other interested persons may
react unfavorably, including possibly protesting branch or other regulatory
applications that we file, to our rating, which is publicly available.
2
RISKS ASSOCIATED WITH COMMERCIAL LEASES, INCLUDING REGULATORY MATTERS
We purchase commercial finance leases from a local leasing company. At
June 30, 1998, our portfolio of commercial leases totaled $555,000, or 1.69%, 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 $54,000. 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."
We have also recently invested in automobile finance leases originated by
another local company. All of these purchases are with full recourse. This
investment does, however, pose a greater risk than investments in single-family
residential loans. See "Business of Northfield Federal Savings -- Lending
Activities -- Commercial and Automobile Leases."
RISKS ASSOCIATED WITH CONSTRUCTION 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.
RISKS ASSOCIATED WITH COMMERCIAL REAL ESTATE LENDING
We are also actively involved in commercial real estate lending. At June
30, 1998, these loans represented approximately 7.78% 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
3
cash flow from the property to service the debt. Cash flow may be significantly
affected by general economic conditions.
RISKS ASSOCIATED WITH CONSUMER LENDING
We also offer home equity lines of credit and savings account loans. The
home equity lines of credit are secured by a real estate mortgage with our
security interest in the borrower's primary residence. The savings account
loans are made for up to 90% of the balance on deposits in savings accounts or
certificates of deposit and are secured by an interest in the borrower's
account. In both cases, loan repayment depends primarily upon the financial
solvency of the individual borrower.
MANAGEMENT'S DISCRETION IN ALLOCATING NET PROCEEDS
While there are certain limits under federal law regarding the allocation
of the net proceeds, management has broad discretion in determining the manner
of use of the net proceeds retained by the Company. Such proceeds will
initially be invested in short-term investments and will be available for a
variety of corporate purposes, including future acquisitions and diversification
of business, additional capital contributions and dividends to stockholders to
the extent permitted by applicable regulations. However, there can be no
assurance that management in the future will apply the net proceeds to these
purposes or any other purposes.
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
4
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 October 29, 1998, subject to extension to no later
than November 6, 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.
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
5
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 97,400 shares, or 25.63% of the shares to be
outstanding assuming 380,000 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 amendments 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 DIRECTORS 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 53,200 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."
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."
6
FINANCIAL INSTITUTION REGULATION OF THE THRIFT INDUSTRY
We are subject to extensive regulation, supervision, and examination by the
OTS and the Federal Deposit Insurance Corporation ("FDIC"). The House of
Representatives has passed legislation which calls for the modernization of the
banking system and which would significantly affect the operations and
regulatory structure of the financial services industry, including savings
institutions like us. While this legislation preserves the thrift charter, it
would limit the powers and activities of new unitary thrift holding companies.
The Senate is now considering the legislation and may modify it further. At this
time, we do not know what form the final legislation might take, but if enacted
into law, the legislation could affect our competitive environment as well as
our business and operations. See "Regulation -- Proposed Legislative and
Regulatory Changes."
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."
COMMON STOCK NOT INSURED
The shares of Common Stock are not deposits or savings accounts in us and
are therefore not insured or guaranteed by the FDIC or any other government
agency.
7
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 380,000 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 3.29%
J. Thomas Hoffman Director 12,500 125,000 3.29
G. Ronald Jobson Director, President and
Chief Executive Officer 12,500 125,000 3.29
E. Thomas Lawrence, Jr. Director 3,000 30,000 .79
David G. Rittenhouse Director 12,500 125,000 3.29
William R. Rush Director 12,500 125,000 3.29
All directors and
executive officers
as a group (8 persons) 67,000 670,000 17.63
ESOP 30,400 304,000 8.00
Management Recognition Plan 15,200 152,000 4.00
------- ---------- -------
112,600 $1,126,000 29.63%
======= ========== =======
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 the ESOP and any proceeds from the offering it retains.
8
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 acquisitions. 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 will be subject to examination.
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 association 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 FDIC under the Savings
Association Insurance Fund ("SAIF"). At June 30, 1998, we had total assets of
$39 million, total deposits of $35 million and total retained earnings of $3.1
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 and automobile 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 net proceeds from the stock
offering. Currently, we expect that in accordance with applicable OTS
regulations and policies, the Company will retain $1.4 million, $1.7 million,
$2.0 million and $2.3 million, 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 the 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, a portion of the net proceeds 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. We also have plans to lease or purchase property to
establish a branch in Cecil and/or Harford County,
9
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 the establishment of new branches will help us take advantage of
strong loan demand in our market areas. Finally, our business plan contemplates
spending $1.5 million on a new office building approximately two years following
the conversion. However, our plans to establish new branches and to relocate our
main office may be impeded or delayed by the rating we received in our most
recent CRA evaluation. See "Risk Factors -- Risks Associated with "Needs to
Improve" CRA Rating" and "Regulation --Community Reinvestment Act." As part of
our plan to improve our CRA performance, we intend to invest $380,000 (which
represents 10% of the gross proceeds at the midpoint of the Estimated Valuation
Range) in loans to first-time low- and moderate-income home buyers. This
investment of the conversion proceeds is part of a CRA action plan we have
adopted which includes: (i) offering high loan-to-value mortgage loans with
discounted rates; (ii) expanding our solicitation, advertising and education
efforts to reach low- and moderate-income borrowers; and (iii) purchasing low-
and moderate-income loans from brokers at a premium. 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 expenses to be $400,000.
Our estimated net proceeds will range from $2.8 million to $4.0 million (or up
to $4.6 million in the event the maximum of the Estimated Valuation Range is
increased to $5.0 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
10
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.
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 "NFSB," and the
Company intends to request that 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.
11
CAPITALIZATION
The following table presents our historical capitalization as of June 30,
1998 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 the issuance of any Contingent Shares.
CAPITALIZATION PRO FORMA CONSOLIDATED CAPITALIZATION OF
OF THE THE COMPANY AT JUNE 30, 1998 BASED ON THE SALE OF
-------------------------------------------------------------------
BANK AT 323,000 SHARES 380,000 SHARES 437,000 SHARES 502,550 SHARES
JUNE 30, AT $10.00 AT $10.00 AT $10.00 AT $10.00
1998 PER SHARE PER SHARE PER SHARE PER SHARE
-------------- --------------- --------------- --------------- ----------------
(IN THOUSANDS)
Deposits (1)......................... $ 35,030 $ 35,030 $ 35,030 $ 35,030 $ 35,030
Other borrowed funds................. -- -- -- -- --
-------------- -------------- -------------- -------------- ---------------
Total deposits and borrowed funds $ 35,030 $ 35,030 $ 35,030 $ 35,030 $ 35,030
============== ============== ============== ============== ===============
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........................... -- 3 4 4 5
Paid-in capital (2)................ -- 2,838 3,396 3,956 4,599
Less: Common stock acquired by
ESOP (3).......................... -- (258) (304) (350) (402)
Common stock acquired by
MRP (4)................. -- (129) (152) (175) (201)
Retained earnings -- substantially
restricted........................ 3,087 3,087 3,087 3,087 3,087
-------------- -------------- -------------- -------------- ---------------
Total stockholders' equity....... $ 3,087 $ 5,540 $ 6,031 $ 6,523 $ 7,087
============== ============== ============== ============== ===============
_________________
(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 that a number of shares equal to 4% of the number of shares sold in
the conversion will be acquired in the open market at the conversion price
per share ($10.00) by the MRP, following stockholder approval of such plan.
If the MRP were funded by authorized but unissued shares, stockholders'
interests would be diluted by approximately 4%. Implementation of the MRP
within one year of conversion would require regulatory and shareholder
approval at a meeting of our stockholders to be held no earlier than six
months after conversion. See "Management of Northfield Federal Savings --
Proposed Future Stock Benefit Plans -- Management Recognition Plan."
12
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table shows our historical capital position relative to our
regulatory capital requirements as of June 30, 1998 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 JUNE 30, 1998 BASED ON THE SALE OF /(1)/:
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM AS ADJUSTED
323,000 SHARES 380,000 SHARES 437,000 SHARES 502,550 SHARES
HISTORICAL AT AT $10.00 AT $10.00 AT $10.00 AT $10.00
JUNE 30, 1998 PER SHARE PER SHARE PER SHARE PER SHARE
------------------- ---------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2)
------ ----------- ------ ----------- ------ ----------- ------ ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Capital under generally
accepted
accounting principles... $3,087 7.9% $4,121 10.2% $4,331 10.7% $4,542 11.1% $4,786 11.6%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Tangible capital........... $3,087 7.9% $4,121 10.2% 4,331 10.7% 4,542 11.1% 4,786 11.6%
Tangible capital
requirement............... 585 1.5 604 1.5 608 1.5 612 1.5 616 1.5
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Excess.................. $2,502 6.4% $3,517 8.7% $3,723 9.2% $3,930 9.6% $4,170 10.1%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Core capital............... $3,087 7.9% $4,121 10.2% $4,331 10.7% $4,542 11.1% $4,786 11.6%
Core capital requirement... 1,170 3.0 1,208 3.0 1,216 3.0 1,224 3.0 1,233 3.0
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Excess.................. $1,917 4.9% $2,913 7.2% $3,115 7.7% $3,318 8.1% $3,553 8.6%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Risk-based capital......... $3,287 17.1% $4,321 21.8% $4,531 22.7% $4,742 23.6% $4,986 24.6%
Risk-based capital
requirement............... 1,537 8.0 1,587 8.0 1,597 8.0 1,608 8.0 1,619 8.0
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Excess.................. $1,750 9.1% $2,734 13.8% $2,934 14.7% $3,134 15.6% $3,367 16.6%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
____________________
(1) Assumes that the Company will retain net proceeds of $1,420,000,
$1,700,000, $1,980,000 and $2,302,000, 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 an average risk-
weight of 49%, which is our approximate average risk weight at June 30,
1998. 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 reflected in this table 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 (380,000 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 (in millions, $39.0 historical, $40.3
minimum, $40.5 midpoint, $40.8 maximum and $41.1 maximum as adjusted, of
the Estimated Valuation Range), adjusted total assets for the purposes of
the tangible and core capital requirements (in millions, same amounts as
those computed under GAAP), and risk-weighted assets for the purpose of the
risk-based capital requirement (in millions, $19.2 historical, $19.8
minimum, $20.0 midpoint, $20.1 maximum, and $20.2 maximum as adjusted, of
the Estimated Valuation Range).
13
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 $2.5 million and $4.0 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; and (ii) expenses, including commissions to
be paid to Trident Securities, will amount to $400,000 at the midpoint of the
Estimated Valuation Range.
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 5.40%, which was
approximately equal to the one-year U.S. Treasury bill rate at June 30, 1998.
