SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
(AMENDMENT NO. )
FILED BY THE REGISTRANT |X|
FILED BY A PARTY OTHER THAN THE REGISTRANT |_|
CHECK THE APPROPRIATE BOX:
|X| Preliminary Proxy Statement
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
1st BERGEN BANCORP
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NOT APPLICABLE
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
|X| No fee required
| | Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11
1) Title of each class of securities to which transaction applies:
COMMON STOCK, NO PAR VALUE PER SHARE
2) Aggregate number of securities to which transaction applies:
2,564,003
3) Per unit price or other identifying
value of transaction computed pursuant
to Exchange Act Rule 0-11:
$24
4) Proposed maximum aggregate value of transaction:
$64,692,933
5) Total fee paid: $12,350
|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offset fee was
paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Number:
----------------------------------------------------------------------
3) Filing Party:
----------------------------------------------------------------------
4) Date Filed:
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1ST BERGEN BANCORP
THE HOLDING COMPANY FOR SOUTH BERGEN SAVINGS BANK
MARCH 5, 1999
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of 1st
Bergen Bancorp (the "Company") to be held on March 29, 1999 at 10:00 AM at the
Fiesta, Route 17 South, Wood-Ridge, New Jersey 07075 ("Special Meeting"). At the
Special Meeting you will be asked to consider a special proposal, which is
explained in detail in the accompanying Proxy Statement.
You will be asked to consider and vote upon a proposal to approve the Agreement
and Plan of Merger, dated as of October 14, 1998 (the "Merger Agreement"), by
and among Kearny Federal Savings Bank ("Kearny"), the Company, and South Bergen
Savings Bank, providing for the acquisition of the Company by Kearny. The
acquisition of the Company will be accomplished by means of a merger (the
"Merger") of the Company with a newly formed acquisition subsidiary of Kearny.
As a result of the Merger, each outstanding share of the Company's common stock
will be converted into the right to receive $24.00 in cash.
Your Board of Directors believes the Merger is in the best interests of the
Company and its stockholders and recommends that you vote for approval of the
Merger Agreement. FinPro, Inc., the Company's financial advisor, has rendered an
opinion to the effect that, as of the date of such opinion and based upon the
considerations described therein, the consideration to be received by the
Company's stockholders in the Merger is fair to them from a financial point of
view.
The affirmative vote of the holders of a majority of the outstanding shares of
the Company's common stock is required to approve and adopt the Merger
Agreement. The Merger is also subject to certain other conditions, including the
approval of various regulatory agencies.
Stockholders are urged to read carefully the accompanying Proxy Statement, which
contains a detailed description of the Merger, the Merger Agreement and related
matters.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS IN THE
BEST INTERESTS OF STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Whether or not you plan to attend the Special Meeting personally, please
complete, sign and date the enclosed proxy card and return it as soon as
possible in the postage-paid envelope provided. You may revoke your proxy at any
time prior to its exercise, and you may attend the Special Meeting and vote in
person, even if you have previously returned your proxy card. However, if you
are a stockholder whose shares are not registered in your own name, you will
need additional documentation from your record holder to vote personally at the
Special Meeting. PLEASE DO
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NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. If the Merger is consummated,
you will be sent instructions regarding the surrender of your existing stock
certificates.
We thank you for your prompt attention to this matter and appreciate your
support.
Sincerely,
/s/ William M. Brickman
William M. Brickman
President and Chief Executive Officer
3
1ST BERGEN BANCORP
250 VALLEY BLVD.
WOOD-RIDGE, NEW JERSEY 07075
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON
MARCH 29, 1999
NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders (the "Special
Meeting") of 1st Bergen Bancorp (the "Company") will be held on March 29, 1999
at 10:00 AM at the Fiesta, Route 17 South, Wood-Ridge, New Jersey 07075.
A Proxy Statement and Proxy Card for the Special Meeting are enclosed herewith.
The Special Meeting is for the purpose of considering and voting upon the
following matter:
A proposal to approve and adopt the Agreement and Plan of Merger ("Merger
Agreement"), dated as of October 14, 1998, by and among the Company, Kearny
Federal Savings Bank, a mutual savings bank incorporated under the laws of the
United States ("Kearny"), the Company, and South Bergen Savings Bank, pursuant
to which, among other things, Kearny's newly formed acquisition subsidiary will
merge with and into the Company, with the Company surviving, and each share of
the Company's common stock, no par value per share (the "Common Stock"), other
than shares of Common Stock owned by Kearny or its subsidiaries (except for
shares held in a fiduciary capacity or in respect of a debt previously
contracted) and shares of Common Stock held by the Company or its subsidiaries
in treasury, will be converted into the right to receive $24.00 in cash, all as
more fully described in the accompanying Proxy Statement.
A copy of the Merger Agreement is set forth in Annex A to the accompanying Proxy
Statement. Upon consummation of the Merger, the terms of the directors will
terminate as provided in the Merger Agreement and the term of the auditors will
terminate.
Pursuant to the Bylaws of the Company, the Board of Directors has fixed [DATE]
as the record date for the determination of stockholders entitled to notice of
and to vote at the Special Meeting and at any adjournments thereof. Only holders
of the Common Stock as of the close of business on that date will be entitled to
notice of and to vote at the Special Meeting or any adjournments thereof. A list
of stockholders entitled to vote at the Special Meeting will be available at 250
Valley Blvd., Wood-Ridge, New Jersey 07075, for a period of ten days prior to
the Special Meeting and will also be available for inspection at the meeting
itself. It is expected that representatives of the Company's accountants will be
present at the meeting.
There are no dissenting stockholders' rights applicable to the transactions
contemplated to be voted on at the Special Meeting.
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND PROMPTLY RETURN IT IN THE
ENCLOSED ENVELOPE, REGARDLESS OF THE NUMBER OF SHARES OWNED. ANY STOCKHOLDER
PRESENT AT THE SPECIAL MEETING MAY
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REVOKE HIS OR HER PROXY AND VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE
SPECIAL MEETING. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE NOT
REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR
RECORD HOLDER TO VOTE PERSONALLY AT THE SPECIAL MEETING.
By Order of the Board of Directors,
/s/ Robert C. Maison
Robert C. Maison
Secretary
Wood-Ridge, New Jersey
March 5, 1999
THE BOARD OF DIRECTORS OF 1ST BERGEN BANCORP UNANIMOUSLY RECOMMENDS THAT YOU
VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT.
5
1st BERGEN BANCORP
250 VALLEY BLVD.
WOOD-RIDGE, NEW JERSEY 07075
(201) 939-3400
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
March 29, 1999
INTRODUCTION
This Proxy Statement is being furnished to the holders of the common
stock, no par value per share (the "Common Stock" or "Bergen Common Stock"), of
1st Bergen Bancorp, a New Jersey corporation ("1st Bergen" or the "Company") in
connection with the solicitation of proxies on behalf of the Board of Directors
of 1st Bergen for use at the special meeting (the "Special Meeting") of
stockholders of 1st Bergen to be held for the purposes described herein, and at
any adjournment or postponements thereof. Only stockholders of record at the
close of business on February 24, 1999 (the "Record Date") will be entitled to
vote at the Special Meeting or at any adjournments thereof, either in person or
by proxy. At the close of business on the Record Date, there were 2,585,243
shares of Bergen Common Stock outstanding, each of which is entitled to one vote
on each matter properly coming before the Special Meeting. This Proxy Statement
and the accompanying form of proxy are first being mailed to stockholders on or
about March 5, 1999.
At the Special Meeting, stockholders will be asked to consider and vote on
a proposal to approve and adopt the Agreement and Plan of Merger ("Merger
Agreement"), dated as of October 14, 1998, by and among the Company, South
Bergen Savings Bank, and Kearny Federal Savings Bank ("Kearny"), a mutual
savings bank organized under the laws of the United States, pursuant to which,
among other things, a newly-formed acquisition subsidiary of Kearny will merge
(the "Merger") with and into the Company, which will survive the Merger as a
direct or indirect wholly-owned subsidiary of Kearny (the Company, as the
surviving corporation in the Merger, is sometimes referred to in this Proxy
Statement as the "Surviving Corporation"). The Merger Agreement also
contemplates that South Bergen Savings Bank ("South Bergen" or the "Bank"), a
wholly-owned subsidiary of the Company, will merge (the "Bank Merger") with and
into Kearny. At the effective time of the Merger (the "Effective Time"), each
share of Bergen Common Stock outstanding (except for certain shares owned by the
Company, Kearny or their respective subsidiaries) will by virtue of the Merger
be canceled and automatically converted into the right to receive $24.00 in cash
(the "Merger Consideration"). See "PROPOSAL -- THE MERGER--Form of the Merger
and the Bank Merger; Purchase Price." In the Merger Agreement, the Company
agrees to take actions necessary so that, immediately prior to the Effective
Time, each outstanding option to purchase Bergen Common Stock issued pursuant to
the stock option plans of the Company will be canceled, and each holder of any
such option will be entitled to receive the difference between the exercise
price per share and $24.00 per share, paid in cash.
Consummation of the Merger is conditioned upon, among other things,
approval and adoption of the Merger Agreement by the affirmative vote of the
holders of a majority of the shares of Common Stock outstanding and the receipt
of all necessary governmental approvals and
consents. There can be no assurance that all conditions to the Merger will be
satisfied or, where permissible, waived, or that the Merger will be consummated.
See "PROPOSAL --THE MERGER--Conditions to the Merger."
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON. THIS PROXY STATEMENT DOES NOT CONSTITUTE A
SOLICITATION OF A PROXY IN ANY JURISDICTION FROM ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE ANY SUCH SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS
PROXY STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS
PROXY STATEMENT OR THAT THE INFORMATION IS CORRECT AS OF ANY TIME SUBSEQUENT TO
SUCH DATE. ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT RELATING TO THE
COMPANY AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY THE COMPANY AND ALL
INFORMATION CONTAINED IN THIS PROXY STATEMENT RELATING TO KEARNY AND ITS
SUBSIDIARIES HAS BEEN SUPPLIED BY KEARNY AND ITS SUBSIDIARIES.
THE DATE OF THIS PROXY STATEMENT IS MARCH 5, 1999.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements
and other information can be inspected and copied at the public reference
facilities of the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the SEC's Regional Offices located at Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
also be obtained at prescribed rates from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The
Company files its reports, proxy statements and other information (including
this proxy statement) with the SEC electronically through the Electronic Data
Gathering, Analysis, and Retrieval ("EDGAR") system, which filings are publicly
available through the SEC's Web site at http://www.sec.gov. In addition, such
reports, proxy statements and other information can be inspected at the offices
of the National Association of Securities Dealers, Inc., at 1735 K Street, N.W.,
Washington, D.C. 20006.
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TABLE OF CONTENTS
INTRODUCTION...................................................................1
AVAILABLE INFORMATION..........................................................2
TABLE OF CONTENTS..............................................................3
SUMMARY........................................................................5
THE COMPANIES.........................................................5
1ST BERGEN BANCORP...........................................5
KEARNY FEDERAL SAVINGS BANK..................................5
MERGER SUB...................................................6
THE SPECIAL MEETING...................................................6
DATE, TIME, PLACE AND PURPOSE OF SPECIAL MEETING.............6
RECORD DATE; SHARES ENTITLED TO VOTE..................................6
REQUIRED STOCKHOLDER APPROVAL; VOTING AGREEMENTS.............6
THE MERGER............................................................7
Form of the Merger and Bank Merger; Purchase Price...........7
Effective Time of the Merger.................................7
Reasons for the Merger; Recommendation of the 1st Bergen
Board of Directors.........................................7
Opinion of FinPro............................................7
Interests of Management and Directors in the Merger..........8
Conditions to the Merger.....................................8
Regulatory Approvals.........................................8
Procedure for Exchange of Certificates.......................8
Federal Income Tax Consequences..............................9
No Solicitation of Alternative Transactions..................9
Termination of the Merger Agreement..........................9
Rights of Dissenting Stockholders............................9
Market Prices of Common Stock................................9
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY.................10
THE SPECIAL MEETING ..........................................................11
GENERAL .............................................................11
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING......................11
VOTING AT THE SPECIAL MEETING; RECORD DATE...........................11
PROXIES .............................................................12
PROPOSAL -- THE MERGER...............................................13
FORM OF THE MERGER AND THE BANK MERGER; PURCHASE PRICE......13
EFFECTIVE TIME OF THE MERGER................................14
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF
CERTIFICATES..............................................14
BACKGROUND OF AND REASONS FOR THE MERGER....................14
Background of the Merger...........................14
Reasons for the Merger.............................16
Recommendation of the Board of Directors of
1st Bergen.......................................17
Opinion of FinPro..................................17
Analysis of FinPro.................................18
RIGHTS OF DISSENTING STOCKHOLDERS...........................32
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................32
ACCOUNTING TREATMENT........................................33
EXPENSES....................................................33
REPRESENTATIONS AND WARRANTIES..............................24
CONDITIONS TO THE MERGER....................................24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................26
REGULATORY APPROVALS........................................28
CONDUCT OF BUSINESS PENDING THE MERGER......................28
COVENANTS...................................................29
NO SOLICITATION OF ALTERNATIVE TRANSACTIONS.................29
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EFFECT ON EMPLOYEES AND BENEFIT PLANS; INTERESTS OF
MANAGEMENT AND DIRECTORS IN THE MERGER....................30
Indemnification; Directors' and Officers'
Insurance........................................30
Advisory Board.....................................30
Employees - General................................30
Employment Agreements with Executive Officers......31
Benefit Plans, Stock Options and Stock Bonus
Plans............................................31
TERMINATION.................................................32
BUSINESS OF THE COMPANY.......................................................33
MARKET AREA AND COMPETITION..........................................34
PERSONNEL............................................................35
REGULATION AND SUPERVISION...........................................35
General.....................................................35
Prompt Corrective Action....................................35
Insurance of Deposit Accounts...............................36
Regulatory Capital..........................................36
Federal Home Loan Bank System...............................38
Qualified Thrift Lender Test................................38
Limitations on Capital Distributions........................39
Holding Company Regulation..................................40
Transactions with Affiliates................................40
The Federal Reserve System..................................41
Federal Securities Laws.....................................42
Industry Segments...........................................42
PROPERTIES...........................................................42
LEGAL PROCEEDINGS....................................................43
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY.........43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...........................................................44
OVERVIEW.............................................................44
STOCKHOLDERS' EQUITY.................................................45
Comparison of Operating Results for the Nine Months
Ended September 30, 1998 and 1997.........................45
Comparison of Operating Results for the Years Ended
December 31, 1997 and 1996................................47
Comparison of Operating Results for the Years Ended
December 31, 1996 and 1995................................49
MARKET RISK AND INTEREST RATE SENSITIVITY ANALYSIS...................51
YEAR 2000............................................................53
ANALYSIS OF NET INTEREST INCOME......................................54
RATE/VOLUME ANALYSIS.................................................56
LIQUIDITY AND CAPITAL RESOURCES......................................57
LENDING PORTFOLIO....................................................57
MORTGAGE-BACKED SECURITIES...........................................62
DELINQUENT LOANS AND FORECLOSED ASSETS...............................63
ALLOWANCE FOR LOAN LOSSES............................................65
INVESTMENT ACTIVITIES................................................66
SOURCES OF FUNDS.....................................................67
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.................................69
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................69
EXPERTS.......................................................................69
STOCKHOLDER PROPOSALS.........................................................70
OTHER MATTERS.................................................................70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
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SUMMARY
The following is a summary of information contained elsewhere in this
Proxy Statement and has been prepared to assist stockholders in their review of
this Proxy Statement. This summary is not intended to be a complete statement of
all material facts and is qualified in its entirety by the more detailed
information contained in this Proxy Statement and the Annexes hereto, all of
which stockholders are urged to read carefully.
THE COMPANIES
1st BERGEN BANCORP
The Company, a New Jersey corporation, is a holding company whose
principal subsidiary is South Bergen Savings Bank, a federally-chartered savings
bank, headquartered in Wood-Ridge, New Jersey ("South Bergen" or the "Bank").
The Bank's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). The Company
was organized at the direction of the Bank on November 28, 1995 in connection
with the Bank's conversion from the mutual to stock form of organization. The
conversion was completed on March 29, 1996. The primary activity of the Company
is its ownership of all the outstanding capital stock of the Bank. The Bank is a
capital stock savings bank, one of whose predecessor institutions was originally
organized in 1890, and is headquartered in Wood-Ridge, New Jersey. The Bank
conducts its business through four offices located in Bergen, Passaic and Morris
Counties, New Jersey. At September 30, 1998, the Company had consolidated total
assets of $306.2 million, deposits of $228.3 million and stockholders' equity of
$36.4 million.