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 3.35%. 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.
14
AT OR FOR THE SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------
MAXIMUM AS
MINIMUM OF MIDPOINT OF MAXIMUM OF ADJUSTED, OF
323,000 380,000 437,000 502,550
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.................................. $ 3,230 $ 3,800 $ 4,370 $ 5,026
Less estimated offering expenses......................... (389) (400) (410) (422)
-------- -------- -------- ----------
Estimated net offering proceeds....................... $ 2,841 $ 3,400 $ 3,960 $ 4,604
======== ======== ======== ==========
Less: Common stock acquired by ESOP..................... $ (258) $ (304) $ (350) $ (402)
Common stock acquired by MRP...................... (129) (152) (175) (201)
-------- -------- -------- ----------
Estimated investable net proceeds..................... $ 2,453 $ 2,944 $ 3,436 $ 4,000
======== ======== ======== ==========
Net income:
Historical net income................................. $ 193 $ 193 $ 193 $ 193
Pro forma income on net proceeds...................... 41 49 58 67
Pro forma ESOP adjustment (1)......................... (7) (8) (9) (10)
Pro forma MRP adjustment (2).......................... (8) (9) (11) (12)
-------- -------- -------- ----------
Total............................................. $ 219 $ 225 $ 231 $ 237
======== ======== ======== ==========
Net income per share: (3)
Historical net income................................. $ 0.64 $ 0.55 $ 0.48 $ 0.41
Pro forma income on net proceeds...................... 0.14 0.14 0.14 0.14
Pro forma ESOP adjustment (1)......................... (0.02) (0.02) (0.02) (0.02)
Pro forma MRP adjustment (2).......................... (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- ----------
Total (3)......................................... $ 0.73 $ 0.64 $ 0.57 $0.51
======== ======== ======== ==========
Number of shares used in calculating earnings
per share (3).......................................... 299,313 352,133 404,953 465,696
======== ======== ======== ==========
Stockholders' equity: (4)
Historical........................................... $ 3,087 $ 3,087 $ 3,087 $ 3,087
Estimated net offering proceeds (2).................. 2,841 3,400 3,960 4,604
Less: Common stock acquired by ESOP (1)........... (258) (304) (350) (402)
Common stock acquired by MRP (2)................ (129) (152) (175) (201)
-------- -------- -------- ----------
Total............................................. $ 5,540 $ 6,031 $ 6,523 $ 7,087
======== ======== ======== ==========
Stockholders' equity per share: (4)
Historical............................................ $ 9.56 $ 8.12 $ 7.06 $6.14
Estimated net offering proceeds....................... 8.80 8.95 9.06 9.16
Less: Common stock acquired by ESOP (1)........... (0.80) (0.80) (0.80) (0.80)
Common stock acquired by MRP (2)................ (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- ---------
Total............................................. $ 17.15 $ 15.87 $ 14.93 $ 14.10
======== ======== ======== =========
Offering price as a percentage of pro forma
stockholders' equity per share (4).................... 58.3% 63.0% 67.0% 70.9%
======== ======== ======== =========
Ratio of offering price to pro forma
annualized net income per share (4)................... 6.8 7.8 8.8 9.8
======== ======== ======== =========
Number of shares used in calculating
equity per share (4).................................. 323,000 380,000 437,000 502,550
======== ======== ======== =========
(Footnotes on succeeding page)
15
(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 acquires 4% of the shares sold in the offering for 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 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 $16.88, $15.65, $14.74, and $13.95 at June 30, 1998,
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, less ESOP shares that have not been committed for
release. 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.
16
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------
MAXIMUM AS
MINIMUM OF MIDPOINT OF MAXIMUM OF ADJUSTED, OF
323,000 380,000 437,000 502,550
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....................................... $ 3,230 $ 3,800 $ 4,370 $ 5,026
Less estimated offering expenses.............................. (389) (400) (410) (422)
-------- -------- -------- --------
Estimated net offering proceeds............................ $ 2,841 $ 3,400 $ 3,960 $ 4,604
======== ======== ======== ========
Less: Common stock acquired by ESOP.......................... $ (258) $ (304) $ (350) $ (402)
Common stock acquired by MRP........................... (129) (152) (175) (201)
-------- -------- -------- ------
Estimated investable net proceeds.......................... $ 2,453 $ 2,944 $ 3,436 $ 4,000
======== ======== ======== ========
Net income:
Historical net income...................................... $ 145 $ 145 $ 145 $ 145
Pro forma income on net proceeds........................... 82 99 115 134
Pro forma ESOP adjustment (1).............................. (13) (16) (18) (21)
Pro forma MRP adjustment (2)............................... (16) (19) (22) (25)
-------- -------- -------- --------
Total.................................................... $ 198 $ 209 $ 220 $ 233
======== ======== ======== ========
Net income per share: (3)
Historical net income...................................... $ 0.48 $ 0.41 $ 0.36 $0.31
Pro forma income on net proceeds........................... 0.27 0.28 0.28 0.29
Pro forma ESOP adjustment (1).............................. (0.04) (0.04) (0.04) (0.04)
Pro forma MRP adjustment (2)............................... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Total (3)................................................ $ 0.66 $ 0.59 $ 0.54 $0.50
======== ======== ======== ========
Number of shares used in calculating earnings
per share (3)............................................... 299,313 352,133 404,953 465,696
======== ======== ======== ========
Stockholders' equity: (4)
Historical................................................ $ 2,894 $ 2,894 $ 2,894 $ 2,894
Estimated net offering proceeds (2)....................... 2,841 3,400 3,960 4,604
Less: Common stock acquired by ESOP (1)................ (258) (304) (350) (402)
Common stock acquired by MRP (2)..................... (129) (152) (175) (201)
-------- -------- -------- --------
Total.................................................. $ 5,347 $ 5,838 $ 6,330 $ 6,894
======== ========= ======== ========
Stockholders' equity per share: (4)
Historical................................................. $ 8.96 $ 7.62 $ 6.62 $ 5.76
Estimated net offering proceeds............................ 8.80 8.95 9.06 9.16
Less: Common stock acquired by ESOP (1)................ (0.80) (0.80) (0.80) (0.80)
Common stock acquired by MRP (2)..................... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Total.................................................. $ 16.56 $ 15.36 $ 14.48 $ 13.72
======== ========= ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share (4)......................... 60.4% 65.1% 69.0% 72.9%
======== ======== ======== ========
Ratio of offering price to pro forma
annualized net income per share (4)........................ 15.2 16.9 18.5 20.0
======== ======== ======== ========
Number of shares used in calculating
equity per share (4)....................................... 323,000 380,000 437,000 502,550
======== ======== ======== ========
(Footnotes on succeeding page)
17
(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 SOP 93-6 of the 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 acquires 4% of the shares sold in the offering for 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 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 $16.30, $15.16, $14.31, and $13.58 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, less ESOP shares that have not been committed for
release. 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.
18
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 25 and April 22, 1998. The
conversion will include the 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.
19
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
20
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.
21
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, June 30, 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:
22
CATEGORY 1: ELIGIBLE ACCOUNT HOLDERS. Each depositor qualifying as an
Eligible Account Holder (which collectively encompasses all names on a joint
account or having the same address on our records) 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, 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 437,000 shares), the ESOP has a priority right to fill its
subscription. The ESOP currently intends to purchase up to 8% of the common
stock issued in the conversion (excluding any Contingent 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 or having the same address on our
records) 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
23
of their respective qualifying 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 or having the same address on our
records) 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.
24
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 12:00 Noon,
Eastern Time, on October 29, 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, including individuals on joint
accounts or having the same address on our records, 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 12:00 NOON, EASTERN TIME, ON DECEMBER 21,
1998 (IF THE SUBSCRIPTION OFFERING IS EXTENDED TO NOVEMBER 6, 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,
including individuals on joint accounts or having the same address on our
records, 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
25
Offering, although Trident Securities has agreed to use its best efforts in the
sales of shares in any 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. The
maximum number of shares an eligible depositor (including individuals on joint
accounts or having the same address on our records) may purchase in the
Subscription Offering is 12,500 shares ($125,000). The maximum number of shares
any party may purchase in the Community Offering (or a Syndicated Community
Offering) is 12,500 shares ($125,000). Therefore, 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 "acting in concert" means (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an
26
express agreement; or (ii) a combination or pooling of voting or other interests
in the securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. We may presume that certain persons are acting in concert based upon,
among other things, joint account relationships, common addresses and the fact
that such persons have filed joint Schedule 13Ds with the SEC with respect to
other companies.
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.
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
27
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 over
subscription, 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.
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 over subscription, 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
28
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, (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 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 savings 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 October 22, 1998.
29
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 commission equal to 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 commissions 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 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 $30,000 for preparing the appraisal and other services and will reimburse
Ferguson for reasonable out-of-pocket expenses. We have agreed to indemnify
Ferguson
30
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 August 31, 1998 our estimated aggregate pro forma market value was
$3,800,000. 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 $3,230,000 to
$4,370,000 for the offering. The Estimated Valuation Range will be updated
prior to consummation of the conversion and the Estimated Valuation Range may
increase to $5,025,500 (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 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.
31
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 $3,230,000 or more than
$5,025,500 (excluding the value of any Contingent Shares which may be
issued).
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.
32
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.
Directors 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.
OTHER
ALL STATEMENTS MADE IN THIS DOCUMENT ARE HEREBY QUALIFIED BY THE CONTENTS
OF THE PLAN, THE MATERIAL TERMS OF WHICH ARE SET FORTH HEREIN. THE PLAN 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.
33
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. We also purchase commercial finance leases from a local
leasing company. In recent years, we have come under regulatory criticism based
on violation of the OTS's loans to one borrower regulation due to
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. Following
our receipt of the net conversion proceeds, we will be in compliance with such
regulation.
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. In addition,
because the substantial majority of our commercial leasing portfolio totals only
1.69% of total loans, we do not believe we have significant exposure for year
2000 problems from the commercial lending activities in which we are involved.
The greatest potential for problems, however, concerns the data processing
provided by our third party service bureau. The 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
34
on this issue. We estimate that our expenses related to year 2000 compliance
will be approximately $10,000, of which $8,000 has been expended through
September 15, 1998.
CRA COMPLIANCE
In response to the "Needs to Improve" CRA rating we recently received our
board of directors approved and we have implemented a CRA action plan. The plan
includes: (i) offering 97% loan-to-value ratio loans with private mortgage
insurance, no points, and a 1/8% rate discount below our current rate offering
plan; (ii) expanding our solicitation, advertising and education efforts to
reach low- and moderate-income borrowers; and (iii) purchasing low- and
moderate-income loans from brokers at a premium.
While our board and management are committed to improving our CRA rating as
soon as possible, there can be no assurance that our efforts will in fact result
in enhanced CRA performance or our improvement in our rating. While we have a
"Needs to Improve" rating, our planned uses of the net conversion proceeds may
be impeded. See "Risk Factors -- Risks Associated with "Needs to Improve" CRA
Rating." Our CRA rating may therefore interfere with our strategic business
plans.
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 81.3% of our total loans at
June 30, 1998, with fixed rates. While we plan to emphasize the origination of
home equity loans with shorter terms and variable rates, our primary
35
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.
At June 30, 1998, the average weighted term to maturity of our mortgage
loan portfolio was approximately 22 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 March 31, 1998, as calculated by the OTS, which
is based upon quarterly information that we voluntarily provided to the OTS.
CHANGE NET PORTFOLIO VALUE NPV AS % OF PORTFOLIO VALUE OF ASSETS
------------------------------------------- -------------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE
- ---------- ---------- -------- --------- ---------- ------------------
(DOLLARS IN THOUSANDS)
+ 400 bp $ 154 $(3,787) (96)% .45% (964) bp
+ 300 bp 1,043 (2,898) (74) 2.94 (715) bp
+ 200 bp 2,005 (1,936) (49) 5.47 (462) bp
+ 100 bp 3,011 (930) (24) 7.94 (215) bp
0 bp 3,941 -- -- -- --
- - 100 bp 4,524 583 15 11.34 125 bp
- - 200 bp 4,612 671 17 11.45 136 bp
- - 300 bp 4,714 773 20 11.59 150 bp
- - 400 bp 5,002 1,061 27 12.11 202 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
36
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 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.
37
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.
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------
AT JUNE 30, 1998 1997
1998 ------------------------- ---------------------------
------------------- AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- ------- ------- --------- ------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans....................................... $31,106 7.77% $30,899 $ 1,258 8.14% $25,087 $ 1,010 8.05%
Investment securities available for sale.... -- -- -- -- -- 195 8 8.21
Mortgage-backed securities.................. 2,145 7.87 2,044 77 7.53 2,263 86 7.60
Other interest-earning assets (1)........... 4,972 6.17 4,250 116 5.46 5,097 145 5.69
------- ------- ------- ------- -------
Total interest-earning assets............ 38,223 7.57 37,193 1,451 7.80 32,642 1,249 7.65
Non-interest-earning assets................... 764 599 412
------- ------- -------
Total assets............................. $38,987 $37,792 $33,054
======= ======= =======
Interest-bearing liabilities:
Savings deposits............................ $35,030 4.15 $33,791 847 5.01 $29,203 706 4.84
Short-term borrowings (2)................... 87 3.05 74 1 2.70 99 1 2.02
------- ------- ------- ------- -------
Total interest-bearing liabilities....... 35,117 4.15 33,865 848 5.01 29,302 707 4.83
------- -------
Non-interest-bearing liabilities.............. 783 912 926
------- ------- -------
Total liabilities........................ 35,900 34,777 30,228
Retained earnings............................. 3,087 3,015 2,826
------- ------- -------
Total liabilities and retained earnings.. $38,987 $37,792 $33,054
======= ======= =======
Net interest income........................... $ 603 $ 542
======= =======
Net interest rate spread (3).................. 2.79% 2.82%
==== =======
Net interest-earning assets................... $ 3,328 $ 3,340
======= =======
Net interest margin (4)....................... 3.24% 3.32%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities...... 109.83% 111.40%
======= =======
________________
(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.
38
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans..................................... $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................ 2,167 166 7.66 2,057 162 7.88
Other interest-earning assets (1)......... 4,003 236 5.90 6,353 352 5.54
------- ------- ------- -------
Total interest-earning assets............ 33,635 2,626 7.81 37,193 2,457 7.74
Non-interest-earning assets................. 433 527
------- -------
Total assets............................. $34,068 $32,283
======= =======
Interest-bearing liabilities:
Savings deposits.......................... $29,854 $ 1,474 4.94 $28,796 $ 1,394 4.84
Short-term borrowings (2)................. 419 19 4.53 77 3 3.90
------- ------- ------- -------
Total interest-bearing liabilities....... 30,273 1,493 4.93 28,873 1,397 4.84
------- -------
Non-interest-bearing liabilities............ 891 702
------- -------
Total liabilities........................ 31,164 29,575
Retained earnings........................... 2,904 2,708
------- -------
Total liabilities and retained earnings.. $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.
39
RATE/VOLUME ANALYSIS
The table shows certain information regarding changes in our interest
income and interest expense 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).
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------- ----------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996 1996 VS. 1995
----------------------------- ----------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
----------------------------- ----------------------------------- ---------------------------------
RATE/ RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ----- ------ ----- ------- ------ ---------- ------ ------- ----- ---------- -----
(IN THOUSANDS)
Interest income:
Loans.................... $ 234 $ 11 $ 3 $ 248 $ 341 $ (51) $ (9) $ 281 $ 127 $(63) $(4) $ 60
Investment securities
available
for sale............... (8) -- -- (8) 1 -- (1) -- -- -- -- --
Mortgage-backed securities (8) (1) -- (9) 9 (4) -- 5 (15) (2) -- (17)
Interest-bearing deposits. (24) (6) 1 (29) (129) 20 (8) (117) (1) (6) -- (5)
----- ---- ----- ----- ----- ----- ----- ----- ----- ---- --------- ----
Total interest-earning
assets................. 194 4 4 202 222 (35) (18) 169 113 (71) (4) 38
----- ---- ----- ----- ----- ----- ----- ----- ----- ---- --------- ----
Interest-bearing
liabilities:
Deposits.................. 111 26 4 141 49 29 1 79 49 (5) -- 44
Short-term borrowings (1). -- -- -- -- 17 -- -- 17 (1) -- -- (1)
----- ---- ----- ----- ----- ----- ----- ----- ----- ---- --------- ----
111 26 4 141 66 29 1 96 48 (5) -- 43
----- ---- ----- ----- ----- ----- ----- ----- ----- ---- --------- ----
Increase (decrease) in
net interest
income.................. $ 83 $(22) $ -- $ 61 $ 156 $ (64) $ (19) $ 73 $ 65 $(66) $(4) $ (5)
===== ==== ===== ===== ===== ===== ===== ===== ===== ==== ========= ====
_______________
(1) Includes FHLB of Atlanta advances and advance payments by borrowers for
expenses.
40
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Total assets increased by $2.9 million, or 8.0%, from $36.1 million at
December 31, 1997 to $39.0 million at June 30, 1998. Total liabilities
increased by $2.7 million, or 8.1%, from $33.2 million at December 31, 1997 to
$35.9 million at June 30, 1998. The increase in assets for the period was
attributable to the growth in our loan portfolio of $1.1 million which was the
result of our capitalizing on strong loan demand in our market area, an increase
in our interest-bearing deposits in other banks of $1.2 million, in addition to
capital improvements, which increased from $40,374 at December 31, 1997 to
$135,434 at June 30, 1998, related to relocating our main office to a separate
building. Loan growth was funded from a net increase in deposits of $2.4
million.
At June 30, 1998, we were in compliance with all applicable regulatory
capital requirements with total core and tangible capital of $3.1 million (7.92%
of adjusted total assets) and total risk-based capital of $3.3 million (17.11%
of risk-weighted assets).
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1997
NET INCOME. Our net income increased $27,000, from $166,000 for the six
months ended June 30, 1997 to $193,000 for the six months ended June 30, 1998
due primarily to increases in net interest income and non-interest income offset
by increases in non-interest expenses and the provision for income tax.
NET INTEREST INCOME. Our net interest income, which is the difference
between our interest income and our interest expense, increased $61,000, from
$542,000 for the six months ended June 30, 1997 to $603,000 for the six months
ended June 30, 1998. The increase was due to an increase in the level of
interest income we received on our loan portfolio. Interest expense also
increased over these six-month periods due primarily to an increase in both the
volume and the average cost of our deposits.
PROVISIONS 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 losses which is
an expense item. During the six months ended June 30, 1998 we made no provision
for loan losses compared to a $5,000 provision for the comparable period in
fiscal year 1997. We determined, based on our analysis of all pertinent
information available to us concerning our loan portfolio, that no addition to
the loan loss allowance was necessary for this period.
NON-INTEREST INCOME. Non-interest income (e.g., gains or losses on the
sale of securities, loan and deposit account fees) increased $1,400 over the
comparative six-month periods due to increases in the fees earned on loans and
other income offset by a decrease in the fees earned on deposit accounts.
41
NON-INTEREST EXPENSE. Our non-interest 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. Other non-interest expenses include stationery and supplies,
bank fees and accounting and auditing fees. Non-interest expenses increased by
$24,000 for the six months ended June 30, 1998 compared to the same period in
fiscal year 1997 due to increases in compensation and related expenses,
occupancy, deposit insurance and other expenses offset by decreases in
furniture, fixtures and equipment expense and advertising. Our non-interest
expenses will increase following the conversion for several reasons. See
"Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996 -- Non-interest Expense."
INCOME TAX EXPENSE. Our provision for income tax increased $16,000 over
the comparable periods due to the increase in our net income.
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 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. During fiscal year 1997, we made a provision
for loan losses 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 from 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 predictable. Although there can be no
certainty in this regard, we expect our portfolio of commercial real estate
loans to increase in the future and we expect future loan loss provisions to
exceed the pre-1997 amounts, specifically because commercial real estate loans
involve a higher
42
degree of credit risk since such loans depend on cash flow from the property to
service the debt and cash flow may be affected by general economic
conditions.
NON-INTEREST INCOME. Non-interest income 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
earned on loans and $2,100 in other income.
NON-INTEREST EXPENSE. For fiscal year 1997, total non-interest 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 non-interest expense will increase following the conversion due to
several factors. First, we will incur significant expenses, including added
personnel costs, in the event that our plans to establish a new branch office
materialize. 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.
Finally, our business plan contemplates spending $1.5 million on a new office
building approximately two years following the conversion.
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 June 30, 1998
was 4% and our liquidity ratio for the month ended June 30, 1998 was 26%. 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
43
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.
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 June 30, 1998, cash and cash equivalents totaled $3,890,000.
Our primary investing activities include origination of loans and purchase
of mortgage-backed securities. During the six months ended June 30, 1998 and
the years ended December 31, 1997 and 1996, purchases of mortgage-backed
securities totaled $785,000, $0 and $499,000, respectively, while loan
originations and purchases totaled $4,349,000, $10,581,000 and $6,494,000. These
investments were funded in part by loan and mortgage-backed security repayments
of $3,767,000, $4,388,000 and $3,730,000 and an increase in certificates of
deposit received of $924,000, $3,730,000 and $519,000, for the six months ended
June 30, 1998 and the years ended December 31, 1997 and 1996, respectively.