The Bank is principally engaged in the business of attracting retail
deposits from the general public and investing those funds, together with funds
generated from operations and principal payments, primarily in one- to
four-family residential mortgage loans, mortgage backed securities and, to a
lesser extent, consumer and other loans and investment securities.
The principal executive offices of the Company are located at 250 Valley
Blvd., Wood-Ridge, New Jersey 07075, and its telephone number is (201) 939-3400.
KEARNY FEDERAL SAVINGS BANK
Kearny Federal Savings Bank is a federally-chartered mutual savings bank
headquartered in Kearny, New Jersey, with five offices in Kearny, Harrison,
North Arlington, Lyndhurst and Rutherford, New Jersey. Its deposits are insured
by the FDIC through the SAIF. Kearny was founded in 1884 as a New Jersey mutual
building and loan association under the name "Kearny Building and Loan
Association." Kearny received its federal charter in 1941 and obtained federal
insurance of accounts in 1939. It changed its name from Kearny Federal Savings
and Loan Association to Kearny Federal Savings Bank in 1995. At September 30,
1998, Kearny had total assets, deposits and net worth of $800.9 million, $611.3
million and $181.5 million, respectively.
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Kearny is a traditional thrift institution, which is primarily engaged in
the business of attracting deposits from the general public and investing those
funds primarily in residential mortgage loans and mortgage-backed and other
investment securities.
The main office of Kearny is located at 614 Kearny Avenue, Kearny, New
Jersey 07032, and its telephone number is (201) 991-4100.
MERGER SUB
Kearny Acquisition Subsidiary, Inc. (the "Merger Sub") was incorporated by
Kearny in December 1998 as a general business corporation under the laws of the
State of New Jersey solely for the purposes of effectuating the Agreement and
Plan of Merger. The Merger Sub conducts no active business and was created to
effectuate the transaction based upon regulatory and tax considerations. At the
completion of the Merger, the Merger Sub will cease to exist. The main office
and board of directors of the Merger Sub are the same as Kearny.
THE SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE OF SPECIAL MEETING
The Special Meeting will be held on March 29, 1999 at 10:00 A.M. at the
Fiesta, Route 17 South, Wood-Ridge, New Jersey 07075. At the Special Meeting,
stockholders will be asked to consider and act on the approval and adoption of
the Merger Agreement.
RECORD DATE; SHARES ENTITLED TO VOTE
Holders of record of Common Stock at the close of business on February 24,
1999 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting and any adjournments or postponements thereof. On that date there were
2,585,243 shares of Common Stock outstanding, each of which will be entitled to
one vote on each matter to be acted upon or which may properly come before the
Special Meeting and any adjournments or postponements thereof. See "THE SPECIAL
MEETING--Voting at the Meeting; Record Date."
REQUIRED STOCKHOLDER APPROVAL; VOTING AGREEMENTS
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the shares of Common Stock outstanding and entitled to
vote. Approval of the Merger Agreement by the requisite vote of the Company's
stockholders is a condition to the consummation of the Merger. See "THE SPECIAL
MEETING--Voting at the Meeting; Record Date." Approval of the election of
directors and the ratification of auditors and of all other matters which may
come before the Special Meeting require the affirmative vote of a majority of
votes cast, in person or by proxy, by persons entitled to vote at the Special
Meeting.
As of the Record Date, directors and executive officers of the Company,
and their affiliates, may be deemed to be the beneficial owners of 174,850
shares, or 6.76% of the outstanding shares of Common Stock (excluding shares of
Common Stock which are issuable upon exercise of stock options and which are not
outstanding and entitled to vote as of the Record
6
Date). As of the Record Date, neither Kearny nor its subsidiaries owned,
directly or indirectly, any shares of Common Stock.
THE MERGER
Form of the Merger and the Bank Merger; Purchase Price
Under the terms of the Merger Agreement, at the Effective Time, Merger Sub
will merge with and into the Company with the Company surviving the Merger as a
wholly-owned subsidiary of Kearny. Immediately following consummation of the
Merger, it is intended that the Surviving Corporation will be liquidated and the
Bank will thereafter merge with and into Kearny, with Kearny as the surviving
corporation (the "Bank Merger").
At the Effective Time of the Merger, each outstanding share of Common
Stock will be canceled and automatically converted into the right to receive
$24.00 in cash. All allocated stock options (totaling 264,050 shares) to
purchase shares of Bergen Common Stock will be purchased by Kearny for the
difference between $24.00 and the exercise price per share (which averages
$13.975 per share).
Effective Time of the Merger
Subject to the terms and conditions of the Merger Agreement, the Effective
Time of the Merger will occur on the date and time on which a Certificate of
Merger is filed with the Treasurer of the State of New Jersey or such later time
as is specified in such certificate. See "PROPOSAL --THE MERGER--Conditions to
the Merger." It is expected that a period of time will elapse between the
Special Meeting and the Effective Time while the parties seek to obtain the
regulatory approvals required in order to consummate the Merger. See "PROPOSAL
- --THE MERGER--Regulatory Approvals." The Merger Agreement may be terminated by
either party if, among other reasons, the Merger has not been consummated on or
before May 31, 1999. See "PROPOSAL --THE MERGER--Termination."
Reasons for the Merger; Recommendation of the 1st Bergen Board of Directors
The Board of Directors of the Company believes that the Merger is in the
best interests of the stockholders of the Company and has unanimously approved
the Merger Agreement. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF 1st BERGEN BANCORP VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT. In making this determination, the Board of Directors considered a
number of factors. See "PROPOSAL --THE MERGER--Background of and Reasons for the
Merger" and "--Recommendation of the Board of Directors of 1st BERGEN."
Opinion of FinPro
FinPro, Inc. ("FinPro"), as financial advisor to the Company, has rendered
its opinion (the "Fairness Opinion") to the Board of Directors of 1st Bergen to
the effect that, as of the date of such opinion and as of the date of this Proxy
Statement, the Merger Consideration is fair, from a financial point of view, to
the stockholders of the Company. A copy of the Fairness Opinion dated as of the
date of this Proxy Statement is attached hereto as Annex B and is incorporated
by
7
reference herein. The attached opinion sets forth the assumptions made, matters
considered, the scope and limitations of the review undertaken and the
procedures followed by FinPro, and should be read in its entirety. See
"PROPOSAL--THE MERGER--Opinion of FinPro." Reference should be made to the
description, under the caption "PROPOSAL--THE MERGER--Analysis of FinPro" to the
fact that FinPro is to receive fees based, in part, on the consummation of the
Merger."
Interests of Management and Directors in the Merger
Some members of the Company's management and of the Company's Board of
Directors have interests in the Merger that are in addition to their interests
as stockholders of the Company generally. These interests include, among other
things, provisions in the Merger Agreement relating to indemnification, the
appointment of the Company's outside directors as advisory directors to Kearny,
the continuation of directors' and officers' liability insurance, cash payments
for unexercised stock options, the vesting/acceleration of stock benefits,
severance and certain other employee benefits. The aggregate value of all cash
payments to be made to the executive officers and directors of the Company in
connection with stock options, the Recognition and Retention Plan for Executive
Officers and Employees of the Company, Directors' Retirement Plan, employee
severance and advisory director fees, and the revised compensation plans of
Messrs. Brickman, Gossweiler and Maison is estimated to be $5.1 million. The
amounts to be received by the various executive officers and directors of the
Company pursuant to the foregoing arrangements are described in this Proxy
Statement. See "PROPOSAL --THE MERGER--Effect on Employees and Benefit Plans;
Interests of Management and Directors in the Merger."
Conditions to the Merger
The Merger Agreement sets forth a number of conditions which must be
satisfied or, where permissible, waived before the Merger may be consummated,
including (1) the approval of the Merger Agreement by the requisite vote of the
stockholders of the Company, and (2) the receipt of all necessary governmental
approvals for the Merger and the Bank Merger and the absence in any such
approvals of a condition that would result in a material adverse effect (as
defined in the Merger Agreement). See "PROPOSAL --THE MERGER--Conditions to the
Merger" and "--Regulatory Approvals."
Regulatory Approvals
The Merger and Bank Merger are subject to prior approval by the Office of
Thrift Supervision ("OTS"). There can be no assurances that such approvals will
be obtained, or if obtained, as to the date of such approvals. There can also be
no assurance that any such approval will not contain a condition or requirement
which causes such approval to fail to satisfy the conditions to the consummation
of the Merger. See "PROPOSAL --THE MERGER--Conditions to the Merger" and
"--Regulatory Approvals."
Procedures for Exchange of Certificates
If the Merger is consummated, 1st Bergen stockholders will be notified
promptly of the consummation of the Merger and will be advised of the procedure
for surrender of their stock certificates in exchange for the Merger
Consideration (as such term is defined herein). STOCKHOLDERS SHOULD NOT SEND IN
STOCK CERTIFICATES AT THIS TIME. See "PROPOSAL --THE MERGER--Conversion of
Shares; Procedures for Exchange of Certificates."
8
Federal Income Tax Consequences
The receipt of cash by a 1st Bergen stockholder in exchange for his or her
shares of Common Stock pursuant to the Merger will be a taxable transaction to
such stockholder for federal income tax purposes and may also be a taxable
transaction under applicable state, local, foreign and other tax laws. In
general, a stockholder will recognize gain or loss equal to the difference, if
any, between the amount of cash received in exchange for his or her shares of
Common Stock and the stockholder's tax basis in such shares.
All stockholders should read carefully the discussion in the "PROPOSAL
- --THE MERGER--Certain Federal Income Tax Consequences" section of this Proxy
Statement. They are urged to consult their own tax advisors as to the specific
consequences to them of the Merger under federal, state, local, foreign and any
other applicable tax laws.
No Solicitation of Alternative Transactions
The Merger Agreement provides that 1st Bergen will not initiate, solicit
or encourage any inquiries, proposals or offers with respect to a merger,
consolidation or certain similar transactions involving 1st Bergen or any of its
subsidiaries, provided, however, that 1st Bergen may engage in negotiations and
discussions and provide information to a person relating to such a transaction
if 1st Bergen's Board of Directors, after consultation with its outside counsel,
determines that the failure to do so would constitute a breach of their
fiduciary duties. See "PROPOSAL --THE MERGER--No Solicitation of Alternative
Transactions."
Termination of the Merger Agreement
The Merger Agreement may be terminated either by Kearny or 1st Bergen,
acting alone under specified circumstances, or by mutual consent. See "PROPOSAL
- --THE MERGER--Termination."
Rights of Dissenting Stockholders
There are no dissenting stockholders' rights applicable to the transaction
contemplated under the Proposal.
Market Prices of Common Stock
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotations
("Nasdaq") National Market System under the symbol "FBER".
The last reported sales price of Bergen Common Stock on October 14, 1998,
the last trading day immediately prior to public announcement of the execution
of the Merger Agreement, was $18.25 per share. On March __, 1999 (the last
practicable date prior to the mailing of this Proxy Statement), the last
reported sales price of Bergen Common Stock was $_____ per share. Stockholders
are advised to obtain current market quotations for their shares. 1st Bergen
declared a cash dividend in the amount of $0.07 cents per share in the calendar
quarter ended September 30, 1998.
9
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The following tables set forth selected consolidated historical financial
and other data of the Company for the periods and at the dates indicated. The
information is derived in part from and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company contained
elsewhere herein. The Selected Consolidated Financial and Other Data at and for
the nine month periods ended September 30, 1998 and 1997 are derived from
unaudited consolidated financial statements and, in the opinion of management,
all adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results for the unaudited periods have been made. The
results of operations data presented below for the nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
any future period.
SELECTED FINANCIAL AND OTHER DATA OF THE COMPANY
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
SELECTED FINANCIAL CONDITION DATA:
Total assets $306,235 $284,738 $290,345 $246,553 $225,046 $215,130 $219,107
Loans receivable, net 129,287 120,971 127,818 123,825 109,051 120,831 129,566
Investment securities held to maturity 28,954 55,081 46,903 33,136 39,510 38,963 36,914
Mortgage-backed securities held to
maturity 33,785 52,469 52,458 51,769 54,869 41,222 28,315
Mortgage-backed securities available
for sale 10,131 10,682 10,445 2,824 0 0 0
Investment securities available for sale 76,807 19,728 41,090 19,597 6,778 6,349 0
Deposits 228,311 215,516 217,426 204,154 209,213 194,838 204,436
Real estate owned, net 43 209 118 537 1,926 265 525
Advances from FHLB 39,500 27,334 31,334 0 0 4,250 0
Stockholders' equity 36,370 38,881 39,270 41,235 14,667 13,778 13,426
FOR THE NINE
MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
SELECTED OPERATING DATA:
Interest income $ 15,968 $ 14,407 $ 19,502 $ 17,238 $ 15,276 $ 15,298 $ 17,161
Interest expense 9,105 7,574 10,431 9,172 8,579 6,788 7,602
-------- -------- -------- -------- -------- -------- --------
Net interest income 6,863 6,833 9,071 8,066 6,697 8,510 9,559
Provision for loan losses 225 400 475 725 1,005 2,540 3,042
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 6,638 6,433 8,596 7,341 5,692 5,970 6,517
Non-interest income (loss) 279 204 289 201 (199) 142 148
Net loss (gain) from real estate
owned 24 (33) 11 261 93 97 912
Other non-interest expense 4,463 4,223 5,698 6,079 4,682 4,524 4,255
Income before income tax expense 2,430 2,447 3,176 1,202 718 1,491 1,498
Income taxes (benefit) 830 883 1,059 446 260 536 (727)
-------- -------- -------- -------- -------- -------- --------
Net income $ 1,600 $ 1,564 $ 2,117 $ 756 $ 458 $ 955 $ 2,225
======== ======== ======== ======== ======== ======== ========
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30,(1) AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS:
Return on average assets .72% .79% .78% .31% .21% .44% 1.02%
Return on average equity 5.64% 5.21% 7.14% 1.99% 3.19% 6.74% 18.41%
Equity to assets 11.88% 13.65% 13.53% 16.72% 6.52% 6.40% 6.13%
Net interest rate spread 2.72% 2.92% 2.93% 2.90% 3.05% 3.85% 4.73%
Net interest margin 3.15% 3.50% 3.48% 3.43% 3.19% 4.01% 4.71%
Non-interest income (loss) to
average assets .12% .10% .11% .08% (.09%) .06% .07%
Non-interest expense to average
assets 1.99% 2.12% 2.09% 2.57% 2.19% 2.11% 2.37%
Efficiency ratio (2) 62.49% 60.01% 60.89% 60.97% 73.48% 53.41% 53.23%
Average interest earning assets to
average interest bearing liabilities 112.56% 115.6% 113.60% 112.62% 103.47% 104.87% 99.50%
(1) Annualized where appropriate
(2) Total non-interest expense divided by the sum of net interest income and
non-interest income. Excludes effect of one-time FDIC special SAIF
assessment for 1996.
10
THE SPECIAL MEETING
GENERAL
This Proxy Statement is being furnished to holders of Common Stock of the
Company in connection with the solicitation of proxies by the Board of Directors
for use at the Special Meeting of Stockholders to be held on March 29, 1999 at
10:00 AM at the Fiesta, Route 17 South, Wood-Ridge, New Jersey 07075, and at any
adjournments or postponements thereof.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the stockholders of the Company will be asked to
consider and vote upon a proposal to approve and adopt the Merger Agreement and
the transactions contemplated thereby.
The Board of Directors knows of no additional matters that will be
presented for consideration at the Special Meeting. Execution of a proxy,
however, confers on the designated proxy-holders discretionary authority to vote
the shares of Common Stock covered thereby in accordance with their best
judgment on such other business, if any, that may properly come before the
Special Meeting or any adjournments or postponements thereof.