At June 30, 1998, we had $3,640,000 in outstanding commitments to originate
fixed rate loans with rates that ranged from 6.5% to 8.50% and had no non-
recourse commercial finance lease commitments outstanding. 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 $10,502,000 at June 30, 1998. 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.
44
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.
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 as a result of such
adoption.
45
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-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 No. 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 Nos. 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.
46
FASB STATEMENT ON DISCLOSURES REGARDING SEGMENTS. In June 1997, the FASB
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 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. SFAS No. 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. SFAS No.
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 post-retirement 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.
FASB STATEMENT ON ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. In June 1998, FASB issued SFAS No. 133. This Statement
standardizes the accounting for derivative instruments including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize these items as assets or liabilities in the statement of financial
position and measure them at fair value. This Statement generally provides for
matching the timing of gain or loss recognition on the hedging instrument with
the recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or the earnings effect of the
hedged forecasted transaction. The Statement, which is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999, will not affect our
financial position or our results of operations. We do not intend to early
implement SFAS No. 133 or to reclassify any of our financial instruments as a
result of this Statement.
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.
47
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 bank following the
conversion.
Since the Company will own only one savings institution, 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 $35 million at June 30, 1998. 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 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 our market areas
can support future lending growth, although 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.
48
The following table sets forth information concerning the types of loans held by
us at the dates indicated.
AT JUNE 30, AT DECEMBER 31,
------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ ------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family
residential
mortgage loans........ $ 26,762 81.33% $ 25,740 81.35% $ 19,439 77.18%
Construction loans....... 2,796 8.50 2,105 6.65 2,462 9.78
Commercial real estate
loans................... 2,559 7.78 2,805 8.87 2,195 8.71
Commercial loans
collateralized by lease
finance receivables..... 555 1.69 741 2.34 1,018 4.04
Consumer loans:
Home equity lines of
credit.................. 158 .48 177 .56 -- --
Loans secured by deposits 73 .22 74 .23 74 .29
--------- ------ -------- ------- --------- ------
Total loans........ 32,903 100.00 31,642 100.00% 25,188 100.00%
====== ======= ======
Less:
Undisbursed portion of
loans in process........ 1,316 1,197 1,028
Deferred loan
origination fees........ 281 268 219
Allowance for losses..... 200 216 100
--------- -------- ---------
Loan portfolio, net $ 31,106 $ 29,961 $ 23,841
========= ======== =========
49
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 AFTER
DUE DURING THE YEAR ENDING 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER 15
DECEMBER 31, 5 YEARS AFTER 10 YEARS AFTER 15 YEARS AFTER YEARS AFTER
--------------------------
1998 1999 2000 DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------ ------ ------
1997 1997 1997 1997 TOTAL
------------ ------------ ------------- ------------ ------
(IN THOUSANDS)
Real estate loans:
One- to four-family...... $ 371 $ 4 $ 48 $ 377 $1,165 $2,909 $20,866 $25,740
Construction............. 1,038 1,067 -- -- -- -- -- 2,105
Commercial real estate... 137 2 -- 314 852 1,010 490 2,805
Commercial loans
collateralized
by lease finance
receivables........... 120 154 372 95 -- -- -- 741
Consumer loans:
Home equity lines of
credit.................. 177 -- -- -- -- -- -- 177
Loans secured by deposits 74 -- -- -- -- -- -- 74
------ ------ ------ ------ ------ ------ ------- -------
Total................. $1,917 $1,227 $ 420 $ 786 $2,017 $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 $ --
========== ======
50
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.
51
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 June 30, 1998, the
largest of our commercial real estate loans was an $990,000 loan participation,
of which our interest totaled $396,000. This loan was secured by an office
building.
Commercial real estate lending, which accounted for approximately 7.78% of
our loan portfolio at June 30, 1998, 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 AND AUTOMOBILE 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
June 30, 1998, our portfolio of commercial leases totaled $555,000, or 1.69%, 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
52
================================================================================
Sticker appears at top of page 53 and reads as follows:
The first full paragraph on page 53 notes that "[w]e have very recently
also invested $500,000 in automobile finance leases from another local company."
As of the date of the Prospectus, this investment had not, as yet, been made.
Subject to the approval of our Board of Directors, we expect to make this
investment in the near future.
================================================================================
profitable investment and will seek to maintain its relationship with the local
leasing company following the conversion.
We have very recently also invested $500,000 in automobile finance leases
from another local company. These lease purchases, in which we participate with
other local lenders, are structured in the same manner as the commercial
finance leases discussed above. All of our purchases from the automobile
leasing company have been and will be with full recourse. Following the
conversion, we plan to invest an additional $500,000 in these automobile leases.
Automobile finance leases are subject to the same risk of default as direct
automobile loans. These loans involve a higher risk of default than loans
secured by one- to four-family residential loans because they are secured by
automobiles, which are rapidly depreciable assets. The repossessed collateral
for a defaulted automobile loan may not provide an adequate source of repayment
of the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation, and the remaining deficiency may not warrant further
substantial collection efforts against the borrower. In addition, automobile
loan collections depend on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, illness or personal
bankruptcy. The application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may also limit the amount
which can be recovered on such loans.
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.
NEW LENDING PROGRAMS TO BE IMPLEMENTED AS PART OF THE CRA ACTION PLAN. In
an effort to improve our CRA rating, we intend to invest $380,000 (which
represents 10% of the gross conversion proceeds at the midpoint of the Estimated
Valuation Range) in loans to first time low-and moderate-income home buyers.
This investment of the conversion proceeds is part of a CRA action plan we have
adopted which includes: (i) offering 97% loan-to-value ratio loans with private
mortgage insurance, no points, and a 1/8% rate discount below our current rate
offering plan; (ii) expanding our solicitation, advertising and education
efforts to reach low- and moderate-income borrowers; and (iii) purchasing low-
and moderate-income loans from brokers at a premium. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- CRA
Compliance."
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.
53
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.
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.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ----------------------
1998 1997 1997 1996
--------- ----------- --------- ----------
(IN THOUSANDS)
Net loans, beginning of period.............. $ 29,961 $ 23,841 $ 23,841 $ 21,695
Origination by type:
- -------------------
Real estate loans:
One- to four-family...................... $ 3,989 $ 5,325 $ 9,621 $ 6,366
Commercial real estate................... 418 439 439 142
Consumer loans:
Loans secured by deposits................. 31 17 50 8
Home equity lines of credit............... -- 184 505 --
-------- -------- -------- --------
Total loans originated............ 4,438 5,965 10,615 6,516
Purchases:
- ---------
Loan participations....................... -- -- 350 --
Commercial loans collateralized by lease
finance receivables.................... 61 215 340 207
-------- -------- -------- --------
Repayments.................................. (3,224) (2,033) (4,843) (4,329)
Decrease (increase) in other items, net..... (130) (1,441) (342) (248)
-------- -------- -------- --------
Increase in loans receivable, net........... 1,145 2,706 6,120 2,146
-------- -------- -------- --------
Net loans, end of period.................... $ 31,106 $ 26,547 $ 29,961 $ 23,841
======== ======== ======== ========
54
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 June 30, 1998,
commitments to cover originations of mortgage loans were $3,640,000. We believe
that virtually all of our commitments will be funded.
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 June 30, 1998. At June 30, 1998, 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 June 30, 1998, our loans past due between 30 and 89 days
totaled $361,201.
Loans are reviewed on a monthly basis and are generally placed on a
nonaccrual 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.
55
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
JUNE 30, AT DECEMBER 31,
--------------------
1998 1997 1996
------------ -------- -------
(IN THOUSANDS)
Loans accounted for on a non-accrual basis:
Real estate loans:
One- to four-family.......................................... $ -- $ -- $ --
Commercial real estate....................................... -- 135 (1) 270
---- ----- ------
Total real estate loans................................... -- 135 270
Commercial loans collateralized by lease finance receivables.. -- -- --
Consumer loans:
Loans secured by deposits.................................... -- -- --
Home improvement............................................. -- -- --
Automobile................................................... -- -- --
Other consumer............................................... -- -- --
---- ----- ------
Total..................................................... -- 135 270
---- ----- ------
Accruing loans delinquent 90 days or more:
Real estate:
One- to four-family.......................................... $ -- $ -- $ --
Commercial real estate....................................... 269 (2) 279 (2) --
Commercial loans collateralized by lease finance receivables... 3 -- --
Consumer loans................................................. -- -- --
Loan secured by deposits...................................... -- -- --
Home equity lines of credit................................... -- -- --
Automobile.................................................... -- -- --
Other consumer................................................ -- -- --
---- ----- ------
Total..................................................... 272 279 (2) --
---- ----- ------
Total nonperforming loans.............................. 272 414 270
==== ===== ======
Total non-performing loans as a percentage of total net loans.... .87% 1.31% 1.07%
==== ===== ======
Total non-performing assets as a percentage of total assets...... .70% 1.15% .84%
==== ===== ======
- ------------------------
(1) In January 1998, these loans were fully repaid.
(2) This balance represents a loan 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 six months ended June 30, 1998 and the year ended December 31,
1997, we would have recorded additional interest income of approximately $0 and
$5,772, respectively, on nonaccrual loans if such loans had been current
throughout the period. We included income of $0 and $9,442 on such nonaccrual
loans during the six months ended June 30, 1998 and the year ended December 31,
1997, respectively. 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.
56
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 June 30, 1998, $315,000 of our assets were classified as special
mention, $3,000 of assets were classified as doubtful and no assets classified
as substandard or 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 June
30, 1998, 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
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.
57
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.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ---------------------
1998 1997 1997 1996
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period............ $ 216 $ 100 $ 100 $ 90
Charge-offs
- -----------
Real estate loans:
One- to four-family...................... (16) -- -- --
Commercial real estate................... -- -- -- --
------ ------- ------ ------
Total real estate loans................ (16) -- -- --
Commercial loans collateralized by lease
finance receivables.................... -- -- (7) --
------ ------- ------ ------
-- -- (7) --
------ ------- ------ ------
Consumer loans:
Loan secured by deposits................ -- -- -- --
Home equity line of credit.............. -- -- -- --
Automobile.............................. -- -- -- --
Other consumer.......................... -- -- -- --
------ ------- ------ ------
Recoveries................................ -- -- -- --
------ ------- ------ ------
Net recoveries (charge-offs).............. (16) -- (7) --
------ ------- ------ ------
Additions charged to operations........... -- 5 123 10
------ ------- ------ ------
Balance at end of period.................. $ 200 $ 105 $ 216 $ 100
====== ======= ====== ======
Allowance for loan losses to total
non-performing loans at end of period.... 73.53% 131.25% 52.17% 37.04%
====== ======= ====== ======
Allowance for loan losses to net loans
at end of period......................... .64% .40% .72% .42%
====== ======= ====== ======
Net loans charge-offs..................... (16) -- (7) --
------ ------- ------ ------
Provision for loan losses................. -- 5 123 10
------ ------- ------ ------
Ratio of net charge-offs to average
loans outstanding during the period .05% -- % .03% -- %
====== ======= ====== ======
58
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.