THE COMPANY'S BOARD OF DIRECTORS HAS APPROVED THE PROPOSAL TO BE PRESENTED AT
THE SPECIAL MEETING. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
VOTING AT THE SPECIAL MEETING; RECORD DATE
The Board of Directors has fixed the close of business on February 24,
1999 as the record date (the "Record Date") for the determination of
stockholders of the Company entitled to notice of and to vote at the Special
Meeting and any adjournments or postponements thereof. Only holders of record on
such date will be entitled to notice of and to vote at the Special Meeting. On
the Record Date, there were 2,585,243 shares of Common Stock outstanding and
entitled to vote which were held by approximately 610 holders of record. Each
holder of record of Common Stock on the Record Date is entitled to cast one vote
per share, exercisable in person or by a properly executed proxy, on all matters
to be presented at the Special Meeting and any adjournments or postponements
thereof. The presence, in person or by properly executed proxy, of the holders
of a majority of the shares of Common Stock outstanding and entitled to vote at
the Special Meeting is necessary to constitute a quorum at the Special Meeting.
Adoption of the Merger Agreement requires the affirmative vote of the
holders of a majority of the shares of Common Stock outstanding and entitled to
vote thereon. The obtaining of such vote is a condition to consummation of the
Merger. In determining whether the proposal to approve and adopt the Merger
Agreement has received the requisite number of affirmative votes, abstentions
and broker non-votes will have the same effect as votes against the Merger
Agreement
11
Proxies solicited hereby will be returned to the Company, and will be
tabulated by inspectors of election designated by the Board, who will not be
employed by, or a director of, the Company or any of its affiliates.
As of the Record Date, directors and executive officers of the Company,
and their affiliates, may be deemed to be the beneficial owners of 174,850
shares, or 6.76% of the outstanding shares of Common Stock (excluding shares of
Common Stock which are issuable upon exercise of stock options and which are not
outstanding and entitled to vote as of the Record Date). The remaining directors
and executive officers have also indicated to the Company that they intend to
vote all of their shares (174,850 shares in the aggregate) in favor of the
approval and adoption of the Merger Agreement. As of the Record Date, neither
Kearny nor its subsidiaries owned, directly or indirectly, any shares of Common
Stock.
PROXIES
This Proxy Statement is being furnished to stockholders of the Company in
connection with the solicitation of proxies by the Board of Directors for use at
the Special Meeting. All shares of Common Stock which are entitled to vote and
are represented at the Special Meeting by properly executed proxies received
prior to or at the Special Meeting, and not duly revoked, will be voted at the
Special Meeting in accordance with the instructions indicated on such proxies.
If no instructions are indicated on a properly executed proxy, such proxy will
be voted FOR the approval and adoption of the Merger Agreement.
If any other matters are properly presented for consideration at the
Special Meeting, including, among other things, consideration of a motion to
adjourn or postpone the Annual Meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the
persons named in the enclosed form of proxy and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment. The
Company has no knowledge of any matters to be presented at the Special Meeting
other than those matters described herein.
1st BERGEN STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by: (i) filing
with the Secretary of the Company, at or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy; (ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of the Company at or before the taking of the
vote at the Special Meeting; or (iii) attending the Special Meeting and voting
in person. Attendance at the Special Meeting will not in and of itself
constitute a revocation of a proxy. In addition, stockholders whose shares of
Common Stock are not registered in their own name will need additional
documentation from the record holder of such shares to vote personally at the
Special Meeting. Any written notice of revocation or subsequent proxy should be
sent so as to be delivered to 1st Bergen Bancorp, 250 Valley Blvd., Wood-Ridge,
New Jersey 07075, Attention: Robert C. Maison, Secretary, or hand-delivered to
the Secretary of the Company, at or before the taking of the vote at the Special
Meeting.
12
The Merger Agreement provides that all expenses of this solicitation,
including the cost of preparing, printing and mailing this Proxy Statement, will
be borne equally by the Company and Kearny. In addition to solicitation by use
of the mails, proxies may be solicited by directors, officers and employees of
the Company or its subsidiaries in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Arrangements will also be made
with custodians, nominees and fiduciaries for the forwarding of proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and the Company will reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
PROPOSAL -- THE MERGER
This section of the Proxy Statement describes aspects of the proposed
Merger. The following description does not purport to be complete and, to the
extent it relates to matters contained in the Merger Agreement, is qualified in
its entirety by reference to that agreement, which is attached as Annex A to
this Proxy Statement and are incorporated herein by reference. All stockholders
are urged to read the Merger Agreement in its entirety.
FORM OF THE MERGER AND THE BANK MERGER; PURCHASE PRICE
Under the terms of the Merger Agreement, Merger Sub will be merged with
and into the Company, with the result that the Company will become a (direct or
indirect) wholly-owned subsidiary of Kearny (the Surviving Corporation is
expected to become a subsidiary of Kearny). Immediately following consummation
of the merger of the Merger Sub with and into the Company, it is intended that
the Surviving Corporation will be liquidated and the Bank will thereafter merge
with and into Kearny. At the Effective Time of the Merger, each share of Common
Stock then outstanding (except for (i) shares of Common Stock which are owned by
Kearny or any of its subsidiaries (other than shares held in a fiduciary
capacity or in respect of debt previously contracted), and (ii) shares of Common
Stock held by the Company or any of its subsidiaries in its treasury will be
canceled and automatically converted into the right to receive $24.00 in cash,
subject to possible upward adjustment as described below (as it may be adjusted,
hereinafter sometimes referred to as the "Merger Consideration"). Immediately
prior to the Effective Time, each outstanding option to purchase Common Stock
issued pursuant to the Company's stock plans will be canceled, and each holder
of any such option, whether or not then exercisable, will be entitled to receive
immediately prior to the Effective Time for each option an amount in cash
representing the difference between the strike price of such options, currently
$13.975 per share, and $24.00 per share. See "--Effect on Employees and Benefit
Plans; Interests of Certain Persons in the Merger."
The Agreement is subject to certain conditions and contains other material
terms more fully set forth in this Proxy Statement and in the Merger Agreement.
Based upon the number of shares of Common Stock outstanding at the Record
Date and the number of shares subject to options for which payment will be made
pursuant to the Merger Agreement, the amount of funds necessary to pay the
merger consideration would be approximately $64.7 million.
13
EFFECTIVE TIME OF THE MERGER
Subject to the terms and conditions of the Merger Agreement, the Effective
Time of the Merger will occur on the date and time on which the Merger and Bank
Merger become effective in accordance with applicable laws and regulations. See
"--Conditions to the Merger" below. It is expected that a period of time will
elapse between the Annual Meeting and the Effective Time while the parties seek
to obtain the regulatory approvals required in order to consummate the Merger.
See "--Regulatory Approvals" below. The Merger Agreement may be terminated by
either party if, among other reasons, the Merger has not been consummated on or
before May 31, 1999. See "--Termination" below.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
Promptly after the Effective Time, a paying agent (the "Paying Agent")
selected by Kearny will send to each holder of record of Common Stock
immediately prior to the Effective Time entitled to receive the Merger
Consideration a letter of transmittal and instructions for use in surrendering
such holder's certificates formerly representing shares of Common Stock (the
"Certificates") in exchange for the cash into which such shares have been
converted. When the Certificates are surrendered for exchange after the
consummation of the Merger, holders of such Certificates will be promptly paid
the cash amount, without interest, into which such shares of Common Stock have
been converted.
STOCKHOLDERS SHOULD NOT FORWARD COMPANY STOCK CERTIFICATES TO THE PAYING AGENT
UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. STOCKHOLDERS SHOULD NOT RETURN STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
BACKGROUND OF AND REASONS FOR THE MERGER
Background of the Merger
During 1997, the Company was aware of the possibility of engaging in
acquisition transactions in the New Jersey thrift industry, a rapidly
consolidating market. From time to time, the Company considered various merger
or acquisition possibilities, though none of these possibilities reached an
advanced stage of consideration.
In the spring of 1998, the Company continued to receive initial
indications of interest from other financial institutions in New Jersey
interested in either merging with, or acquiring the Company. These indications
prompted an intensive review by the Board of Directors of the Company as to the
future of the Company and South Bergen.
The Company engaged FinPro, Inc. to prepare an analysis of the Company's
strategic position and the possible transactions the Company could engage in. At
a meeting of the in executive session of the Board of Directors on August 12,
1998, FinPro presented the results of its analysis, Company counsel discussed
with the committee the duties and responsibilities of the Board of Directors
with respect to a sale or merger. The executive session of the Board
14
authorized the creation of a Strategic Planning Committee to explore the options
presented by FinPro and report back to the Board.
The Strategic Planning Committee met on August 24, 1998 to discuss the
options available to the Company, and resolved to recommend to the full Board
that consideration be given to the potential sale of the Company, and that a
bidders' list of financial institutions be considered.
At the direction of the Strategic Planning Committee, FinPro presented a
list of all reasonable partners for a merger on August 28, 1998. This list was
reviewed by the Board of Directors, and the number of partners was reduced,
under criteria set by the Board of Directors. The Company authorized FinPro, as
part of its advisory duties, to contact one commercial bank, four public
thrifts, and three mutual thrifts, all of whom were based either in New York or
New Jersey. Of these institutions, five expressed an interest in presenting a
bid for the Company, including Kearny.
Also on August 28, 1998, an investor group made a filing with the
Securities and Exchange Commission indicating that it had purchased
approximately 9.2% of the Company's Common Stock, and suggesting that the
Company consider a merger with another local banking institution to maximize
shareholder value.
The Company, through FinPro, engaged in discussions with each of the
parties that expressed an interest in presenting a bid for the Company, and
prepared due diligence materials and confidentiality agreements to promote the
bidding process. All of the parties received identical due diligence materials,
and included in these materials was an identical list of negotiating points with
respect to price and deal structure.
On September 3, 1998, the Strategic Planning Committee met to discuss the
various bid proposals that had been received, and set a schedule for considering
these proposals.
These proposals were considered by the Company, and at an executive
session of the Board held on September 18, 1998, the Board considered the
various bids that had been received up to that point; on October 2, 1998, the
Strategic Planning Committee reviewed these bids in detail with the assistance
of FinPro. The Committee reviewed the proposal of Kearny, which involved an
all-cash proposal for the shares of the Company within a price range of
$23.00-$25.00 per share, and agreed to grant Kearny a right to conduct exclusive
due diligence, if it raised its minimum price to $24.00 per share. Kearny agreed
to do this, and was so granted the exclusive due diligence rights. Kearny's bid
range of $23.00-$25.00 per share in cash represented the highest dollar
consideration to shareholders, and was also not subject to neither share-price
volatility connected with bids in which stock is used for consideration, nor any
contingent factors.
Kearny, after engaging in its exclusive due diligence, offered to purchase
the Company at $24.00 per share, on an all cash basis.
At a special meeting of the Board of Directors held on October 5, 1998,
officials of the Company and FinPro reviewed Kearny's offer and compared it to
the other bids which had been received. Based on this analysis, the bid of
Kearny was accepted as a basis for negotiations, and the Board authorized the
officers of the Company to negotiate a tentative agreement with Kearny.
On October 9, 1998, a form of tentative agreement was presented at a
special meeting of the Board of Directors; at the same time, FinPro presented an
oral analysis regarding the fairness of the proposed agreement to the
shareholders of the Company; it was FinPro's analysis that the proposed
transaction was fair to the shareholders of the Company, based on comparisons
with
15
other, similar transactions and the current market for the Company's securities.
FinPro rendered this analysis at the same time it was participating in the
process, under the direction of the Board of Directors, of the negotiation of
the Merger. The Board engaged in a discussion of this analysis, as well as the
other factors influencing a decision on Kearny's proposal. The Board approved in
principle the terms of the tentative agreement, and authorized the officers of
the Company to negotiate the final terms of the agreement and submit it to the
Board for final approval.
On October 14, 1998, another special meeting of the Board of Directors was
held, at which time the final agreement was reviewed and discussed, and FinPro
updated its oral fairness opinion. At that time, the Board approved the final
agreement.
Reasons for the Merger
The Board of Directors of the Company has unanimously approved the Merger,
and believes that the Merger is in the best interests of the Company, its
shareholders, its employees, and the community at large.
Prior to reaching this conclusion, the Company's Board of Directors
reviewed and considered the results of a due diligence process carried out at
its direction, and reviewed the terms of the Merger with the Company's
management, FinPro and Company counsel. In reaching the conclusion to accept
Kearny's offer and to enter into the final Merger Agreement, the Board
considered a number of factors, including the following:
(i) Information provided by Kearny concerning its financial condition, results
of operations and business on a historical and prospective basis, together
with current industry, economic and market conditions applicable to
financial institutions like Kearny and South Bergen, indicated that the
management of Kearny has been successful in profitably expanding its
business.
(ii) The price being paid by Kearny in the Merger compared favorably in terms
of multiples of book value and earnings to recent mergers involving
comparable financial institutions (see "Proposal --The Merger Opinion of
FinPro").
(iii) The financial aspects of the written proposals received from other
financial institutions which submitted expressions of interest to the
Company's representatives were less favorable to the Company and its
shareholders in terms of market risk and mutliples of book value and
earnings.
(iv) The extensive efforts of FinPro to elicit interest from other entities
which might be interested in a business combination with the Company
indicated that the proposals received represented a thorough check of the
acquisition market.
(v) The belief of the Company's Board of Directors that consolidation in the
financial services industry is likely to continue.
(vi) The favorable opinion of FinPro that the consideration to be received by
the shareholders of the Company was fair from a financial point of view.
The Board of Directors also took into account the fact that Kearny
expressed an interest in retaining as many of South Bergen's employees as
possible, and that Kearny had no plans to close any of South Bergen's branches,
thus lessening the impact of the Merger on the Company's and South Bergen's
employees, and on the communities served by the Company and South Bergen. The
Board of Directors believes that the Merger will result in a stronger and more
effective
16
competitor in the Company's markets, better able to compete effectively in the
rapidly changing marketplace for banking and financial services.
The foregoing does not purport to be a complete list of the matters
considered by the Company's Board of Directors in approving the Merger. In
approving the Merger, no one factor or group of factors was identified by the
Board as being more significant than any other factor in the decision-making
process.
Recommendation of the Board of Directors of 1st Bergen
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF THE STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ADOPTION AND APPROVAL OF THE MERGER AGREEMENT.
For information regarding the interests of the Directors and executive
officers of the Company in the Merger, see "--Effect on Employees and Benefit
Plans; Interests of Certain Persons in the Merger" and "--Security Ownership of
Certain Beneficial Owners and Management."
Opinion of FinPro
The Company retained FinPro to render an opinion with respect to the
fairness from a financial point of view of the consideration to be received by
the shareholders of the Company in the Merger. FinPro was selected to act as the
Company's financial advisor based upon its qualifications, expertise and
reputation. FinPro specializes in the securities of banking enterprises and
regularly engages in the valuation of banking businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
On October 14, 1998, at the meeting at which the Company's Board approved
and adopted the Agreement and the transactions contemplated thereby, FinPro
rendered its oral opinion to the Company's Board that, as of such date, the
Merger Consideration was fair to the stockholders of the Company from a
financial point of view. That opinion was updated as of the date of this Proxy
Statement. In connection with its opinion dated the date of this Proxy
Statement, FinPro also confirmed the appropriateness of its reliance on the
analyses used to render its opinion by performing procedures to update certain
of such analyses and by reviewing the assumptions on which such analyses were
based and the factors considered in connection therewith. No limitations were
imposed by the Company's Board upon FinPro with respect to the investigations
made or procedures followed by FinPro in rendering its opinions. In considering
FinPro's fairness opinion, the Board of Directors was aware of and considered
the fact that in connection with the Merger, FinPro would be entitled to receive
a transaction fee which, as described more fully below, is in part contingent
upon consummation of the Merger.
17
FinPro's opinion is addressed to the Board of Directors of the Company and
does not constitute a recommendation to any of the stockholders of the Company
as to how such stockholders should vote with respect to the Merger.
THE FULL TEXT OF THE OPINION OF FINPRO, WHICH SETS FORTH A DESCRIPTION OF THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE
REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT AS ANNEX B AND IS
INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO READ THE OPINION IN
ITS ENTIRETY. THE FOLLOWING SUMMARY OF THE OPINION IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE OPINION.
Analysis of FinPro
The Company retained FinPro, a financial consulting firm, on the basis of
its experience, to render a written fairness opinion to the Board of Directors
and shareholders of Company as to the per share price to be paid for Company's
stock, as set forth in the Agreement and Plan of Reorganization dated October
14, 1998. FinPro has been in the business of consulting for the banking and
thrift industry for ten years, including the appraisal and valuation of banking
and thrift institutions and their securities in connection with mergers,
acquisitions and other securities transactions. FinPro has knowledge of and
experience with the New Jersey banking and thrift market and financial
organizations operating in that market. FinPro reviewed the negotiated terms of
the Agreement including governance matters.
On October 14, 1998, in connection with its consideration of the Agreement
and Plan of Reorganization, FinPro issued an oral opinion to the Board of
Directors of the Company that the proposed cash per share price, $24.00, of the
Merger as provided in the Agreement is fair and equitable, from a financial
perspective, to the Company and its shareholders. This oral opinion was
subsequently confirmed in writing. A copy of the written opinion is attached as
Appendix B to this Joint Proxy Statement/Prospectus and should be read in its
entirety by shareholders. FinPro's written opinion does not constitute an
endorsement of the Merger or a recommendation to any shareholder as to how such
shareholder should vote at the Special Meeting.
In rendering its opinion, FinPro reviewed certain publicly available
information concerning the Company and Kearny including each party's audited
financial statements and annual reports. FinPro considered many factors in
making its evaluation. In arriving at its Opinion regarding the fairness of the
per share price, FinPro reviewed: (i) the Agreement and Plan of Reorganization
dated October 14, 1998; (ii) the most recent external auditor's reports to the
Boards of Directors of the Company; (iii) the June 30, 1998 Report of Condition
and Income for each organization; (iv) the Rate Sensitivity Analysis reports for
the Company; (v) the Company's listing of marketable securities showing rate,
maturity, and market value as compared to book value; (vi) the Company's
internal loan classification list; (vii) a listing of other real estate owned
for the Company; (viii) the budget and long range operating plan of the Company;
(ix) the Minutes of the Board of Directors meetings for the Company; (x) the
most recent Board report for the Company; (xi) the listing and description of
significant real properties for the Company; and (xii) the directors and
officers liability and blanket bond insurance policies for the Company. FinPro
conducted limited due diligence on Kearny as part of team that included a
representative of McCarter & English, the Company's legal counsel. The due
diligence focused
18
on the ability of Kearny to meet its obligations as set forth in the Agreement.
FinPro conducted an on-site review of each organization's historical performance
and current financial condition and performed a market area analysis.
In addition, FinPro discussed with the management of the Company the
relative operating performance and future prospects, primarily with respect to
the current level of their earnings and future expected operating results,
giving weight to FinPro's assessment of the future of the thrift industry and
the Company's performance within the industry. FinPro compared the results of
operation of the Company with the results of operation of all New Jersey
thrifts.
- --------------------------------------------------------------------------------
New Jersey
Publicly Traded
COMPANY Thrift Median
-------------
Return on Average Assets 0.72% 0.85%
Return on Average Equity 5.64% 8.33%
Asset Growth 7.55% 10.44%
Yield on Interest Bearing Assets 7.32% 7.21%
Cost of Interest Bearing Liabilities 4.59% 4.62%
Net Interest Margin 3.15% 3.21%
Non-interest Income/Average Assets 0.09% 0.23%
Non-interest Expense/Average Assets 1.49% 1.92%
Non-performing Loans/Loans 1.60% 0.65%
Loan Loss Reserves/Loans 2.43% 1.04%
Loan Loss Reserves/Non-Performing Loans 152.17% 97.54%
Efficiency Ratio 62.49% 56.34%
Core Capital/Tangible Assets 10.90% 9.26%
- --------------------------------------------------------------------------------
Source: The SNL DataSource, SNL Securities, Last Twelve Months Data.
Many variables affect the value of financial institutions, not the least
of which is the uncertainty of future events, so that the relative importance of
the valuation variable differs in different situations, with the result that
appraisal theorists argue about which variables are the most appropriate ones on
which to focus. However, most appraisers agree that the primary financial
variables to be considered are earnings, equity, dividends or dividend-paying
capacity, asset quality and cash flow. In addition, in most instances, if not
all, value is further tempered by non-financial factors such as marketability,
voting rights or block size, history of past sales of the thrift's stock, nature
and relationship of the other shareholdings in the thrift, and special ownership
or management considerations.
FinPro analyzed the total deal price on a cash equivalent fair market
value basis using the standard evaluation techniques (as discussed below)
including, but not limited to, comparable sales multiples, net present value of
dividends and terminal value, return on investment, price equity index and
contribution analysis based on certain assumptions of projected growth, earnings
and dividends.
NET ASSET VALUE
Net asset value is the value of the net equity of a thrift, including
every kind of property and value. This approach normally assumes liquidation on
the date of appraisal with the recognition of securities gains or losses, real
estate appreciation or depreciation, adjustments to
19
the loan loss reserve, discount to the loan portfolio and changes in the net
value of other assets. As such, it is not the best approach to use when valuing
a going concern, because it is based on historical costs and varying accounting
methods. Even if the assets and liabilities are adjusted to reflect prevailing
prices and yields (which is often of limited accuracy because readily available
data is often lacking), it still results in a liquidation value for the concern.
Furthermore, since this method does not take into account the values
attributable to the going concern such as the interrelationship among the
company's assets and liabilities, customer relations, market presence, image and
reputation, and staff expertise and depth, little weight is given by FinPro to
the net asset value method of valuation.
MARKET VALUE
Market value is generally defined as the price, established on an
"arms-length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The market value is frequently used to determine the price of a minority
block of stock when both the quantity and the quality of the "comparable" data
are deemed sufficient. However, the relative thinness of the specific market for
the stock of the thrift being appraised may result in the need to review
alternative markets for comparative pricing purposes. The "hypothetical" market
value for a small thrift with a thin market for its stock is normally determined
by comparison to the average price to earnings, price to equity and dividend
yield of local or regional publicly-traded thrift issues, adjusting for
significant differences in financial performance criteria and for any lack of
marketability or liquidity. The market value in connection with the evaluation
of control of a thrift is determined by the previous sales of thrifts in the
state or region. In valuing a business enterprise, when sufficient comparable
trade data is available; the market value deserves greater weight than the net
asset value and similar emphasis as the investment value as discussed below.
FinPro maintains substantial files concerning the prices paid for thrift
institutions nationwide. The database includes transactions involving New Jersey
thrifts and thrifts in the Mid Atlantic region of the United States over the
last five years. The database provides comparable pricing and financial
performance data for thrifts sold or acquired. Organized by different peer
groups, the data present averages of financial performance and purchase price
levels, thereby facilitating a valid comparative purchase price analysis. In
analyzing the transaction value of the Company, FinPro has considered the market
approach and has evaluated price to earnings, price to equity and core deposit
premium multiples for two different groups. The first group was FinPro's
"Comparable Group" which was composed of all thrifts that announced sales
between January 1, 1997 and November 2, 1998 with market values less than $100
million, a tangible equity to assets ratio between 10.00% and 15.00% and a
return on average equity less than 8.00%. The second group was composed of all
New Jersey thrifts that announced sales between January 1, 1997 and November 2,
1998.
SELECT MERGER MULTIPLES
During FinPro's analysis of recent merger multiples in relationship to the
proposed transaction, FinPro placed a heavy reliance on the "Comparable Group"
multiples. FinPro calculated and "Adjusted Equity Value" of $20.83 per share,
based on the Company's September 30, 1998 equity and the median price to book
value multiple of 1.4808 for the "Comparable
20
Group". FinPro calculated an "Adjusted Earnings Value" of $20.94 per share,
based on Company's September 30, 1998 last twelve month's earnings and the
median price earnings multiple of 23.79x for the "Comparable Group".
Additionally, FinPro calculated a "Core Deposit Premium Value" of $21.24 per
share, based on the Company's September 30, 1998 tangible equity and deposits
and the median tangible book premium to core deposits of 8.96% for the
"Comparable Group" FinPro calculated and "Adjusted Equity Value" of $20.83 per
share, based on the Company's September 30, 1998 equity and the median price to
book value multiple of 1.4808 for the "Comparable Group". FinPro calculated an
"Adjusted Earnings Value" of $20.94 per share, based on Company's September 30,
1998 last twelve month's earnings and the median price earnings multiple of
23.79x for the "Comparable Group". Additionally, FinPro calculated a "Core
Deposit Premium Value" of $21.24 per share, based on the Company's September 30,
1998 tangible equity and deposits and the median tangible book premium to core
deposits of 8.96% for the "Comparable Group".
A lower level of reliance was placed on the multiples for New Jersey
thrift transactions announced between January 1, 1997 and November 2, 1998.
FinPro calculated an "Adjusted Equity Value" of $28.20 per share, based on
Company's September 30, 1998 equity and the median price to book value multiple
of 2.0044 for New Jersey Thrifts that announced sales between January 1, 1997
and November 2, 1998. FinPro calculated an "Adjusted Earnings Value" of $23.06
per share, based on Company's June 30, 1998 last twelve months earnings and the
median price to earnings multiple of 26.20x for New Jersey thrifts that
announced sales between January 1, 1997 and November 2, 1998. Additionally,
FinPro calculated a "Core Deposit Premium Value" of $27.49 per share, based on
Company's September 30, 1998 tangible equity and deposits and the median
tangible book premium to core deposits of 16.76% for New Jersey thrifts that
announced sales between January 1, 1997 and November 2, 1998.
The financial performance characteristics of the selected thrift
organizations vary, sometimes substantially, from those of the Company. As such,
this analysis is not a simple mathematical formula, but rather a series of
considerations and judgements, regarding the financial performance and value of
each of the companies.
INVESTMENT VALUE
The investment value is sometimes referred to as the income value or
earnings value. One investment value method frequently used estimates the
present value of an enterprise's future earnings or cash flow. Another popular
investment value method is to determine the level of current annual benefits
(earnings, cash flow, dividends, etc.), and then capitalize one or more of the
benefit types using an appropriate capitalization rate such as an earnings or
dividend yield. Yet another method of calculating investment value is a cash
flow analysis of the ability of a thrift to service acquisition debt obligations
(at a certain price level) while providing sufficient earnings for reasonable
dividends and capital adequacy requirements. In connection with the cash flow
analysis, the return on investment that would accrue to a prospective buyer at
the transaction value is calculated. The investment value methods which were
analyzed in connection with this transaction were the net present value
analysis, and the return on investment analysis, which are discussed below.
21
NET PRESENT VALUE OF DIVIDENDS STREAM AND TERMINAL VALUE
The investment of earnings value of any banking institution's stock is an
estimate of present value of the future benefits, usually earnings, cash flow or
dividends, which will accrue to the stock. FinPro calculated a net present value
of dividends stream and terminal value through 2009 under a number of
iterations. The earnings growth rates ranged from 5.00% to 10.00%, with dividend
estimates based upon historical levels. The terminal value was approximated
using acquisition price to earnings multiples ranging between 17.00x to 32.00x.
Discount rates between 9% and 12% were utilized. Based on these assumptions,
FinPro's net present value of dividends stream and terminal value per share
ranged between $7.79 to $26.43. FinPro's computations were based on an analysis
of the thrift industry, the economic and competitive situations in the Company's
market area, its current financial condition and historical levels of growth and
earnings.
RETURN ON INVESTMENT ANALYSIS
Return on investment (ROI) analysis calculates the ten year return of an
equity investment equal to Company's' book value at September 30, 1998, (i)
assuming a constant return on equity of 5.92%, with a liquidation at 23.79 (the
median price to earnings multiple for the "Comparable Group") times the earnings
in the year 2009; and (ii) assuming a gradual increasing return on equity from
5.92% to 8.50%, with a liquidation at 23.79 (the median price to earnings
multiple for the "Comparable Group") times the earnings in the year 2009. Both
scenarios assumed a 36% tax rate. This ROI analysis provides a benchmark for
assessing the validity of the fair market value of a majority block of stock.
The ROI analysis is one approach to valuing a going concern, and is directly
impacted by the earnings stream, dividend payout levels and levels of debt, if
any. Other financial and non-financial factors indirectly affect the ROI;
however, these factors more directly influence the level of ROI an investor
would demand from an investment in a majority block of stock of a specific
thrift at a certain point in time. The ROI, assuming a constant return on equity
with liquidation at 23.79 times earnings per share in 2009 is 4.82%. The ROI,
assuming a gradual increasing in return on equity with liquidation at 23.79
times earnings per share in 2009, is 7.67%.
PRICE EQUITY INDEX ANALYSIS
Furthermore, a price level indicator, the equity index, may be used to
confirm the validity of the transaction value. The equity index adjusts the
price to equity multiple in order to facilitate a truer price level comparison
with comparable thrift institutions, regardless of differing levels of equity
capital. The equity index is derived by multiplying the price to equity multiple
by the equity-to-assets ratio. The following table sets forth the average price
equity indexes for all New Jersey thrift transactions announced between January
1, 1997 and November 2, 1998, for the "Comparable Group" and for the Company.
Price Equity Index
------------------
Company Acquisition 21.51%
New Jersey Thrift Acquisition Median 19.70%
"Comparable Group" Median 19.33%
Source: SNL Securities data, FinPro calculations
22
Theoretically, an earnings stream may be valued through the use of a net
present value analysis. In FinPro's experience with thrift majority block stock
valuations, it has determined that a relationship does exist between the net
present value of an "average" thrift organization and the transaction value of a
majority block of the thrift organization's stock. There are many other factors
to consider, when valuing a going concern, which do not directly impact the
earnings stream and the net present value but which do exert a degree of
influence over the fair market value of a going concern. These factors include,
but are not limited to, the general condition of the industry, the economic and
competitive situations in the market area and the expertise of the management of
the organization being valued.
Conclusion
It is FinPro's opinion that the proposed cash per price share of $24.00
per share is fair from a financial perspective to the shareholders of the
Company. In arriving at its opinion, FinPro, based on its experience and
judgment as an independent appraiser, subjectively weighed the values arrived at
using the net asset value, market value and investment value appraisal methods
previously summarized, and concluded that each analysis independently supports
FinPro's ultimate opinion regarding the fairness of the transaction.
Additionally, this opinion was influenced by the fact that Kearny's offer of
$24.00 per share was significantly higher than any of the bids offered by the
other institutions contacted by FinPro at the direction of the Board of
Directors.
Neither the Company nor Kearny imposed any limitations upon the scope of
the investigation to be performed by FinPro in formulating its Opinion. In
rendering its Opinion, FinPro did not independently verify the asset quality and
financial condition of the Company, but instead relied upon the data provided by
or on behalf of the Company to be true and accurate in all material respects.
Prior to being retained for this assignment, FinPro, Inc. had provided
professional services and products to the Company. These professional services
included: assistance with strategic planning, an independent appraisal of the
Company's stock as part of its conversion from a mutual institution to a stock
institution, merger and acquisition analysis, interest rate risk management
consulting, and market feasability consulting, along with other, general
consulting engagements. The revenues derived from such services and products are
insignificant when compared to the firm's total gross revenues. FinPro is not
affiliated in any way with Company or Kearny or their respective affiliates.
On August 7, 1998, the Company entered into a letter agreement with
FinPro, pursuant to which FinPro would act as a financial advisor to the Company
with respect to merger and acquisition activities. Providing a fairness opinion
was included as part of this letter agreement. The aggregate fee to be paid to
FinPro, assuming the consummation of the Merger, will be equal to 1.00% of the
total aggregate fair market value paid at the closing (approximately $650,000),
less FinPro's $20,000 retainer fee (received upon the execution of the letter
agreement) and $80,000 in aggregate fees payable upon the completion by FinPro
of due diligence, presentation of an oral opinion regarding the Merger to the
Company's Board of Directors, and delivery of the opinion of FinPro attached
hereto. The letter agreement provides for the indemnification by the Company of
FinPro in the event that FinPro becomes involved in any capacity, other than as
a plaintiff, in any action, proceeding or investigation brought by or against
any person, including stockholders of the Company, in connection with any matter
related to FinPro's assignments as described in such letter agreement, and the
Company will reimburse FinPro periodically for its legal and other expenses
(including the cost of any investigation and preparation) reasonably incurred in
conjunction therewith. If for any reason such indemnification is unavailable to
FinPro or insufficient to hold it harmless, then the Company shall contribute to
the amount paid or payable by FinPro in such proportion as is appropriate to
reflect relative fault of the Company and FinPro.