AT DECEMBER 31,
----------------------------------------------------
AT JUNE 30, 1998 1997 1996
--------------------------- ------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- -------------- --------- ------------ -------- ---------------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family..................... $ 80 81.33% $ 96 81.35% $ 45 77.18%
Construction............................ -- 8.50 -- 6.65 -- 9.78
Commercial real estate loans............ 60 7.78 60 8.87 -- 8.71
Commercial loan collateralized by lease
finance receivables..................... 60 1.69 60 2.34 55 4.04
Consumer loans........................... -- .70 -- .79 -- .29
------ ------ ------ ------ ------ ------
Total allowance for loan losses........ $ 200 100.00% $ 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
59
interest by the full 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 June 30, 1998.
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 $93,000 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 June
30, 1998, our REMIC had a weighted average life of one year. 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 June 30, 1998, 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
JUNE 30, AT DECEMBER 31,
----------------------
1998 1997 1996
-------- ------ -------
(IN THOUSANDS)
Available for sale:
Lord Abbett U.S. Government Securities Fund.. $ -- $ -- $ 197
Held to Maturity:
Interest-bearing deposits in other banks..... 4,699 3,514 5,186
Mortgage-backed securities................... 2,145 1,955 2,333
Federal Home Loan Bank of Atlanta stock...... 273 226 226
------ ------ ------
Total $7,117 $5,695 $7,942
====== ====== ======
60
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for our investment portfolio at June 30, 1998.
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 $4,600 6.10% $-- --% $ 99 5.50% $ -- --%
Mortgage-backed
securities.............. 70 5.50 52 8.00 301 8.52 1,722 7.87
FHLB stock............... -- -- -- -- -- -- 273 7.50
------ -------- ---- ------
Total............... $4,670 6.09% $52 8.00% $400 7.78% $1,995 7.82%
====== ======== ==== ======
TOTAL INVESTMENT PORTFOLIO
----------------------------
WEIGHTED
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
-------- ------ ---------
Securities held to
maturity:
Interest-bearing deposits $4,699 $4,699 6.09%
Mortgage-backed
securities.............. 2,145 2,200 7.89
FHLB stock............... 273 273 7.50
------ ------
Total............... $7,117 $7,172 6.69%
====== ======
61
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 June 30, 1998, 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)
3.05 % None Passbook accounts $ 25 $ 3,022 8.63%
2.41 None Demand and NOW accounts 25 2,193 6.26
4.04 None Money market accounts 1,000 8,770 25.04
Certificates of Deposit
-----------------------
5.30 6 months Fixed-Term, Fixed-Rate 100 1,776 5.07
5.53 12 months Fixed-Term, Fixed-Rate 100 2,190 6.25
5.57 18 months Fixed-Term, Fixed-Rate 100 365 1.04
5.60 30 months Fixed-Term, Fixed-Rate 100 200 .57
5.74 36 months Fixed-Term, Fixed-Rate 100 490 1.40
6.46 48 months Fixed-Term, Fixed-Rate 100 152 .43
6.66 60 months Fixed-Term, Fixed-Rate 100 1,159 3.31
6.92 72 months Fixed-Term, Fixed-Rate 100 4,854 13.86
6.19 Other 1,000 9,847 28.11
------- ------
6.21 Total certificates of deposit 21,033 60.04
------- ------
4.15 Total deposits $35,018 99.97%
======= ======
Accrued interest on deposits .12 .03
------- ------
Total savings on deposits $35,030 100.00%
======= ======
_________________
(1) Indicates weighted average interest rate at June 30, 1998.
62
The following table sets forth information about our average deposit
balances and interest rates during the periods indicated.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------------ ----------------------------------------------
1998 1997 1997 1996
------------------ ---------------------- --------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
------- --------- --------- ---------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
Now accounts............... $ 1,788 2.85% $ 1,752 2.90% $ 1,740 2.89% $ 1,628 2.76%
Money market deposits...... 8,468 3.90 7,882 3.77 7,779 3.89 8,104 3.57
Passbook savings........... 2,864 2.93 2,622 3.00 2,587 2.97 2,701 2.99
Certificates of deposit.... 20,671 5.94 16,946 5.81 17,748 5.88 16,363 5.98
------- ------- ------- -------
Total.................... $33,791 5.01 $29,202 4.84 $29,854 4.94 $28,796 4.84
======= ======= ======= =======
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
AT
JUNE 30, AT DECEMBER 31,
--------------------
1998 1997 1996
-------- ------- -------
RATE (IN THOUSANDS)
----
4.00 - 5.99%.......... $11,986 $10,996 $10,314
6.00 - 7.99%.......... 9,047 9,112 6,062
8.00 - 9.99%.......... -- -- 2
------- ------- -------
$21,033 $20,108 $16,378
======= ======= =======
The following table sets forth the amount and maturities of our time
deposits at June 30, 1998.
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%............. $ 7,399 $ 3,093 $ 446 $ 1,048 $11,986
6.00 - 7.99%............. 3,103 2,165 2,798 981 9,047
------- ------- ------- ------- -------
$10,502 $ 5,258 $ 3,244 $ 2,029 $21,033
======= ======= ======= ======= =======
63
The following table sets forth our savings activity for the periods
indicated:
BALANCE AT BALANCE AT BALANCE AT
JUNE 30, % OF INCREASE DECEMBER 31, % OF INCREASE DECEMBER 31, % OF
1998 DEPOSITS (DECREASE) 1997 DEPOSITS (DECREASE) 1996 DEPOSITS
------- -------- ---------- ----------- --------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
Demand and NOW accounts.... $ 2,193 6.26% $ 114 $ 2,079 6.37% $ (45) $ 2,124 7.29%
Money market deposit....... 8,770 25.04 954 7,816 23.96 (158) 7,974 27.39
Passbook savings accounts.. 3,022 8.63 417 2,605 7.99 (22) 2,627 9.03
Certificates of deposit.... 19,001 54.24 349 18,652 57.18 4,555 14,097 48.42
Jumbo certificates......... 2,032 5.80 576 1,456 4.46 (825) 2,281 7.83
Accrued interest on
deposits.................. 12 .03 (2) 14 .04 1 13 .04
------- ------- ------- ------- ------- ------- ------- ------
35,030 100.00% $ 2,408 $32,622 100.00% $ 3,506 $29,116 100.00%
======= ======= ======= ======= ======= ======= ======= ======
64
The following table indicates the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of June 30, 1998.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- --------------
(IN THOUSANDS)
Three months or less........... $ 100
Over three through six months.. 141
Over six through 12 months..... 215
Over 12 months................. 1,576
------
Total....................... $2,032
======
SAVINGS DEPOSIT ACTIVITY
The following table sets forth our savings activities for the periods
indicated.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ---------------------
1998 1997 1997 1996
--------- ------------- -------- -----------
(DOLLARS IN THOUSANDS)
Opening balance...................... $32,607 $29,103 $29,103 $29,162
Net increase (decrease) before
interest credited................. 1,585 (21) 2,027 (1,464)
Interest credited.................... 826 702 1,477 1,405
------- ------- ------- -------
Ending balance..................... $35,018 $29,784 $32,607 $29,103
======= ======= ======= =======
Net increase (decrease).............. $ 2,411 $ 681 $ 3,504 $ (59)
======= ======= ======= =======
Percent increase (decrease).......... 7.39% 2.34% 12.04% (.20)%
======= ======= ======= =======
65
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 June 30, 1998, we had no borrowings from the FHLB of Atlanta.
AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- -----------------------------
1998 1997 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............... -- -- -- --
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.
66
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 DEPOSITS
YEAR OWNED OR AT JUNE 30, APPROXIMATE AT JUNE 30,
OPENED LEASED 1998 (1) SQUARE FOOTAGE 1998
------ ----------- ------------ -------------- -----------
(DEPOSITS IN THOUSANDS)
MAIN OFFICE:
1844 E. Joppa Road 1983 Leased (2) $ 0 3,150 $18,614,000
Baltimore, Maryland
BRANCH OFFICE:
8705 Harford Road
Baltimore, Maryland 1923 Owned 28,000 750 16,404,000
EXECUTIVE OFFICES:
8005 Harford Road
Baltimore, Maryland 1998 Leased (3) 48,000 2,915 N/A
- ------------------
(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 our investment in premises and equipment totaled $135,000
at June 30, 1998. See note 5 of notes to financial statements.
PERSONNEL
At June 30, 1998, we had 8 full-time and 2 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.
67
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.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES
The U.S. Congress is in the process of drafting legislation which may have
a profound effect on the financial services industry. On May 13, 1998, the U.S.
House of Representatives passed H.R. 10, the "Financial Services Competition Act
of 1998," which calls for a sweeping modernization of the banking system that
would permit affiliations between commercial banks, securities firms, insurance
companies and, subject to certain limitations, other commercial enterprises.
The stated purposes of H.R. 10 are to enhance consumer choice in the financial
services marketplace, level the playing field among providers of financial
services and increase competition. H.R. 10 removes many of the statutory
restrictions contained in current laws regulating the financial services
industry and calls for a new regulatory framework of financial institutions and
their holding companies. H.R. 10. however, preserves the thrift charter and all
existing thrift powers, but would restrict the activities of new unitary thrift
holding companies. The Senate is now considering and may further modify H.R.
10. At this time, it is unknown whether H.R. 10 will be enacted into law, or if
enacted, what form the final version of such legislation might take and how such
legislation may affect our and our holding company's business and operations.
68
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 institutions. 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 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.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require savings
institutions to meet three capital standards: (i) tangible capital equal to at
least 1.5 % of total adjusted assets, (ii) core capital equal to at least 3% of
total adjusted assets, and (iii) risk-based capital equal to at least 8% 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%, a ratio of Tier 1
capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to
adjusted total assets of less than 4% (3% 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.
69
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 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 June 30,
1998, 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................ $3,087 7.92%
Tangible capital requirement.... 585 1.50
------ -----
Excess........................ $2,502 6.42%
====== =====
Core capital.................... $3,087 7.92%
Core capital requirement........ 1,170 3.00
------ -----
Excess........................ $1,917 4.92%
====== =====
Risk-based capital.............. $3,287 17.11%
Risk-based capital requirement.. 1,537 8.00
------ -----
Excess........................ $1,750 9.11%
====== =====
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
70
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 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 June 30, 1998, 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 set a 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% 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
June 30, 1998, 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
71
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.
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 June 30,
1998, we were in compliance with our Qualified Thrift Lender requirement with
approximately 95.96% of our assets invested in Qualified Thrift Investments.
COMMUNITY REINVESTMENT ACT. In enacting the CRA, the Congress required
each federal banking regulatory agency to assess an institution's record of
helping to meet the credit needs of the local communities in which the
institution is chartered, consistent with the safe and sound operation of the
institution, and to take this record into account in the agency's evaluation of
an application for a deposit facility by the institution. OTS regulations
provide that the OTS will take into account
72
the record of performance under the CRA for, among other things, the following
applications: (i) the establishment of branches or other deposit-accepting
facilities of a savings institution; (ii) the relocation of a main office or
branch of a savings institution; (iii) the merger or consolidation of a savings
institution with another depository institution; or (iv) acquisition by a thrift
holding company of a savings institution. A savings institution's record of CRA
performance may be the basis for denying or conditioning approval of any of
these types of applications. The OTS rates the performance of a savings
institution under the applicable CRA performance standards and assigns one of
the following ratings: Outstanding, Satisfactory, Needs to Improve, or
Substantial NonCompliance. In its last CRA evaluation, we received a rating of
"Needs to Improve." For a detailed discussion of the risks associated with this
rating and our response to receipt of the rating, see "Risk Factors -- Risks
Associated with "Needs to Improve CRA Rating" and "Management's Discussion and
Analysis and Results of Operations --CRA Compliance."
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 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 June 30, 1998, our required liquid asset
ratio was 4% and our actual ratio was 26%. Monetary penalties may be imposed
upon institution for violations of liquidity requirements.
73
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 June 30, 1998, we had $272,900 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 June 30,
1998, 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.
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
74
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 directly, or
indirectly through one or more intermediaries, who controls, or is 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.
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
75
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 June 30, 1998, we had $119,526 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. AMTI 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 AMTI is increased by an amount equal to 75% of the amount by which our
adjusted current earnings exceeds our AMTI (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 $5,000,000 or less for its 1995-1997 tax years will be a small 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.
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
76
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.
77
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
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 JUNE 30, 1998 WITH THE BANK SINCE EXPIRES
- ---- ------------- ------------- -------- -------
Gary R. Bozel 40 Chairman of the Board 1985 2001
G. Ronald Jobson 62 President, Chief Executive 1994 2000
Officer and Director
J. Thomas Hoffman 50 Secretary and Director 1983 2000
E. Thomas Lawrence, Jr. 43 Director 1994 1999
David G. Rittenhouse 82 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
78
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.
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
79
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.
DEFERRED COMPENSATION PLAN. We adopted the Northfield Federal Savings
Deferred Compensation Plan, effective December 24, 1997 for our directors and
select executive officers. 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 bookkeeping accounts in the name of
each participant. In addition, on December 31, 1997, each director's account
was credited with the product of $2,500 and 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. 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. Beginning with 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.
Participants are fully vested in their accounts at all times. 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.
We have established a trust in order to hold assets with which to pay plan
benefits to participants. Trust assets are subject to claims of 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.
80
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).
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, if we determine not to renew Mr.
Jobson's term of employment 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 (if the agreement is renewed by the board past the
initial term), 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. The maximum amount that Mr. Jobson could currently receive is
$224,250 (assuming the full length of his remaining term). 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, until he
becomes eligible to participate in Medicare.
EMPLOYEE STOCK OWNERSHIP PLAN. We have established the ESOP for the
exclusive benefit of our participating employees, 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
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determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash.
In accordance with the Plan, the ESOP may borrow funds with which to acquire up
to 8% of the common stock to be issued in the 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% of the common stock to be issued in the offering
(30,400 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 participant
accounts as the loan is repaid. We anticipate contributing approximately
$30,000 annually (based on a 30,400 share 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 437,000 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 participant accounts on the basis of each participant's
annual wages subject to federal income tax withholding, plus any amounts
withheld under a plan qualified under Section 125 or 401(k) of the Code and
sponsored by us. 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 after 1997, 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.
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 or its
successor equal to the amount, if any, which would have been allocated to the
participant's account immediately following the
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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.
401(K) PLAN. Our 401(k) Plan has been amended to eliminate matching
contributions as of April 1, 1998 and is being amended in connection with the
conversion to allow participants a one-time right to direct that all or part of
their account balances be invested in Company common stock. Participants will
retain the right to vote those shares held in trust for them under the 401(k)
Plan.
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 if required by applicable law. We
currently expect to implement this plan 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., 38,000 shares based upon the
sale of 380,000 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.
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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 implement the MRP no sooner than one year after the
conversion (subject to any stockholder approval required by law), 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 or more 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
380,000 shares of common stock in the offering at the midpoint of the Estimated
Valuation Range, the MRP Trust is expected to purchase up to 15,200 shares of
common stock.
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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) for 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 "Additional Information" as to how to obtain a copy of these
documents.
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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.
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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 such
stockholders represent not less than 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.
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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
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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
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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 502,550 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.
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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
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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.
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 are, of necessity, brief descriptions and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
92
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.
93
NORTHFIELD FEDERAL SAVINGS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report F-1
Statements of Financial Condition as of the Six Months Ended June 30, 1998
(unaudited) and the Years Ended December 31, 1997 and 1996 F-2
Statements of Operations for the Six Months Ended June 30, 1998 and 1997
(unaudited) and the Years Ended December 31, 1997 and 1996 F-3
Statements of Retained Earnings for the Six Months Ended June 30, 1998
(unaudited) and the Years Ended December 31, 1997 and 1996 F-4
Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997
(unaudited) and the Years Ended December 31, 1997 and 1996 F-5
Notes to Financial Statements F-8
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.
94
[LETTERHEAD OF ANDERSON ASSOCIATES, LLP APPEARS HERE]
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/ Andersen Associates, LLP
February 12, 1998
Baltimore, Maryland
F-1
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
June 30, December 31,
------------
1998 1997 1996
-------- ---- ----
(Unaudited)
Assets
------
Cash $ 222,219 $ 116,900 $ 172,850
Interest bearing deposits in other banks 4,698,697 3,513,650 5,186,074
Securities available for sale (Note 2) - - 196,772
Mortgage backed securities - held to maturity
(fair value $2,200,212 - 1998, $2,010,934 - 1997
and $2,378,256 - 1996) (Note 3) 2,145,156 1,955,008 2,333,119
Loans receivable, net (note 4) 31,105,777 29,961,032 23,841,394
Accrued interest receivable - loans 163,420 149,536 127,180
- investments 17,666 25,000 41,157
- mortgage backed
securities 14,106 12,693 15,194
Premises and equipment, at cost, less
accumulated depreciation (Note 5) 135,434 40,374 52,301
Federal Home Loan Bank of Atlanta stock
at cost (Note 6) 272,900 226,400 226,400
Deferred income taxes (Note 10) 8,826 26,279 -
Prepaid income taxes (Note 10) 17,630 - 782
Prepaid expenses and other assets 185,323 57,544 34,846
----------- ----------- -----------
Total assets $38,987,154 $36,084,416 $32,228,069
=========== =========== ===========
Liabilities and Retained Earnings
---------------------------------
Liabilities
- -----------
Deposit accounts (Note 7) $35,030,284 $32,621,766 $29,115,850
Advance payments by borrowers
for expenses 705,990 371,262 316,973
Deferred income taxes (Note 10) - - 57,612
Income taxes payable (Note 10) - 62,964 2,600
Other liabilities 164,374 134,667 5,329
----------- ----------- -----------
Total liabilities 35,900,648 33,190,659 29,498,364
Commitments and contingencies - Notes 4 and 5
Retained earnings (substantially restricted)
(Note 9) 3,086,506 2,893,757 2,749,226
Net unrealized loss on securities available for
sale net of tax - - (19,521)
----------- ----------- -----------
Total retained earnings 3,086,506 2,893,757 2,729,705
----------- ----------- -----------
Total liabilities and retained earnings $38,987,154 $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
------------------------
Six Months Ended Years Ended
June 30, 1998 December 31,
---------------------- -----------------------
1998 1997 1997 1996
---- ---- --- ----
(Unaudited)
Income
- ------
Interest and fees on loans (Note 4) $1,258,428 $1,010,424 $2,209,375 $1,927,726
Interest on securities available for sale - 8,121 14,888 15,216
Interest on mortgage backed securities 76,946 86,095 166,235 161,432
Other interest income 115,658 144,759 235,958 352,631
---------- ---------- ---------- ----------
Total interest income 1,451,032 1,249,399 2,626,456 2,457,005
Interest Expense
- ----------------
Interest on deposits (Note 7) 846,730 705,576 1,473,588 1,394,152
Interest on short-term borrowings 1,167 1,534 19,973 2,556
---------- ---------- ---------- ----------
Total interest expense 847,897 707,110 1,493,561 1,396,708
---------- ---------- ---------- ----------
Net interest income 603,135 542,289 1,132,895 1,060,297
Provision for losses on loans (Note 4) - 5,000 123,270 10,000
---------- ---------- ---------- ----------
Net interest income after provision
for losses on loans 603,135 537,289 1,009,625 1,050,297
Non-Interest Income (Loss)
- --------------------------
Loss on sale of securities available for sale - - (32,321) -
Fees on loans 4,619 4,179 8,366 7,101
Fees on deposits 5,984 7,286 14,033 18,978
All other income 5,448 3,232 7,504 5,359
---------- ---------- ---------- ----------
Net non-interest income (loss) 16,051 14,697 (2,418) 31,438
Non-Interest Expenses
- ---------------------
Compensation and related expenses 148,606 146,344 469,637 328,285
Occupancy 34,643 31,537 63,201 59,397
Deposit insurance 9,944 5,685 15,238 250,195
Service bureau expense 30,382 29,122 56,637 55,651
Furniture, fixtures and equipment expense 10,172 15,419 28,075 31,673
Advertising 12,089 14,533 30,013 22,412
Other 68,742 47,760 108,702 95,662
---------- ---------- ---------- ----------
Total non-interest expenses 314,578 290,400 771,503 843,275
---------- ---------- ---------- ----------
Income before tax provision 304,608 261,586 235,704 238,460
Provision for income tax (Note 10) 111,859 95,976 91,173 89,581
---------- ---------- ---------- ----------
Net income $ 192,749 $ 165,610 $ 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
--------------------------------------------------------
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
--------------------------------------------------
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
securities available for sale
net of tax - (5,575) (5,575)
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
securities available for sale
net of tax - 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
Net income for the six month period
ended June 30, 1998 (unaudited) 192,749 - 192,749
---------- -------- ----------
Balance June 30, 1998 (unaudited) $3,086,506 $ - $3,086,506
========== ======== ==========
The accompanying notes to financial statements
are an integral part of these statements.