RIGHTS OF DISSENTING STOCKHOLDERS
New Jersey law does not provide for any dissenting shareholders' rights
for holders of Bergen Common Stock because each stockholder will receive cash in
exchange for their Bergen Common Stock.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
consequences of the Merger under present law to stockholders who are
individuals. Generally, the transaction will result in capital gain to
individual stockholders in an amount equal to $24.00 per share, less the
stockholder's adjusted basis in the stock, as more specifically described
herein. Some stockholders (including, but not limited to, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, employee
stockholders, foreign corporations and persons who are not citizens or residents
of the United States) may be subject to special rules not discussed below. The
discussion assumes that each stockholder holds shares of Common Stock as a
capital asset. However, stockholders who are employees or directors of 1st
Bergen may not be entitled to treat some of the shares which they may have
acquired from 1st Bergen (e.g., through Company stock benefit plans) as capital
assets or a portion of the gain on the sale of such shares as capital gain
because they may be required to report any gain on the sale of the shares as
taxable compensation from the Company.
The receipt of cash in exchange for shares of Common Stock pursuant to the
Merger will be treated as a sale or exchange of the shares of Common Stock for
federal income tax purposes, and may also be a taxable transaction for state,
local and other tax purposes. Each stockholder will recognize gain or loss for
federal income tax purposes generally in an amount equal to the difference
between the amount of cash received and the cost or other tax basis of his, her
or its shares of Common Stock surrendered. Except for gain attributable to
certain shares owned by employees or directors of 1st Bergen as described above,
gain or loss on the sale of shares will be long-term capital gain or loss if the
shares of Common Stock have been held by the stockholder for more than one year.
Otherwise, gain or loss will be short-term capital gain or loss. The holding
period with respect to the shares of Common Stock must be calculated separately
with respect to each block of shares of Common Stock held by a stockholder.
STOCKHOLDERS AND ESOP PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCE OF THE MERGER TO THEM, INCLUDING THE
APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM TAX, AND STATE, LOCAL AND
FOREIGN TAX LAWS.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" transaction. Under the
purchase method of accounting, the assets and liabilities of the Company will be
recorded on the consolidated financial statements of Kearny at their respective
fair value at the Effective Time. Any excess of the value of the consideration
paid by Kearny over the fair value of the Company's identifiable net assets
acquired, less liabilities assumed, will be recorded as intangible assets.
EXPENSES
Each of Kearny and the Company will bear and pay all costs and expenses
incurred by it or on its behalf in connection with the Merger and the Bank
Merger, including fees and expenses of its own financial or other consultants,
investment bankers, accountants and counsel. All costs and expenses of
preparing, printing and mailing of this Proxy Statement and all other fees paid
to the SEC in connection with the Merger shall be borne equally by Kearny and
the Company.
23
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each of the Company and Kearny (in each case of the Company, including its
savings institution subsidiary and other subsidiaries). These include, among
other things, representations and warranties of the Company as to (i) its
organization and good standing, (ii) the identity and ownership of its
subsidiaries, (iii) its capital stock, (iv) the authorization of the Merger
Agreement, (v) the absence of knowledge by the Company of any reason why any
required governmental consents or approvals could not be obtained, (vi)
compliance with laws, (vii) the conformity to applicable accounting standards of
the Company's financial statements and the accuracy of the Company's filings
with the SEC and the Federal Deposit Insurance Corporation, (viii) pending or
threatened material litigation or other actions, (ix) taxes, (x) employee
benefit plans, (xi) insurance, (xii) certain environmental matters and (xiii)
certain material contracts of the Company.
Kearny's representations and warranties include, among other things, those
as to (i) its organization and good standing, (ii) the authorization of the
Merger Agreement, (iii) the absence of the need (except as specified) for
governmental consents to the Merger, and (iv) the absence of knowledge by Kearny
of any reason why it would be unable to obtain any required governmental
consents or approvals, and the belief that no such consent or approval will
contain a condition which would have a material adverse effect (as defined in
the Merger Agreement).
CONDITIONS TO THE MERGER
The respective obligations of each party to consummate the Merger are
subject to the fulfillment or written waiver of each of the following conditions
prior to the Effective Time: (i) the Merger Agreement will have been duly
adopted by the requisite vote of the holders of the outstanding shares of Common
Stock; (ii) all requisite governmental approvals for the Merger and the Bank
Merger will have been obtained and will be in full force and effect and all
related waiting periods will have expired and no such approval will be
conditioned or restricted in a manner that, individually or in the aggregate,
would result in a material adverse effect (as defined in the Merger Agreement)
on 1st Bergen, as the surviving corporation in the Merger, or Kearny, as the
surviving bank in the Bank Merger; (iii) all consents or approvals of all
persons (other than governmental entities) required for or in connection with
the execution, delivery and performance of the Merger Agreement and the
consummation of the Merger will have been obtained and will be in full force and
effect, unless the failure to obtain any such consent or approval, individually
or in the aggregate, would not result in a material adverse effect on 1st Bergen
or Kearny; and (iv) no jurisdiction or governmental entity will have enacted or
issued any statute, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) which prohibits consummation
of the transactions contemplated by the Merger Agreement.
The obligation of Kearny to consummate the Merger is also subject to the
fulfillment or written waiver by Kearny, of each of the following conditions
prior to the Effective Time: (i) the representations and warranties of the
Company set forth in the Merger Agreement will be true and correct as of the
date of the Merger Agreement and as of the Closing Date as though made on and as
of the Closing Date, except that representations and warranties that by their
terms speak as of the date of the Merger Agreement or some other date certain
will be true and correct as of such date, and Kearny will have received a
certificate, dated the Closing Date, signed on behalf of the
24
Company by its Chief Executive Officer and Chief Financial Officer to such
effect; and (ii) the Company will have performed in all material respects all
covenants required to be performed by it under the Merger Agreement at or prior
to the Closing Date, and Kearny will have received a certificate, dated the
Closing Date, signed on behalf of the Company by its Chief Executive Officer and
Chief Financial Officer to such effect.
The obligation of the Company to consummate the Merger is also subject to
the fulfillment, or written waiver by the Company, of each of the following
conditions prior to the Effective Time: (i) the representations and warranties
of Kearny set forth in the Merger Agreement will be true and correct as of the
date of the Merger Agreement and as of Closing Date as though made on and as of
the Closing Date, except that representations and warranties that by their terms
speak as of the date of the Merger Agreement or some other date certain shall be
true and correct as of such date, and the Company will have received a
certificate, dated the Closing Date, signed on behalf of Kearny by a senior
officer of Kearny to such effect; and (ii) Kearny will have performed in all
material respects all covenants required to be performed by it under the Merger
Agreement at or prior to the Closing Date, and the Company will have received a
certificate, dated the Closing Date, signed on behalf of Kearny by a senior
officer of Kearny to such effect.
25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth information as to ownership of the
Company's Common Stock by (i) members of the Company's Board of Directors, (ii)
those officers listed under the "Summary Compensation" section of Form 10-K,
(iii) all executive officers and Directors as a group, and (iv) those persons
believed by the Company to be beneficial owners of more than 5% of the Company's
outstanding shares of Common Stock as of September 30, 1998 as disclosed in
certain reports regarding such ownership filed by such persons with the Company
and with the SEC, in accordance with sections 13(d) and 13(g) of the Exchange
Act. Other than those persons listed below, the Company is not aware of any
person, as such term is defined in the Exchange Act, that owns more than 5% of
the Company's Common Stock as of September 30, 1998.
Ownership by Directors and Executive Officers:
==============================================================================================
Number of Shares (1) As a Percent of Outstanding
-------------------- Shares
------
- ----------------------------------------------------------------------------------------------
James W. Mason 27,348 - (2) 1.06
- ----------------------------------------------------------------------------------------------
Bernard Leung, M.D. 10,948 .42
- ----------------------------------------------------------------------------------------------
Robert C. Miller 12,254 .47
- ----------------------------------------------------------------------------------------------
Richard Masch 16,348 .63
- ----------------------------------------------------------------------------------------------
Kathleen Fisher 8,348 .32
- ----------------------------------------------------------------------------------------------
William M. Brickman 50,308 - (3) 1.95
- ----------------------------------------------------------------------------------------------
Robert O'Neill 5,600 .22
- ----------------------------------------------------------------------------------------------
Albert E. Gossweiler 28,913 - (4) 1.12
- ----------------------------------------------------------------------------------------------
Robert C. Maison 14,783 - (5) .57
- ----------------------------------------------------------------------------------------------
All Executive Officers and
Directors as a Group 174,850 6.76
==============================================================================================
(1) Includes all shares granted pursuant to the Recognition and Retention
Plans for Executive Officers and Employees, of which 20% vest in April,
1998, 1999, 2000, 2001 and 2002.
(2) Includes 9,000 shares held by Mr. Mason's wife, 1,500 shares held by Mr.
Mason as custodian for his grandchildren and 1,500 shares held by Mrs.
Mason as custodian for Mr. Mason's grandchildren.
(3) Includes 2,500 shares held by Mr. Brickman's wife and 2,568 shares held by
the South Bergen Savings Bank 401K Profit Sharing Plan for the Benefit of
Mr. Brickman.
26
(4) Includes 2,422 shares held by the South Bergen Savings Bank 401K Profit
Sharing Plan for the benefit of Mr. Gossweiler.
(5) Includes 3,674 shares held by the South Bergen Savings Bank 401K Profit
Sharing Plan for the benefit of Mr. Maison.
Ownership by persons owning more than 5% of the Company's outstanding
Common Stock:
===============================================================================================
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
===============================================================================================
Common Stock South Bergen Savings Bank 253,920 9.82%
Employee Stock Ownership Trust ("ESOP")
250 Valley Boulevard
Wood-Ridge, NJ 07075
- -----------------------------------------------------------------------------------------------
Common Stock Seidman and Associates 237,100 9.17%
Lanidex Center
100 Misty Lane
P.O. Box 5430
Parsippany, NJ 07054
- -----------------------------------------------------------------------------------------------
Common Stock First Manhattan Co. 231,200 8.94%
437 Madison Avenue
New York, NY 10022
- -----------------------------------------------------------------------------------------------
Common Stock Greater Community Bancorp 213,657 8.26%
55 Union Boulevard
Totowa, NJ 07512
- -----------------------------------------------------------------------------------------------
Common Stock Janus Capital Corporation 192,125 7.43%
100 Fillmore Street
Denver, CO 80206
- -----------------------------------------------------------------------------------------------
27
REGULATORY APPROVALS
Consummation of the Merger is subject to, among other things, the receipt
and effectiveness of all necessary governmental approvals required to consummate
the Merger and the Bank Merger. The Merger Agreement may be terminated and the
Merger abandoned, among other things, if any such governmental approval is
denied. There can be no assurance that all requisite approvals will be obtained,
that such approvals will be received on a timely basis or that such approvals
will not be subject to conditions that would cause the Company or Kearny to
terminate the Merger Agreement.
The Merger and the Bank Merger require the approval of the OTS under the
Home Owners' Loan Act, the Federal Deposit Insurance Act and related OTS
Regulations. The Company has been informed by Kearny that it filed applications
for such approval with the OTS on November 25, 1998. As of the date of this
Proxy Statement, the OTS has not provided Kearny with all required approvals.
The foregoing approval requires consideration by the OTS of various
factors. These include assessments of the competitive effect of the contemplated
transaction, the managerial and financial resources and future prospects of the
resulting institution and the effect of the contemplated transaction on the
convenience and needs of the communities to be served. These regulatory
considerations also include, among other things, an assessment of compliance
with the Community Reinvestment Act of 1977. The regulations of the OTS require
publication of notice of, and an opportunity for public comment with respect to,
the applications filed in connection with the Merger and the Bank Merger.
THERE CAN BE NO ASSURANCE THAT THE OTS WILL APPROVE THE MERGER OR THE BANK
MERGER, AND IF SUCH TRANSACTION IS APPROVED, THERE CAN BE NO ASSURANCE AS TO THE
DATE OF SUCH APPROVAL.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed that it and its
subsidiaries will conduct their respective businesses only in the ordinary
regular and usual course, and will use all reasonable efforts to preserve intact
their business organizations and assets and maintain their rights, franchises,
and existing relations with customers and employees. In addition, the Company
has agreed that, among other things, without the prior consent of Kearny,
neither it nor any of its subsidiaries will: (i) amend their certificates of
incorporation or bylaws, except as may be provided in the Merger Agreement; (ii)
impose, or permit to exist, any lien, charge or encumbrance to exist on any
share of capital stock held by them; (iii) except as otherwise provided for in
the Merger Agreement or related agreements, repurchase, redeem, acquire or
exchange, or split or subdivide its capital stock; (iv) pay a cash dividend on
Company Common Stock (except for regular quarterly cash dividends payable in the
same amount and during the same time periods as past quarterly dividends; (v)
except as expressly permitted by the Merger Agreement, and except for action
involving existing subsidiaries or subsidiaries to carry on activities permitted
by the Merger Agreement, acquire direct or indirect control over any
corporation, association, firm, organization or other entity; (vi) except as
expressly permitted by the Merger Agreement, issue, sell or agree to sell, or
otherwise permit to become outstanding, any
28
additional shares of Company Common Stock; (vii) incur any additional debt
obligation other than short term debt refinancing other short term debt, in an
equal or lesser amount, or indebtedness of the Company (or any Company
subsidiary) to South Bergen in an excess of an aggregate of $50,000, except in
the ordinary course of business; (viii) grant any increase in compensation or
benefits to any officer or director, or grant any increase in compensation or
benefits to non-officer employees in excess of the lesser of 5% per annum or
$5,000 for any of them individually upon not less than 3 business days' notice
to Kearny; (ix) enter into any employment or severance agreements with any of
its officers or employees; (x) adopt any new employee benefit plan; (xi) enter
into any new service contracts, purchase or sale agreements or lease agreements
in excess of $25,000 that are material to the Company or any subsidiary; (xii)
make any capital expenditure exceeding $25,000; (xiii) take any action,
knowingly, that would violate any of the representations and warranties in the
Merger Agreement; (xiv) change their methods of accounting, except as required
by changes in generally accepted accounting principles as concurred in by the
Company's independent auditors or regulatory accounting principles; (xv) take
any action, knowingly that could jeopardize the receipt of regulatory approvals;
(xvi) fail to use best efforts to keep in full force and effect insurance and
bonding coverage; (xvii) fail to notify Kearny promptly of the receipt of any
letter notice or other communication from a governmental entity advising the
Company that it is contemplating issuing, requiring or requesting any agreement,
memorandum of understanding, or similar undertaking, order or directive; (xviii)
fail to notify Kearny promptly of the commencement or threat of any tax audit,
action or proceeding; (xix) fail to maintain and keep properties in good repair
and condition (save for ordinary wear and tear); and (xx) engage in any
off-balance sheet hedge transactions
COVENANTS
Pursuant to the Merger Agreement, each of the Company and Kearny has made
various covenants customary to transactions of this type, including, among
others, that each party will use all reasonable efforts to take or cause to be
taken all actions necessary, proper or advisable to consummate the Merger on a
prompt basis and that the Company will provide Dime with access to certain books
and records of, and other information regarding the Company.
NO SOLICITATION OF ALTERNATIVE TRANSACTIONS
In addition, the Company has agreed that neither it (including its
officers, directors, employees and agents) nor any of its subsidiaries will,
directly or indirectly, initiate, solicit or encourage inquiries or proposals,
furnish any information relating to, or participate in any discussions with any
entity other than Kearny, with respect to a merger, business combination or
similar transaction, or any purchase of all or any substantial part of the
assets of any equity securities of the Company or its subsidiaries, except where
the failure to furnish such information or participate in such discussions would
constitute a breach of the fiduciary obligations of the Company's Board of
Directors, based on the written advice of outside counsel. The Company has also
agreed to notify Kearny if it receives any inquiries or proposals with respect
to the foregoing.
29
EFFECT ON EMPLOYEES AND BENEFIT PLANS; INTERESTS OF MANAGEMENT AND DIRECTORS IN
THE MERGER
Indemnification; Directors' and Officers' Insurance
The Merger Agreement provides that Kearny will indemnify and hold harmless
the past and present directors and officers of the Company and its subsidiaries
against certain liabilities for six years following the Effective Time to the
fullest extent to which directors and officers of the Company would have been
entitled under New Jersey or other applicable law on the date of the Merger
Agreement (and Kearny will pay expenses in advance of the final disposition of
any action or proceeding to the extent permissible under New Jersey law;
provided, that the person to whom expenses are advanced provides an undertaking
to repay such expenses if it is ultimately determined that such person is not
entitled to indemnification). In addition, Kearny will use reasonable efforts to
maintain for a period of three years following the Effective Time the Company
directors' and officers' liability insurance policy to cover those persons
serving as officers and directors of the Company immediately prior to the
Effective time, provided that Kearny will not be required to expend more than
200% of the current amount expended by the Company for such coverage. If Kearny
is unable to maintain or obtain such coverage, Kearny will use reasonable
efforts to obtain comparable coverage for no more than the amount set forth
above. Kearny has agreed that any successor will be required to assume its
obligations to provide the indemnifications set forth herein.
Advisory Board
Promptly following the Effective Time, Kearny has agreed to appoint
members of the Board of Directors of the Company, who are not also officers or
employees of the Company, to a newly formed advisory board to Kearny. The
persons who will be appointed must be nominated by the Company and must be
willing to serve on such board for two years. The functions of the members of
the advisory board will be determined by the board of directors of Kearny. The
members of the advisory board will receive $13,125 for one year of service from
the Effective Time, the chairman of the advisory board receiving $16,875 for
such service. The advisory board will terminate on a date no earlier than two
years from the time the Merger and Bank Merger become effective. Kearny reserves
the right to request and receive the resignation of a member of the advisory
board if it is determined that such member has a conflict of interest or other
circumstances exist which compromise the member's ability to effectively serve
on the board.
Employees--General
Kearny will attempt to retain qualified employees of the Company subject
to the needs of its business. Any employee who is terminated involuntarily
without cause after the effective time of the Merger will be provided a
severance payment, to be mutually agreed upon by the parties to the Merger
Agreement, who will also develop a bonus plan that shall pay a bonus plan to
certain key employees who are not covered by an employment agreement for
remaining employed at South Bergen from the time of the signing of the Merger
Agreement through three months after the closing of the Merger.
30
Employment Agreements with Executive Officers
The Company and South Bergen have existing employment agreements with
William M. Brickman (President and CEO), Albert E. Gossweiler (Exec. Vice Pres.
and CFO) and Robert C. Maison (Senior Vice Pres.) (collectively, the
"Executives"). Pursuant to these employment agreements, the Executives would
have been entitled to receive a payment equal to the current base salary through
the remaining term of the agreement, as a result of a change in control (as such
term is defined in such agreements), following a termination of employment. The
proposed merger transaction will qualify as such a change in control, and the
Executives would have been entitled to receive cash payments pursuant to such
employment agreements. In exchange for new agreements with Kearny, each
Executive has voluntarily agreed to waive his right to receive benefits that
each would otherwise have had the right to receive under their respective
agreements; in other words, the Executives will not receive any benefits under
their existing employment agreements.
Kearny intends to enter into new, separate employment agreements with
Messrs. Brickman and Gossweiler, and a consulting agreement with Mr. Maison. The
agreement with Mr. Brickman will be from the date of signing the employment
agreement through December 31, 2003. His salary will be at a rate of $14,185 per
month for the period from the effective time of the merger through March 31,
2001, and a base salary at a rate of $2,536 per month for the period from April
1, 2001 through December 31, 2003. Mr. Brickman and his spouse, as the case may
be, shall be entitled to participate in any group long-term disability, medical,
dental, prescription drugs or medical reimbursement plans on the same basis as
is offered to other employees of Kearny. Mr. Gossweiler's agreement will be for
a period from the date of signing of the employment agreement through march 31,
2001 with a base salary at the rate of $129,333 per annum. Mr. Gossweiler shall
be entitled to participate in and receive the benefits of any plan of Kearny
which may become applicable to employees, including retirement, medical and life
insurance plans. He will also receive a retention incentive bonus every six
months through March 31, 2001, each payment totaling approximately $50,000. Mr.
Maison's consulting agreement will be for the period from the date of signing
the consulting agreement through March 31, 2001 at a rate of $9,537 per month.
He will be an independent contractor and will not be entitled to participate in
and receive the benefits of any plan of Kearny which may become applicable to
employees, including retirement, medical and life insurance plans.
Benefit Plans, Stock Options and Stock Bonus Plans
At the effective time of the Merger, the Bank's Employee Stock Ownership
Plan ("ESOP") will exchange all shares held by the ESOP to Kearny for $24.00 per
share, pay off any remaining loan related to the initial acquisition of the
shares, terminate the ESOP, and then distribute the remaining proceeds to the
ESOP participants in accordance with the terms of the ESOP after the Internal
Revenue Service issues a favorable determination letter regarding the
termination of the ESOP. The Bank has terminated the 401(k) Profit Sharing Plan
effective December 31, 1998. The Bank has amended its Defined Benefit Plan to
cease benefits accruals under the Defined Benefit Plan effective December 15,
1998. The Bank has issued a notice of intent to terminate the Defined Benefit
Plan; the proposed date of termination is January 22, 1999. Distributions from
the 401(k) Profit Sharing Plan and the Defined Benefit Plan will be made after
the Internal Revenue Service issues favorable determination letters regarding
the termination of such plans. Kearny will also purchase all existing, allocated
stock options, currently equivalent to
31
264,050 shares, for the difference between the strike price per share of such
options, currently $13.975 per share, and $24.00 per share, to be paid in cash
to the holders of such options. Shares vested for the benefit of outside
directors under the Company's Recognition and Retention Plan for Outside
Directors and shares vested for the benefit of participants in the Company's
Recognition and Retention Plan for Executive Officers and Employees shall each
become and be converted into the right to receive $24.00 in cash at the time of
the Merger.
TERMINATION
The Merger Agreement provides that, either before or after the approval of
the Merger by the stockholders of the Company, the Merger Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time,
under certain circumstances, including the following: (i) by mutual consent of
the Company and Kearny; (ii) by either the Company or Kearny (a) upon certain
uncured breaches of the representations, warranties or covenants of the other
party; (b) if the Merger is not consummated on or prior to May 31, 1999 (unless
the failure to consummate the Merger is due to the action or failure to act of
the party seeking to terminate); or (c) if any required governmental approval
has been denied or required to be withdrawn, or the applicable governmental
authority has indicated an intention to deny or impose a condition which would
result in a material adverse effect on the Company or Kearny (unless the failure
of such occurrence is due to the failure of the party seeking to terminate to
perform its obligations under the Merger Agreement); or (iii) by Kearny, (x) if
the Board of Directors of the Company fails to recommend the Merger to the
Company's stockholders or withdraws, modifies or qualifies its recommendation in
a manner adverse to Kearny, or (y) the Board of Directors of the Company
participates in (or authorizes participation in) negotiations regarding the
substantive terms of a formal Acquisition Proposal (as defined in the Merger
Agreement).
32
BUSINESS OF THE COMPANY
The Company is a New Jersey business corporation and unitary savings and
loan holding company under the Home Owner's Loan Act of 1933, as amended (the
"HOLA"). The Company was incorporated on November 28, 1995, for the purpose of
acquiring the Bank in connection with the Bank's conversion from the mutual form
of ownership to the stock form of ownership. Management of the Bank believed
that establishing a holding company structure in connection with the mutual to
stock conversion would facilitate certain operations of the Bank, including
acquisition of other financial institutions, and provide additional financial
flexibility for the growth of the Bank. On March 29, 1996, the Bank converted
from the mutual to stock form and the Company acquired 100% of the outstanding
stock of the Bank. The principal activities of the Company are owning and
supervising the Bank.
33
The Bank is a federally chartered savings bank, one of whose predecessor
institutions was founded in 1890. The Bank converted from a New Jersey state
chartered savings and loan association to a federally chartered savings bank in
November 1995. The Bank's principal business is attracting retail deposits from
the general public and investing those deposits, together with funds generated
from operations and principal payments, primarily in one- to four-family
residential mortgage loans and mortgage-backed securities and, to a lesser
extent, consumer and other loans and investment securities. The Bank's revenues
are derived principally from interest on its mortgage loan and mortgage-backed
securities portfolio and interest and dividends on its investment securities.
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities and advances from the Federal
Home Loan Bank of New York. Through its wholly owned subsidiary, South Bergen
Financial Services, Inc., the Bank also engages in the sale of annuity
investment products.
The Bank has historically operated through its main office located in
Wood-Ridge and its branch in East Rutherford, New Jersey. Since consummation of
the Bank's mutual to stock conversion, the Company, seeking to expand its
franchise through the establishment of new offices, has opened a supermarket
branch in Wanaque, Passaic County, in September of 1996, and a stand alone
branch in Montville, Morris County, in March 1997. The Company seeks to use
expansion of its branch network as a means of expanding its existing trade area
and entering into new trade areas. Management believes that these three areas
are growing economically and are not adequately served by branches of the Bank's
larger competitors. In addition, Management of the Company is familiar with
these areas. Therefore, Management believes that expansion of the Company's
trade area into these locations will provide the Company with additional
opportunities to grow. The Company intends to continue to establish additional
branches in locations which Management believes are underserved by larger
institutions and which have a need for the Company's products and services. New
branches may either be supermarket branches or traditional stand-alone branches.
These additional branches may constitute an additional presence in trade areas
currently served by the Company or expansion into new trade areas.
MARKET AREA AND COMPETITION
The Company conducts business as a community-oriented savings bank,
offering a variety of financial services to meet the needs of the communities it
serves. The Company's primary market area for deposit gathering includes the
neighborhoods surrounding its four offices. The Bank operates two offices in
Bergen County and one each in Morris and Passaic Counties, New Jersey. The
Company's primary market area for loan originations is northern and central New
Jersey, although the Company originates loans throughout the State of New
Jersey.
The Company faces significant competition both in making loans and in
attracting deposits. Northern New Jersey has a high density of financial
institutions, many of which are branches of significantly larger money center
and regional banks which have resulted from the recent consolidation of the
banking industry in New Jersey and surrounding states and which have greater
financial resources than the Company, and all of which are competitors of the
Company to varying degrees. The Company's competition for loans comes
principally from commercial banks, savings banks, savings and loan associations,
credit unions, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations and credit unions. The Company
faces additional competition for deposits from short-term money market funds,
mutual funds and other corporate
34
and government securities funds and from other financial institutions such as
brokerage firms and insurance companies.
PERSONNEL
At September 30, 1998, the Company had a total of 52 full-time employees
and 12 part-time employees. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be good.
REGULATION AND SUPERVISION
General
The Bank is a federally chartered savings bank and its deposit accounts
are insured up to applicable limits by the Federal Deposit Insurance Corporation
(the "FDIC") under the Savings Association Insurance Fund (the "SAIF"). The Bank
is subject to extensive regulation and supervision by the Office of Thrift
Supervision (the "OTS"), as its primary federal regulator and by the FDIC, as
the deposit insurer. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other depository institutions. There are periodic
examinations by the OTS and the FDIC to assess the Bank's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings and loan association
can engage and is intended primarily for the protection of the insurance fund
and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.
As a unitary savings and loan holding company, the Company is subject to
supervision and regulation by the OTS and is subject to public reporting and
other obligations under the Federal securities laws.
Prompt Corrective Action
Federal law establishes a system of prompt corrective action to resolve
the problems of undercapitalized institutions and permits the federal banking
agencies, including the OTS, to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's capital level. Generally, subject to a narrow exception, the
appropriate federal banking agency is required to appoint a receiver or
conservator for an institution that is critically undercapitalized within 90
days after it becomes critically undercapitalized.
Under the rules implementing the prompt corrective action provisions, an
institution that has a total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0%
or greater, and is not subject to any written agreement, order, capital
directive or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure is deemed to be "well-capitalized". An
institution that has a total risk-based capital ratio of 8.0% or greater, a Tier
l risk-based capital ratio of 4.0% or greater and a leverage ratio of 4.0% or
greater (or a leverage ratio of 3.0% or greater if the bank is rated composite
"1"
35
under the CAMEL rating system and is not experiencing or anticipating
significant growth) and does not meet the definition of a "well-capitalized"
bank is considered to be "adequately capitalized." An institution that has a
total risk-based capital of less than 8.0% or has a Tier 1 risk-based capital
ratio that is less than 4.0% or has a leverage ratio of less than 4.0% is
considered "undercapitalized." An institution that has a total risk-based
capital ratio of less than 6.0%, or a Tier 1 risk-based capital ratio that is
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a bank that has a ratio of tangible equity
to total assets (core capital, such as common equity capital, and cumulative
perpetual preferred stock minus all intangible assets, except for limited
amounts of purchased mortgage servicing rights and of purchased credit card
relationships) to assets equal to or less than 2.0% is deemed to be "critically
undercapitalized." Under the rule, the appropriate federal banking agency may
reclassify a well-capitalized bank as adequately capitalized, and may require an
adequately capitalized bank or an undercapitalized bank to comply with certain
mandatory or discretionary supervisory actions as if the bank were in the next
lower capital category (except that the appropriate federal banking agency may
not reclassify a significantly undercapitalized bank as critically
undercapitalized), if the appropriate federal banking agency determines the bank
is in an unsafe or unsound condition, or the Bank has received and not corrected
a less than satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity. At September 30, 1998, the Bank's leverage
ratio as calculated under the prompt corrective action rule was 10.9 %, and so
the Bank is deemed "well-capitalized."
Insurance of Deposit Accounts
The amount of insurance premiums paid by insured depository institutions
is determined by the FDIC pursuant to a risk based system, whereby the FDIC
assigns an institution to one of three capital categories consisting of (1)
well-capitalized, (2) adequately capitalized, or (3) undercapitalized, and one
of three supervisory categories. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under this
system, there are nine assessment risk classifications (i.e., combinations of
capital categories and supervisory subgroups within each capital group) to which
differing assessment rates are applied. Currently, assessment rates for SAIF
insured institutions range from .23% of deposits for an institution in the
highest category (i.e., well-capitalized and financially sound, with only a few
minor weaknesses) to .31% of deposits for an institution in the lowest category
(i.e., undercapitalized and posing a substantial probability of loss to the FDIC
unless effective corrective action is taken). However, reflecting the
recapitalization of the SAIF, the FDIC has proposed a new schedule of assessment
rates of from 0 to 27 basis points.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that, among other things, the institution has engaged in, or is
engaging in, unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or written agreement entered into with
the FDIC. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Regulatory Capital
The OTS' capital requirements applicable to the Bank consist of a
"tangible capital requirement", a "leverage limit" and a "risk-based capital
requirement".
36
Under the tangible capital requirement, a savings association must
maintain tangible capital in an amount equal to at least 1.5% of adjusted total
assets. Tangible capital is defined as core capital less all intangible assets,
plus a specified amount of purchased mortgage servicing rights.
The leverage limit requires that savings associations maintain "core
capital" in an amount equal to at least 3.0% of adjusted total assets, although
to be adequately capitalized for purposes of the prompt corrective action
regulations, core capital must generally be 4.0%. 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, plus purchased mortgage servicing rights valued at
the lower of 90.0% of fair market value, 90.0% of original cost or the current
amortized book value as determined under generally accepted accounting
principles ("GAAP"), less non-qualifying intangible assets.
In April 1991, The OTS published a proposed amendment to the regulatory
capital requirements applicable to all savings associations to conform to Office
of the Comptroller of the Currency capital regulations applicable to national
banks. Under the OTS proposal, those savings associations receiving a CAMEL
rating of "1", the best possible rating on a scale of 1 to 5 will be required to
maintain a ratio of core capital to adjusted total assets of 3.0%. All other
savings associations will be required to maintain minimum core capital of 4.0%
to 5.0% of total adjusted assets. In determining the required minimum core
capital ratio, the OTS will assess the quality of risk management and the level
of risk in each saving association on a case-by-case basis. The OTS did not
indicate in the proposed regulation the standards it will use in establishing
the appropriate core capital requirement for savings associations not rated "1"
under the CAMEL rating system. At December 31, 1997, the Bank's ratio of core
capital to total adjusted assets was 10.6%. The OTS prohibits savings
associations from disclosing their CAMEL ratings. In addition, the OTS limits
the amount of purchased mortgage servicing rights includable as core capital to
50.0% of such capital.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk weighted assets of 8.0%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk weight of 0-100% as assigned by the OTS capital
regulation based on the risks the OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed above
under the leverage capital standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses. Allowances for loan
and lease losses includable in supplementary capital is limited to a maximum of
1.25%. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100.0% of core capital.