F-4
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
STATEMENTS OF CASH FLOWS
------------------------
Six Months Ended For Years Ended
June 30, December 31,
---------------------- -------------------------
1998 1997 1997 1996
---------- ---------- ---------- -------------
(Unaudited)
Operating Activities
- --------------------
Net income $ 192,749 $165,610 $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 1,837 4,084 7,358 11,111
Stock dividends on investments - (7,851) (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 (261) 1,933 2,244 2,272
Loan fees deferred 31,287 49,010 77,225 59,520
Amortization of deferred loan fees (19,193) (12,691) (27,831) (42,971)
Provision for losses on loans - 5,000 123,270 10,000
(Increase) decrease in accrued
interest on loans (13,884) (20,784) (22,356) 18,863
Decrease in accrued interest on
investments 7,334 21,047 16,157 16,924
(Increase) decrease in accrued
interest on mortgage backed
securities (1,413) (9,742) 2,501 4,785
Provision for depreciation 6,980 10,290 18,049 23,299
(Increase) decrease in deferred
income taxes 17,453 1,482 (96,173) (24,888)
(Increase) decrease in prepaid
income taxes (17,630) (1,507) 782 75,664
(Increase) decrease in prepaid
expenses and other assets (127,779) (6,466) (22,698) 12,426
Increase (decrease) in accrued
interest payable (2,682) 4,858 1,615 (8,351)
(Decrease) increase in income
taxes payable (62,964) 30,801 60,364 2,600
Increase (decrease) in other
liabilities 29,707 14,629 129,338 (25,974)
----------- ---------- -------- ---------
Net cash provided by
operating activities 41,541 249,703 432,060 268,943
F-5
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
--------------------
STATEMENTS OF CASH FLOWS
------------------------
Six Months Ended For Years Ended
June 30, December 31,
------------------------- --------------------------
1998 1997 1997 1996
------------ ----------- ------------ -----------
(Unaudited)
Cash Flows from Investing Activities
- ------------------------------------
Proceeds from maturing
certificates of deposit $ 245,001 $ 383,154 $ 970,154 $ 755,037
Purchases of certificates of deposit (392,000) (150,000) (150,000) -
Proceeds from sale of securities
available for sale - - 210,891 -
Purchases of mortgage backed
securities (784,712) - - (499,063)
Principal collected on mortgage
backed securities 594,825 119,953 375,867 317,970
Purchase of loans (60,682) (214,557) (334,016) (207,084)
Longer term loans originated (4,288,744) (4,364,527) (10,246,768) (6,286,634)
Principal collected on longer
term loans 3,172,572 1,925,344 4,012,325 3,412,231
Net decrease (increase) in
short-term loans 20,015 (93,654) 276,157 908,611
Purchases of premises and
equipment (102,040) (898) (6,122) (9,552)
Purchase of Federal Home Loan
Bank of Atlanta stock (46,500) - - -
----------- ----------- ------------ -----------
Net cash used by investing
activities (1,642,265) (2,395,185) (4,891,512) (1,608,484)
Cash Flows from Financing Activities
- ------------------------------------
Net increase (decrease) in demand deposits,
money market, passbook accounts
and advance payments by
borrowers for taxes and insurance 1,821,534 134,103 (171,777) (525,232)
Net increase in certificates of
deposit 924,394 869,637 3,730,367 518,741
----------- ----------- ------------ -----------
Net cash provided (used) by
financing activities 2,745,928 1,003,740 3,558,590 (6,491)
----------- ----------- ------------ -----------
Increase (decrease) in cash and cash
equivalents 1,145,204 (1,141,742) (900,862) (1,346,032)
Cash and cash equivalents at
beginning of year 2,744,442 3,645,304 3,645,304 4,991,336
---------- ----------- ------------ -----------
Cash and cash equivalents at
end of year $3,889,646 $ 2,503,562 $ 2,744,442 $ 3,645,304
========== =========== ============ ===========
F-6
NORTHFIELD FEDERAL SAVINGS
--------------------------
Baltimore, Maryland
-------------------
STATEMENTS OF CASH FLOWS
------------------------
Six Months Ended For Years Ended
June 30, December 31,
------------------------------- ---------------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Reconciliation of cash and cash equivalents:
Cash $ 222,219 $ 143,575 $ 116,900 $ 172,850
Interest bearing accounts in
other banks 4,698,697 3,836,369 3,513,650 5,186,074
----------- ----------- ---------- -----------
4,920,916 3,979,944 3,630,550 5,358,924
Less - Certificates of deposit
maturing in 90 days or
more included in interest
bearing accounts in
other banks (1,031,270) (1,476,382) (886,108) (1,713,620)
----------- ----------- ---------- -----------
Cash and cash equivalents $ 3,889,646 $ 2,503,562 $2,744,442 $ 3,645,304
=========== =========== ========== ===========
Supplemental disclosures of cash flows information:
Cash paid during year for:
Interest $ 850,579 $ 702,252 $1,491,949 $ 1,405,078
Income taxes $ 175,000 $ 65,200 $ 126,200 $ 68,193
The accompanying notes to financial statements
are an integral part of these statements.
F-7
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.
The statement of financial condition and retained earnings at
June 30, 1998, and the statements of operations, cash flows and notes
to the financial statements for the six months ended June 30, 1998 and
1997 are unaudited, but in the opinion of management reflect all
adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation. The statement of operations for
the six months ended June 30, 1998 is not necessarily indicative of
the operating results to be expected for the entire fiscal year.
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 the level yield method 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-8
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 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 to the yield of the
related loan over the contractual life utilizing the interest method.
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.
F-9
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Loans Receivable - Continued
----------------
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.
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.
F-10
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 2 - Securities Available for Sale
-----------------------------
The Association had no securities available for sale at June 30,
1998 or 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.
No gains or losses were realized during the six months ended June
30, 1998.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.
Note 3 - Mortgage Backed Securities
--------------------------
Mortgage backed securities consist of the following:
June 30, December 31,
-------- ------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
GNMA participating certificates $ 1,378,436 $ 815,950 $ 1,018,329
FNMA participating certificates 43,612 46,305 50,525
FHLMC participating certificates 607,298 701,770 766,108
REMIC 93,175 395,071 500,000
----------- ----------- -----------
2,122,521 1,959,096 2,334,962
Net - unamortized premiums
and discounts 22,635 (4,088) (1,843)
----------- ----------- -----------
$ 2,145,156 $ 1,955,008 $ 2,333,119
=========== =========== ===========
F-11
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 3 - Mortgage Backed Securities - Continued
--------------------------
The amortized cost and fair value of mortgage backed securities are as
follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
June 30, 1998
---------------------------------------------------------
(Unaudited)
GNMA participating certificates $1,401,836 $46,697 $ - $1,448,533
FNMA participating certificates 43,612 929 - 44,541
FHLMC participating certificates 606,476 8,681 1,492 613,665
REMIC 93,232 241 - 93,473
---------- ------- ---------- ----------
$2,145,156 $56,548 $1,492 $2,200,212
========== ======= ========== ==========
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 six month period ended
June 30, 1998 and for the years ended December 31, 1997 and 1996,
respectively.
F-12
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 3 - Mortgage Backed Securities - Continued
--------------------------
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 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 June 30, 1998, December 31, 1997 and 1996 consist
of the following:
June 30, December 31,
-------- -------------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
One to four family residential
mortgage loans $26,761,847 $25,739,458 $19,439,391
Construction loans 2,795,800 2,104,575 2,461,800
Commercial real estate loans 2,558,943 2,805,693 2,195,236
Commercial loan collateralized by
lease finance receivables 554,496 741,226 1,017,913
Home equity line of credit loans 158,318 177,141 -
Loans secured by deposits 72,950 74,142 73,612
----------- ----------- -----------
32,902,354 31,642,235 25,187,952
Less
- ----
Undisbursed portion of loans
in process (1,315,735) (1,197,270) (1,027,520)
Deferred loan origination fees (280,527) (268,433) (219,038)
Allowance for losses on loans (200,315) (215,500) (100,000)
----------- ----------- -----------
(1,796,577) (1,681,203) (1,346,558)
----------- ----------- -----------
$31,105,777 $29,961,032 $23,841,394
=========== =========== ===========
F-13
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 4 - Loans Receivable - Continued
----------------
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 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
six month periods ended June 30 and the years ended December 31:
June 30, December 31,
----------------- -------------------
1998 1997 1997 1996
------ ------ ------ --------
(Unaudited)
Balance - beginning of year $215,500 $100,000 $100,000 $ 90,000
Provision for losses on loans - 5,000 123,270 10,000
Charge-offs (15,185) - (7,770) -
-------- -------- -------- --------
Balance - end of year $200,315 $105,000 $215,500 $100,000
======== ======== ======== ========
F-14
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 4 Loans Receivable - Continued
----------------
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:
June 30, December 31,
--------------- -----------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Average recorded investment $ - $270,000 $270,000 $270,000
Aggregate recorded investment - 270,000 135,000 270,000
Allowance for loan losses - 2,700 1,350 2,700
Interest income recognized during
impairment - 4,721 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 at June 30, 1998 and December 31, 1997
and 1996, respectively.
June 30, December 31,
-------- -------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Balance outstanding - beginning of year $ 617,952 $498,213 $535,925
New loans 79,600 153,900 -
Principal repayments (216,014) (34,161) (37,712)
--------- -------- --------
Balance outstanding - end of year $ 481,538 $617,952 $498,213
========= ======== ========
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 June 30, 1998,
approximate $3,640,000 and at December 31, 1997, approximate $394,800.
These commitments are for mortgage loans with fixed rates between 6.50%
and 8.50% at June 30, 1998 and 7.125% and 11.50% at December 31, 1997.
There were no non-recourse leasing loan commitments not reflected in the
accompanying statements at June 30,
F-15
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 4 - Loans Receivable - Continued
----------------
1998. 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 and June 30, 1998, as a liability for credit loss.