The OTS has amended its risk-based capital requirements to require
institutions with an "above normal" level of interest rate risk to maintain
additional capital. A savings association is considered to have a "normal" level
of interest rate risk if the decline in the market value of its portfolio equity
after an immediate 200 basis point increase or decrease in market interest rates
(whichever leads to the greater decline) is less than two percent of the current
estimated market value of its assets. The market value of portfolio equity is
defined as the net present value of expected cash inflows and outflows from an
association's assets, liabilities and off-balance sheet items. The amount of
additional capital that an institution with an above normal interest rate risk
is
37
required to maintain (the "interest rate risk component") equals one-half of the
dollar amount by which its measured interest rate risk exceeds the normal level
of interest rate risk. The interest rate risk component is in addition to the
capital otherwise required to satisfy the risk-based capital requirement.
Effectiveness of these risk-based capital requirements has been waived by the
OTS while the OTS reviews the interest rate risk approaches taken by the other
Federal regulators. Although no final determination may be made until the
regulations are implemented, management believes that the Bank will be found to
have an "above normal" level of interest rate risk, but that the Bank's
additional capital requirements will not adversely impact the Bank or its
operations.
The OTS and the FDIC generally are authorized to take enforcement action
against a savings association that fails to meet its capital requirements, which
action may include restrictions on operations and banking activities, the
imposition of a capital directive, a cease-and-desist order, civil money
penalties or harsher measures such as the appointment of a receiver or
conservator or a forced merger into another institution. In addition, under
current regulatory policy, an association that fails to meet its capital
requirements is prohibited from paying any dividends.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") of New York,
which is one of the 12 regional FHLBs. As a member of the FHLB, the Bank is
required to purchase and maintain stock in the FHLB of New York in an amount
equal to the greater of 1.0% of its aggregate unpaid residential mortgage loans,
home purchase contracts or similar obligations at the beginning of each year, or
1/20 (or such greater fraction as established by the FHLB) of outstanding FHLB
advances. At September 30, 1998, the Bank had $2.6 million in FHLB of New York
stock, which was in compliance with this requirement. In past years the Bank has
received dividends on its FHLB stock. Over the past five years such dividends
have averaged 7.74%, and were 6.60% for the year ended December 31, 1997. All 12
FHLBs provide financial assistance for the resolution of troubled savings
associations and contribute to affordable housing programs through direct loans
or interest subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions could cause rates on the
FHLB advances to increase and could affect adversely the level of FHLB dividends
paid and the value of FHLB stock in the future.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from 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. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board.
Qualified Thrift Lender Test
The Qualified Thrift Lender ("QTL") test requires that a savings
association maintain at least 65.0% of its total "portfolio assets" in
"qualified thrift investments" on an average basis in nine of every twelve
months. For purposes of the test, portfolio assets are defined as the total
assets of the savings association minus: goodwill and other intangible assets;
the value of property used by the savings association to conduct its business;
and liquid assets not to exceed a certain percentage of the savings
association's total assets.
38
Under the QTL statutory and regulatory provisions, all forms of home
mortgages, home improvement loans, home equity loans, and loans on the security
of other residential real estate and mobile homes as well as a designated
percentage of consumer loans are "qualified thrift investments," as are shares
of stock of an FHLB, investments or deposits in other insured institutions,
securities issued by the FNMA, FHLMC, or GNMA and other mortgage-related
securities. Investments in nonsubsidiary corporations or partnerships whose
activities include servicing mortgages or real estate development are also
considered qualified thrift investments in proportion to the amount of primary
revenue such entities derive from housing-related activities. Also included in
qualified thrift investments are mortgage servicing rights, whether such rights
are purchased by the insured institution or created when the institution sells
loans and retains the right to service such loans.
A savings institution that fails to become or maintain its status as a
qualified thrift lender must either become a commercial bank or be subject to
certain statutory restrictions. A savings institution that converts to a bank
must pay the applicable exit and entrance fees involved in converting from one
insurance fund to another. A savings institution that fails to meet the QTL test
and does not convert to a bank will be: (1) prohibited from making any
investment or engaging in activities that would not be permissible for national
banks; (2) prohibited from establishing any new branch office where a national
bank located in the savings institution's home state would not be able to
establish a branch office; (3) ineligible to obtain new advances from any FHLB;
and (4) subject to limitations on the payment of dividends comparable to the
statutory and regulatory dividend restrictions applicable to national banks.
Also, beginning three years after the date on which the savings institution
ceases to be a qualified thrift lender, the savings institution would be
prohibited from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any outstanding
advances to any Federal Home Loan Bank. A savings institution may requalify as a
qualified thrift lender if it thereafter complies with the QTL test. As of
September 30, 1998, the Bank was in compliance with the QTL requirement. At
September 30, 1998, 74.5% of the Bank's assets were "qualified thrift
investments".
Limitations on Capital Distributions
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire shares, payments to shareholders of another institution in a
cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, which are based primarily of an
institution's capital level. An institution that exceeds all fully phased-in
regulatory capital requirements before and after a proposed capital distribution
("Tier 1 Association") and has not been advised by the OTS that it is in need of
more than normal supervision, could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of: (i) 100.0% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year; or (ii) 75.0% of its net earnings for the previous four quarters.
Any additional capital distributions would require prior OTS approval. In the
event the Bank's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Bank
39
would be prohibited from making any capital distribution if, after the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less that 4.0%.
Holding Company Regulation
The Company is registered with and is subject to OTS examination and
supervision and certain reporting requirements as a unitary savings and loan
holding company. In addition, the operations of the Company are subject to
regulations promulgated by the OTS from time to time. As a SAIF-insured
subsidiary of a savings and loan holding company, the Bank will be subject to
certain restrictions in dealing with the Company and with other persons
affiliated with the Company, and will continue to be subject to examination and
supervision by the OTS and FDIC.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, from: (i) acquiring control (as defined) of another insured
institution (or holding company thereof) without prior OTS approval; (ii)
acquiring more than 5.0% of the voting shares of another insured institution (or
holding company thereof) which is not a subsidiary, subject to certain
exceptions; (iii) acquiring through merger, consolidation or purchase of assets,
another savings association or holding company thereof, or acquiring all or
substantially all of the assets of such institution (or holding company thereof)
without prior OTS approval; or (iv) acquiring control of a depository
institution not insured by the FDIC (except through a merger with and into the
holding company's savings association subsidiary that is approved by the OTS). A
savings and loan holding company may acquire up to 15.0% of the voting shares of
an undercapitalized savings association. A savings and loan holding company may
not acquire as a separate subsidiary an insured institution that has principal
offices outside of the state where the principal offices of its subsidiary
institution is located, except: (i) in the case of certain emergency
acquisitions approved by the FDIC; (ii) if the holding company controlled (as
defined) such insured institution as of May 5, 1987; or (iii) if the laws of the
state in which the insured institution to be acquired is located specifically
authorize a savings association chartered by that state to be acquired by a
savings association chartered by the state where the acquiring savings
association or savings and loan holding company is located, or by a holding
company that controls such a state chartered association. No director or officer
of a savings and loan holding company or person owning or controlling more than
25.0% of such holding company's voting shares may, except with the prior
approval of the OTS, acquire control of any FDIC-insured depository institution
that is not a subsidiary of such holding company. If the OTS approves such an
acquisition, any holding company controlled by such officer, director or person
shall be subject to the activities limitations that apply to multiple savings
and loan holding companies, unless certain supervisory exceptions apply.
Transactions with Affiliates
Section 11 of HOLA provides that transactions between an insured
subsidiary of a holding company and an affiliate thereof will be subject to the
restrictions that apply to transactions between banks that are members of the
Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of
the Federal Reserve Act. Generally, Sections 23A and 23B: (i) limit the extent
to which a financial institution or its subsidiaries may engage in "covered
transactions" with an "affiliate", to an amount equal to 10.0% of the
institution's capital and surplus, and limit all "covered transactions" in the
aggregate with all affiliates to an amount equal to 20.0% of such capital and
surplus; and (ii) require that all transactions with an affiliate, whether or
not "covered transactions,"
40
be on terms substantially the same, or at least as favorable to the institution
or subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and similar types of transactions. Management believes that the Bank
is in compliance with the requirements of Sections 23A and 23B. In addition to
the restrictions that apply to financial institutions generally under Sections
23A and 23B, Section 11 of the HOLA places three other restrictions on savings
associations, including those that are part of a holding company organization.
First, savings associations may not make any loan or extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies. Second, savings associations may not purchase or invest
in affiliate securities except for those of a subsidiary. Finally, the Director
is granted authority to impose more stringent restrictions when justifiable for
reasons of safety and soundness.
Extensions of credit by the Bank to executive officers, directors, and
principal stockholders and related interests of such persons are subject to
Sections 22(g) and 22(h) of the Federal Reserve Act and Subpart A of the Federal
Reserve Board's Regulation O. These rules prohibit loans to any such individual
where the aggregate amount exceeds an amount equal to 15.0% of an institution's
unimpaired capital and surplus plus an additional 10.0% of unimpaired capital
and surplus in the case of loans that are fully secured by readily marketable
collateral, and/or when the aggregate amount outstanding to all such individuals
exceeds the institution's unimpaired capital and unimpaired surplus. These rules
also provide that no institution shall make any loan or extension of credit in
any manner to any of its executive officers or directors, or to any person who
directly or indirectly, or acting through or in concert with one or more
persons, owns, controls, or has the power to vote more than 10.0% of any class
of voting securities of such institution ("Principal Stockholder"), or to a
related interest (i.e., any company controlled by such executive officer,
director, or Principal Stockholder), or to any political or campaign committee
the funds or services of which will benefit such executive officer, director, or
Principal Stockholder or which is controlled by such executive officer,
director, or Principal Stockholder, unless such loan or extension of credit is
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons,
does not involve more than the normal risk of repayment or present other
unfavorable features, and the institution follows underwriting procedures that
are not less stringent than those applicable to comparable transactions by the
institution with persons who are not executive officers, directors, Principal
Stockholders, or employees of the institution. A savings association is
therefore prohibited from making any new loans or extensions of credit to the
savings association's executive officers, directors, and 10.0% stockholders at
different rates or terms than those offered to the general public. The rules
identify limited circumstances in which an institution is permitted to extend
credit to executive officers. Management believes that the Bank is in compliance
with Sections 22(g) and 22(h) of the Federal Reserve Act and Subpart A of the
Federal Reserve Board's Regulation O.
The Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), nonpersonal certificates of
deposit (those which are transferable or held by a person other than a natural
person) with an original maturity of less than one and one-half years and
certain money market deposit accounts. While noninterest-earning, the balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements imposed by the OTS. In addition,
Federal Reserve Board regulations limit the periods within which
41
depository institutions must provide availability for and pay interest on
deposits to transaction accounts. Depository institutions are required to
disclose their check-hold policies and any changes to those policies in writing
to customers. Because required reserves must be maintained in the form of either
vault cash, a noninterest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of this
reserve requirement is to reduce the Bank's interest-earning assets. The Bank is
in compliance with all such Federal Reserve Board requirements.
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window", but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from the Federal Reserve Bank.
Federal Securities Laws
The Company is subject to the periodic reporting obligations, proxy
solicitation rules, insider trading restrictions and other requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Industry Segments
The Registrant has only one industry segment, banking.
PROPERTIES
At September 30, 1998, the Bank conducted its business through its four
offices located at 250 Valley Boulevard, Wood-Ridge, New Jersey 07075, 20 Willow
Street, East Rutherford, New Jersey, 4 Union Avenue, Haskell, New Jersey, 339
Main Road, Route 202, Montville, New Jersey. The following table sets forth
certain information regarding the Bank's properties.
ORIGINAL DATE OF FURNITURE NET BOOK
LEASED DATE LEASED LEASE AND VALUE OF
LOCATION OR OWNED OR ACQUIRED EXPIRATION EQUIPMENT PROPERTY
- -------- -------- ----------- ---------- --------- --------
250 Valley Boulevard Owned 1957 n/a $171,308 $2,379,635
Wood-Ridge, NJ
20 Willow Street Owned 1970 n/a $ 24,791 $ 61,065
East Rutherford, NJ
4 Union Avenue Leased 1996 2001 $ 41,339 $ 82,617
Haskell, NJ
339 Main Road Leased 1997 2002 $ 89,132 $ 115,020
Route 202
Montville, NJ
42
LEGAL PROCEEDINGS
The Company is involved from time to time as a party to legal proceedings
occurring in the ordinary course of its business. The Company believes that none
of these proceedings would, if adversely determined, have a material effect on
the Company's consolidated financial condition or results of operations.
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotations
("Nasdaq") National Market System under the symbol "FBER". As of September 30,
1998, there were 610 registered holders of the Company's common stock.
The last reported sales price of Bergen Common Stock on October 14, 1998,
the last trading day immediately prior to public announcement of the execution
of the Merger Agreement, was $18.25 per share. On [date] (the last practicable
date prior to the mailing of this Proxy Statement), the last reported sales
price of Bergen Common Stock was $_____ per share. Stockholders are advised to
obtain current market quotations for their shares. 1st Bergen declared a cash
dividend in the amount of $0.07 cents per share in the calendar quarter ended
September 30, 1998.
The following table represents the high and low closing price for the
common stock and the dividends paid for the quarterly periods ending on the
dates indicated below (the Company's Common Stock commenced trading March 29,
1996):
High Low Dividend
---- --- --------
December 31, 1998 22 7/8 14 1/2 $ 0.07
September 30, 1998 19 7/8 14 3/4 $ 0.07
June 30, 1998 20 18 1/8 $ 0.05
March 31, 1998 20 3/4 15 15/16 $ 0.05
December 31, 1997 19 1/2 17 1/2 $ 0.05
September 30, 1997 19 1/2 15 1/4 $ 0.05
June 30, 1997 15 3/4 12 7/8 $ 0.03
May 31, 1997 15 1/8 11 3/8 $ 0.03
December 31, 1996 12 1/8 10 3/4 $ 0.03
September 30, 1996 11 1/8 9 $ 0.03
June 30, 1996 10 9 --
The Company has declared a cash dividend for each successive calendar
quarter beginning with September 1996 and has again done so for the quarter
ending December 31, 1998. However, no assurance can be given that dividends
will be paid in the future since payments of such dividends will be based on
current and prospective earnings, anticipated growth and the capital position of
the Company. In addition, earnings and the financial condition of the Bank and
applicable governmental policies and regulations would also effect the Company's
ability to pay dividends.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this discussion and analysis
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements, including changes in general economic conditions in the Company's
market area, unanticipated occurrences impacting Borrowers of South Bergen,
regulatory developments affecting the banking industry generally or South Bergen
specifically, unanticipated changes in the interest rate environment or other
factors affecting South Bergen's loan and/or investment securities portfolios.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date of this
Proxy. Neither the Company nor South Bergen undertake any obligation to publicly
review or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations should be read in
conjunction with the Company's consolidated financial statements and the
accompanying notes presented elsewhere herein. See "INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS."
OVERVIEW
Total assets increased $15.9 million to $306.2 million at September 30,
1998, from $290.3 million at December 31, 1997. Part of this growth was
attributable to the Company increasing its borrowing through the Federal Home
Loan Bank of New York (FHLB-NY) as it continued to expand its Leverage Program.
At September 30, 1998, the weighted cost of the FHLB-NY borrowings was 5.55%
versus a yield on the investments purchased of 7.38%. Borrowed funds at
September 30, 1998, totalled $39.5 million, an increase of $8.2 million from
December 31, 1997. All borrowings with the FHLB-NY are in the form of securities
sold under agreements to repurchase. Borrowings of $15.5 million have fixed
maturities through February 2000 with an average rate of 5.92%. Borrowings of
$24.0 million have fixed maturities from July 2001 through March 2008 with an
average rate of 5.31% and are callable earlier at the lender's option.
Cash and cash equivalents increased $13.8 million, or 431.3%, to $17.0
million as of September 30, 1998, from $3.2 million at December 31, 1997. The
increase in cash and cash equivalents reflects proceeds from loan, investment
and mortgage-backed securities prepayments exceeding new loan demand. On October
1, 1998, FHLB-NY borrowings totalling $11.5 million with an average cost of
5.96% were repaid. These borrowings were due to mature during the fourth quarter
of 1998. As a result of the repayment, the weighted cost of the FHLB-NY
borrowings was reduced to 5.38% from 5.55%.