Note 5 - Premises and Equipment
----------------------
Premises and equipment at June 30, 1998 and December 31, 1997 and 1996
are as follows:
June 30, December 31,
-------- ------------------
1998 1997 1996 Useful Lives
---- ---- ---- ------------
(Unaudited)
Land $ 15,000 $ 15,000 $ 15,000 -
Office building and
improvements 103,630 49,497 49,497 5 to 35 years
Furniture, fixtures and
equipment 276,297 228,757 222,635 5 to 15 years
--------- --------- ---------
394,927 293,254 287,132
Less - accumulated
depreciation (259,493) (252,880) (234,831)
--------- --------- ---------
$ 135,434 $ 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
six months ended June 30, 1998 and 1997 and for the years ended December
31, 1997 and 1996 was $23,151, $19,750, $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
--------
2004 $236,333
========
F-16
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 June 30, 1998 and December 31, 1997 and 1996
consist of the following:
June 30, December 31,
------------------------- ---------------------------------------------
1998 1997 1996
------------------------- --------------------- -------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(Unaudited)
Demand and NOW
accounts including
non-interest bearing
deposits of $437,837
in 1998, $338,633
in 1997 and
$277,778 in 1996 $ 2,193,290 6.26% $ 2,078,419 6.37% $ 2,123,746 7.29%
Money markets 8,770,212 25.04 7,816,045 23.96 7,973,913 27.39
Passbook savings 3,022,311 8.63 2,604,543 7.99 2,627,415 9.03
Certificates of
deposit 21,032,816 60.04 20,108,422 61.64 16,378,055 56.25
----------- ------ ----------- ------ ----------- ------
35,018,629 99.97 32,607,429 99.96 29,103,129 99.96
Accrued interest
on deposits 11,655 .03 14,337 .04 12,721 .04
----------- ------ ----------- ------ ----------- ------
$35,030,284 100.00% $32,621,766 100.00% $29,115,850 100.00%
=========== ====== =========== ====== =========== ======
F-17
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 7 - Deposit Accounts - Continued
----------------
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 for the six month periods ended June
30, 1998 and 1997 and for the twelve month periods ended December 31,
1997 and 1996 is as follows:
June 30, December 31,
------------------ ----------------------
1998 1997 1997 1996
-------- -------- ---------- ----------
(Unaudited)
NOW accounts $ 25,500 $ 25,378 $ 50,263 $ 44,959
Money markets 165,212 148,549 302,996 289,428
Savings 41,983 39,375 76,881 80,670
Certificates of deposit 614,035 492,274 1,043,448 979,095
-------- -------- ---------- ----------
$846,730 $705,576 $1,473,588 $1,394,152
======== ======== ========== ==========
The Association had deposits of $100,000 or more of approximately
$2,032,392, $1,456,188 and $2,281,290 at June 30, 1998, December 31,
1997 and 1996, respectively. Deposits in excess of $100,000 are not
federally insured.
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 during the year ended
December 31, 1996 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.
F-18
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
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 six months
ended June 30, 1998 and 1997 and the year ended December 31, 1997 and
1996 was $4,126, $6,564, $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 six months
ended June 30, 1998 and 1997 and the year ended December 31, 1997 of
$22,025, $ -0- and $115,000, respectively, 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.
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 June 30, 1998 and 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.
F-19
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 9 - Retained Earnings - Continued
-----------------
The following table presents the Association's capital position
based on the six month period ended June 30, 1998 and the year ended
December 31, 1997 financial statements.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ --------------------------- ------------------------
Amount % Amount % Amount %
--------------- ----- ---------------- ----- --------------- -----
At June 30, 1998
---------------------------------------------------------------------------------------
(Unaudited)
Tangible (1) $3,086,506 7.92% $ 584,807 1.50% $ N/A N/A %
Tier I capital (2) 3,086,506 16.07% N/A N/A % 1,152,600 6.00%
Core (1) 3,086,506 7.92% 1,169,615 3.00% 1,949,358 5.00%
Risk-weighted (2) 3,286,821 17.11% 1,536,800 8.00% 1,921,000 10.00%
At December 31, 1997
---------------------------------------------------------------------------------------
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.
June 30, 1998 December 31, 1997
----------------- -----------------
Current Requirements Current Requirements
-------------------- --------------------
Total retained earnings $ 3,086,506 $ 2,893,757
------------- -------------
Tangible and core capital 3,086,506 2,893,757
General valuation allowance 200,315 215,500
------------- -------------
Risk-based capital $ 3,286,821 $ 3,109,257
============= =============
Total assets $ 38,987,154 $ 36,084,416
------------- -------------
Tangible and adjusted tangible assets $ 38,987,154 $ 36,084,416
============= =============
Risk-weighted assets $ 19,210,000 $ 18,092,000
============= =============
F-20
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 10- Income Taxes
------------
The income tax provision consists of the following for the six
month periods ended June 30, 1998 and 1997 and the years ended
December 31:
June 30, December 31,
------------------ --------------------
1998 1997 1997 1996
-------- -------- --------- ---------
(Unaudited)
Current expense $ 94,406 $94,494 $187,346 $114,469
Deferred expense (benefit) 17,453 1,482 (96,173) (24,888)
-------- ------- -------- --------
Total tax expense $111,859 $95,976 $ 91,173 $ 89,581
======== ======= ======== ========
The income tax provision is reconciled to the amount computed to
the statutory federal income tax rate as follows for the six month
periods ended June 30, 1998 and 1997 and the years ended December 31:
For the Six Month Periods Ended June 30,
------------------------------------------------
1998 1997
--------------------- -----------------------
Amount Rate Amount Rate
------ ---- ------ ----
(Unaudited)
Statutory federal income tax rate $103,567 34.00% $88,939 34.00%
State tax net of federal income tax
Benefit 8,225 2.70 6,773 2.59
Other 67 .02 264 .10
-------- ----- ------- -----
$111,859 36.72% $95,976 36.69%
======== ===== ======= =====
For the Years Ended 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%
====== ===== ====== =====
F-21
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 10- Income Taxes Continued
------------
The tax effects of temporary differences between financial
reporting basis and income tax basis of assets and liabilities at June
30, 1998 and December 31, 1997 and 1996 are as follows:
June 30, December 31,
----------- -----------------------
1998 1997 1996
---- ----- -----
(Unaudited)
Deferred Tax Assets:
Deferred loan origination fees $ 20,179 $ 27,571 $ 42,354
Deferred compensation 44,413 44,413 -
Unrealized loss on securities available
for sale 32,160 32,160 44,442
Allowance for loan losses 77,361 83,226 38,620
--------- --------- --------
174,113 187,370 125,416
Deferred Tax Liabilities:
Federal Home Loan Bank of Atlanta
stock dividend (32,595) (32,595) (32,595)
Depreciation (3,510) (3,510) (6,765)
Excess of tax bad debt reserve over
base year (46,161) (52,756) (65,945)
Conversion from accrual to cash
method of accounting (83,021) (72,230) (77,723)
--------- --------- ---------
(165,287) (161,091) (183,028)
--------- --------- ---------
Net deferred tax assets (liabilities) $ 8,826 $ 26,279 $ (57,612)
========= ========= =========
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
F-22
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 10- Income Taxes - Continued
------------
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 June 30, 1998, 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-23
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 11- Disclosures About Fair Value of Financial Instruments - Continued
-----------------------------------------------------
The Association had off-balance sheet financial instruments that
consisted entirely of loan commitments with fair values that were not
materially difference from the committed amount and were not considered
to be material and accordingly are not included in the table below.
June 30, December 31, December 31,
--------------------- -------------------- ----------------------
1998 1997 1996
--------------------- -------------------- ----------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
-------- ----------- -------- ---------- -------- ------------
(Unaudited)
(Amounts in Thousands)
Financial Assets
- ----------------
Interest bearing
deposits in other
banks $ 4,699 $ 4,699 $ 3,514 $ 3,514 $ 5,186 $ 5,186
Investment
securities - - - - 197 197
Mortgage backed
securities 2,145 2,200 1,955 2,011 2,333 2,378
Federal Home
Loan Bank of
Atlanta stock 273 273 226 226 226 226
Loans receivable 31,106 32,994 29,961 31,772 23,841 23,770
Financial Liabilities
- ---------------------
Savings $ 3,022 $ 3,022 $ 2,605 $ 2,605 $ 2,627 $ 2,627
NOW and money
market deposit
accounts 10,963 10,963 9,894 9,894 10,098 10,098
Certificates of
deposit 21,033 21,126 20,108 20,222 16,378 16,527
Advance payment
by borrowers
for expenses 706 706 371 371 317 317
F-24
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
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.
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
F-25
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 12- Plan of Conversion - Continued
------------------
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 $145,111 and $22,712 were incurred through
June 30, 1998 and December 31, 1997, respectively.
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-26
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-27
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
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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.
F-28
NORTHFIELD FEDERAL SAVINGS
- --------------------------
Baltimore, Maryland
- -------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 13- Recent Accounting Pronouncements - Continued
--------------------------------
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. 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.
FASB Statement on Accounting for Derivative Instruments and
Hedging Activities - In June 1998, FASB issued SFAS No. 133. This
Statement standardizes the accounting for derivative instruments
including certain derivative instruments embedded in other contracts,
by requiring that an entity recognize these items as assets or
liabilities in the statement of financial position and measure them at
fair value. This Statement generally provides for matching the timing
of gain or loss recognition on the hedging instrument with the
recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or the earnings
effect of the hedged forecasted transaction. The Statement, which is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999, will not affect the Association's financial position or
its results of operations.
The Association does not intend to early implement SFAS No. 133 or
to reclassify any of its financial instruments as a result of this
Statement.
F-29
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
CRA Community Reinvestment Act of 1997
Eligible Account Savings account holders of Northfield Federal Savings
Holders with account balances of at least $50.00 as of the
close of business on December 31, 1995
ESOP Employee Stock Ownership Plan of the Company
Estimated Estimated pro forma market value of the common stock
Valuation Range ranging from $3,230,000 to $4,370,000
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 Noon, Eastern Time, on October 29, 1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Federal Reserve System The Board of Governors of the Federal Reserve System
A-1
Ferguson Ferguson & Company
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 of the Company 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 of the Company 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 September 15, 1998 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 Bulletin An electronic stock data system operated by Nasdaq
Board
OTS Office of Thrift Supervision
A-2
Plan of Conversion Plan of Northfield Federal Savings to convert from a
federally chartered mutual savings association to a
federally chartered stock savings bank, with the name
"Northfield Federal Savings Bank," and the issuance of
the savings 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 Offering of non-transferable rights to
subscribe for the Common Stock, in order of priority,
to Eligible Account Holders, tax-qualified employee
plans, Supplemental Eligible Account Holders and Other
Members
Supplemental Eligible Depositors, who are not Eligible Account Holders of
Account Holders Northfield Federal Savings, with account balances of at
least $50.00 on June 30, 1998
Syndicated Community Offering of shares of common stock remaining after the
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 Date The close of business on September 15, 1998, the date
for 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 affairs 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 502,550 SHARES
COMMON STOCK
PROSPECTUS
TRIDENT SECURITIES, INC.
DATED SEPTEMBER 22, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
UNTIL THE LATER OF DECEMBER 21, 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.