Loans receivable, net, increased $1.5 million, or 1.12%, to $129.3 million
at September 1998 from $127.8 million at December 1997. Mortgage-backed
securities held to maturity decreased $18.7 million, or 35.6%, to $33.8 million
at September 30, 1998, from $52.5 million at December 31, 1997. This decrease
reflects higher than average prepayments reflecting the current market rates of
interest and Management's determination to classify new purchases as available
for sale to enhance the Company's liquidity. Mortgage-backed securities
available for sale decreased
44
$313,000, or 3.0%, to $10.1 million at September 30, 1998, from $10.4 million at
December 31, 1997. The decrease was a result of normal repayments and
prepayments.
Investment securities held to maturity decreased $17.9 million, or 38.2%,
to $29.0 million at September 30, 1998, from $46.9 million at December 31, 1997.
This decrease was due to the early maturity or call of securities valued at
$17.0 million and Management's determination to classify new purchases as
available for sale.
Investment securities available for sale increased $35.7 million, or
86.9%, to $76.8 million at September 30, 1998, from $41.1 million at December
31, 1997. This increase was funded in part by reinvested cash flow from the
early maturity of securities in the held to maturity portfolio and additional
FHLB-NY borrowings as the Company increased its leverage program.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased $2.9 million, or 7.38%, to $36.4 million at
September 1998, from $39.3 million at December 1997. The decrease in
stockholders' equity was due primarily to the continued repurchase by the
Company of 1st Bergen Bancorp common stock in the open market pursuant to the
Company's Repurchase Program. During the nine-months ended September 30, 1998,
the Company repurchased 279,292 shares of its common stock with a market value
of $5.4 million. Offsetting the stock repurchase was year-to-date income of $1.6
million.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
Net Income. Net income for the nine months ended September 30, 1998, was
$1.6 million. Earnings per share for this period were $0.71 and $0.69 on a basic
and diluted basis, respectively. Net income for the nine months ended September
30, 1997, was also $1.6 million while earnings per share were $0.57 on a basic
and diluted basis. The period-to-period increases in earnings per share is the
result of the Company's ongoing stock Repurchase Program. Net interest income
after provision for loan losses increased $205,000, or 3.2%, to $6.6 million for
the nine months ended September 30, 1998, from $6.4 million for the same period
last year. This was accompanied by an increase in non-interest income of $75,000
and offset by an increase in non-interest expense of $297,000.
Interest Income. Interest on loans increased $176,000, or 2.3%, to $7.7
million for the nine months ended September 30, 1998, from $7.5 million for the
same period in 1997. The increase in interest on loans was primarily
attributable to an increase in the average balance of loans outstanding during
the period to $129.0 million for the nine months ended September 30, 1998, from
$121.3 million for the same period in 1997. This was partially offset by a
decrease in the average yield to 7.96% for the nine months ended September 30,
1998, from 8.28% for the same period in 1997, reflecting lower current market
rates of interest.
Interest income on mortgage-backed securities held to maturity decreased
$461,000, or 17.6%, to $2.2 million for the nine months ended September 30,
1998, from $2.6 million for the same period in 1997. The decrease was due to a
decline in the average balance of mortgage-backed securities held to maturity
during the period to $43.0 million from $53.0 million for the same period in
1997. This was offset slightly by an increase in the average yield at September
30, 1998, to 6.69% from 6.59% for the comparable period in 1997.
45
Interest income on investments held to maturity decreased $439,000, or
18.3%, to $1.9 million for the nine-month period ended September 30, 1998, from
$2.4 million for the same period in 1997. The decrease was due to a reduction in
the average yield of investments held to maturity to 7.02% from 7.36% for the
same period in 1997. This reduction was partially offset by a decrease in the
average balance outstanding for the nine months ended September 30, 1998, of
$6.3 million to $37.0 million at September 30, 1998, from $43.3 million in 1997.
Interest income on securities available for sale increased $2.1 million,
or 175.0%, to $3.3 million for the nine months ended September 30, 1998,
compared to $1.2 million for the same period in 1997. This increase was due to
an increase in the average balance outstanding of securities available for sale
of $38.0 million, or 149.0%, to $63.5 million compared to $25.5 million for the
comparison period in 1997. This increase was coupled with an increase in the
average yield to 6.89% from 6.39% in 1997.
Interest income on mortgage-backed securities available for sale increased
$280,000, or 111.1%, to $532,000 for the nine months ended September 30, 1998,
from $252,000 for the same period in 1997. This increase was due primarily to
the average balance outstanding of mortgage-backed securities available for sale
increasing $5.2 million, or 92.9%, to $10.8 million at September 30, 1998, from
$5.6 million at September 30, 1997. In addition, the average yield increased to
6.56% from 5.97% in 1997.
Interest Expense. Interest expense increased $1.5 million, or 19.7%, to
$9.1 million for the nine months ended September 30, 1998, from $7.6 million at
September 30, 1997. The increase was primarily attributable to the cost of
borrowed funds in connection with the Company's Leverage Program. The average
balance of borrowed funds was $40.2 million for the nine months ended September
30, 1998, with an average cost of 5.78% compared to an average balance of $14.2
million with an average cost of 5.96% for the same period in 1997. The average
balance of savings deposits was $224.0 million with a cost of 4.38% for the nine
months ended September 30, 1998, compared to an average balance of $211.7
million and a cost of 4.37% at September 30, 1997. The increase in the average
deposits of $12.3 million was due primarily to deposit growth at the Company's
new Wanaque and Montville, New Jersey, offices.
Provision for Loan Losses. The provision for loan losses was $225,000 for
the nine-month period ended September 30, 1998, compared to $400,000 for the
same period last year. The decrease in the provision reflects management's view
of the risks inherent in the Bank's loan portfolio, including, among other
factors, a leveling off of non-performing loans, modest loan growth, the amount
of the existing reserve balance and economic conditions in the Company's trade
area. The ratio of non-performing loans to total assets was 0.69% at September
30, 1998, compared to 0.71% at September 30, 1997. At September 30, 1998 and
December 31, 1997, the allowance for loan losses was $3.2 million and $3.1
million, respectively.
Non-interest Income and Non-interest Expense. Non-interest income
increased $75,000, or 36.8%, to $279,000 for the nine months ended September 30,
1998, compared to $204,000 for the same period last year. The increase was
primarily due to an increase in NOW account service charges and an increase in
safe deposit box rental fees. Non-interest expense increased $298,000, or 7.1%,
to $4.5 million for the nine-month period ended September 30, 1998, from $4.2
million for the same period last year. The increase was primarily due to an
increase in compensation and
46
employee benefit expense of $255,000 related to the addition of staff at the
Company's Montville, New Jersey, office and the amortization of stock based
benefit plans. There were also increases in equipment and real estate owned
expense of $68,000 and $57,000, respectively. Partially offsetting these was a
decrease in other expenses of $74,000.
Income Tax Expense. Income tax expense decreased $53,000, or 6.0%, to
$830,000 for the nine months ended September 30, 1998, from $883,000 for the
same period in 1997 due to lower before-tax income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996.
General. Net income for the year ended December 31, 1997, was $2.1
million, compared with $756,000 for the year ended December 31, 1996, which
amount reflected a one-time non-recurring FDIC special assessment to
recapitalize the Savings Association Insurance Fund (SAIF) as mandated by
Congress. The after tax cost to the Company of this special assessment was
$815,000.
Net Interest Income. For the year ended December 31, 1997, net interest
income increased $1.0 million, or 12.3%, to $9.1 million from $8.1 million for
the year ended December 31, 1996. The Company's net interest rate spread
increased slightly to 2.93% from 2.90% for the year ended December 31, 1997.
Interest Income. Total interest income increased $2.3 million, or 13.4%,
to $19.5 million for the year ended December 31, 1997, from $17.2 million for
the year ended December 31, 1996. This increase was due to an increase in the
average balance of earning assets of $25.4 million, or 10.8%, to $260.6 million
for the year ended December 31, 1997, from $235.2 million for the year ended
December 31, 1996.
Interest income on loans increased $238,000, or 2.4%, to $10.0 million for
the year ended December 31, 1997, from $9.8 million for the year ended December
31, 1996. The average balance of the loan portfolio increased $7.7 million, or
6.7%, to $122.1 million at December 31, 1997, from $114.4 million for the year
ended December 31, 1996. This was offset by a decrease in the average yield of
the loan portfolio to 8.23% for the year ended December 31, 1997, from 8.58% for
the year ended December 31, 1996. Interest income on mortgage-backed securities
held to maturity increased $172,000, or 5.1%, to $3.5 million for the year ended
December 31, 1997, from $3.4 million for the year ended December 31, 1996. This
was due to an increase in the average yield to 6.62% from 6.18% for the year
ended December 31, 1996. This increase was offset by a decrease in the average
balance of mortgage-backed securities held to maturity of $990,000, or 1.8%, to
$53.3 million from $54.3 million for the year ended December 31, 1996. Interest
income on mortgage-backed securities available for sale increased $272,000, or
174.1%, to $428,000 for the year ended December 31, 1997, from $156,000 for the
preceding year. This was due to increases in both the average balance and the
average yield. The average balance increased $3.5 million, or 129.6%, to $6.2
million for 1997 from $2.7 million for the year ended December 31, 1996. This
was coupled with an increase in the average yield to 6.89%, for the year ending
December 31, 1997 from 5.81% for the year ended December 31, 1996.
Interest income on investments held to maturity increased $795,000, or
26.7%, to $3.8 million for the year ended December 31, 1997, from $3.0 million
for the same period last year.
47
This increase was due to an increase in the average balance of $5.4 million, or
11.9%, to $50.7 million for the year ended December 31, 1997, from $45.3 million
for the year ended December 31, 1996. The investments held to maturity portfolio
also experienced an increase in the average yield to 7.24% from 6.37%. Interest
income on investments available for sale increased $787,000, or 84.3%, to $1.7
million from $933,000 for the year ended December 31, 1996. This increase was
due primarily to an increase in the average balance of $9.6 million, or 56.5%,
to $26.6 million for the year ended December 1997 from $17.0 million for the
year ended 1996. In addition, the average yield increased 97 basis points to
6.46% from 5.49% for the year ended December 31, 1996.
Interest Expense. Interest expense increased by $1.2 million, or 13.0%, to
$10.4 million for the year ended December 31, 1997, from $9.2 million for the
year ended December 31, 1996. This increase was primarily attributable to the
cost associated with the borrowed funds used by the Bank in its leverage
program. For the year ended December 31, 1997, the Bank's average cost of funds
on deposits and borrowings increased to 4.55% from 4.43% for the period ended
December 31, 1996. The average balance of certificate accounts increased by $1.2
million, or 0.94%, to $129.7 million for the year ended December 31, 1997, from
$128.5 million for the year ended December 31, 1996, while the average balance
of core deposits increased by $3.5 million, or 4.45%, to $82.2 million for the
year ended December 31, 1997, from $78.7 million for the year ended December 31,
1996. The average balance of borrowed funds for the year ended December 31,
1997, was $17.6 million with an average cost of 6.04%. The Company anticipates
increasing its borrowings in future periods to fund increases in its asset base
through the purchase of investments and mortgage-backed securities. Interest
expense may increase in future periods due to such borrowings.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1997, decreased $250,000 or 34.5%, to $475,000 from $725,000
for the year ended December 31, 1996. The decrease provision reflects a
continued decline in the amount of newly classified loans and the continuing
resolution of existing non-performing assets. Non-performing loans, defined as
non-accrual loans and accruing loans delinquent 90 days or more, increased
$600,000, or 40.0%, to $2.1 million at December 31, 1997, from $1.5 million at
December 31, 1996. At December 31, 1997, and December 31, 1996, the allowance
for loan losses was $3.1 million.
Future provisions for loan losses will continue to be based on
Management's assessment of the loan portfolio and its underlying collateral,
trends in non-performing loans, current economic conditions and other factors
which warrant recognition in order to maintain the allowance for loan losses at
levels sufficient to provide for estimated future losses. Although Management
uses the best information available, adjustments may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Bank's control.
Non-Interest Income. Non-interest income increased $88,000, or 43.9%, to
$289,000 for the year ended December 31, 1997, from $201,000 for the prior year.
The increase was due to several factors including increases in the safe deposit
box rental fees, service charges on NOW accounts and late charges on mortgage
loans.
Non-Interest Expense. Non-interest expense increased $700,000, or 14.0% to
$5.7 million for the year ended December 31, 1997, from $5.0 million for the
prior year; exclusive of the one-time FDIC special assessment. This increase was
due primarily to an increase in compensation and benefit expense of $800,000.
The increase in compensation and employee benefit expense is due to
48
the addition of staff at the Company's two new retail offices in Passaic and
Morris Counties, New Jersey, and the amortization of stock based benefit plans
beginning in 1997. The addition of the two new retail offices also resulted in
small increases in occupancy, equipment and advertising costs. These increases
were partially offset by a reduction in FDIC insurance expense.
Income Tax Expense. Income tax expense increased $614,000, or 137.7%, to
$1.1 million for the year ended December 31, 1997, from $446,000 for the prior
year. The increase was due to the Company's increased income before taxes for
the year ended December 31, 1997, compared to the same period in 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995.
General. Net income for the year ended December 31, 1996, was $756,000
compared with $458,000 for the same period in 1995. This increase reflects an
increase in net interest income offset by the one-time SAIF assessment of $1.3
million.
Net Interest Income. For the year ended December 31, 1996, net interest
income increased $1.4 million, or 20.5%, to $8.1 million for the year ended
December 31, 1996, from $5.7 million for the prior period. The Company's net
interest rate spread decreased slightly by 15 basis points to 2.90% from 3.05%
for the year ended December 31, 1995. This was offset by an increase in interest
earning assets of $25.4 million, or 12.11%, to $235.2 million for the year ended
December 31, 1996, from $209.8 million for the year ended December 31, 1995.
Interest Income. Total interest income increased $1.9 million, or 12.4%,
to $17.2 million for the year ended December 31, 1996, from $15.3 million for
the same period in the prior year. This increase resulted primarily from
increases in interest income on mortgage-backed securities and investment
securities offset by a decrease in interest income on mortgage loans.
The average balance of the loan portfolio decreased $1.7 million, or
1.46%, to $114.4 million for the year ended December 31, 1996, from $116.1
million for 1995. This was coupled with a decrease in the average yield on loans
from 8.83% for the period ending December 31, 1996, to 8.58% for the year ended
1995. The decrease in the loan portfolio reflected payments exceeding
originations and new loan purchases as the Bank continued to experience weak
loan demand in its primary market area. The decrease in yield reflected the
repayment of higher yielding loans in the Bank's portfolio and reinvestment of
such proceeds in lower yielding new loans, both through originations and
purchases.
Interest income on mortgage-backed securities held to maturity increased
$900,000, or 36.7%, to $3.4 million for the year ended December 31, 1996, from
$2.5 million for the prior year. The increase in income was due partly from an
increase in the average balance of mortgage-backed securities held to maturity
of $10.4 million, or 23.7%, to $54.3 million from $43.9 million for the prior
year. This was coupled with an increase in the average yield to 6.18% from 5.59%
reflecting current market rates of interest.
Interest income on investments held to maturity increased $800,000, or
38.1%, to $3.0 million for the year ended December 31, 1996, from $2.2 million
for 1995. The average balance increased $3.6 million, or 8.30%, to $46.8 million
for 1996 from $43.2 million for the year ended December 31, 1995. This was
coupled with an increase in the average yield from 5.09% to 6.37%.
49
Interest Expense. Interest expense increased by $600,000, or 7.0%, to $9.2
million for the year ended December 31, 1996, from $8.6 million for the prior
year. This increase was primarily attributable to increased rates paid by the
Bank on its deposit accounts. For the year ended December 31, 1996, the Bank's
average cost of funds on deposits and borrowings increased to 4.43% for the
period ending December 31, 1996, from 4.23% for 1995, reflecting current market
rates of interest The Bank did not have any FHLBNY borrowings during the year
ended December 31, 1996. For the year ended December 31, 1995, the Bank had
FHLBNY borrowings with an average cost of 6.14% and average balance of $1.8
million.
Provision for Loan Losses. The provision for loan losses decreased
$280,000, or 27.9%, to $725,000 for the year ended December 31, 1996, from $1.0
million for the year ended December 31, 1995. The decreased provision reflects a
decline in the amount of newly classified loans, the continuing resolution of
existing non-performing assets and a decrease in the Bank's overall loan
portfolio. Non-performing loans, defined as non-accrual loans and accruing loans
delinquent 90 days or more, decreased by $3.7 million, or 71.2%, to $1.5 at
December 31, 1996, from $5.2 million at December 31, 1995. This represented a
ratio of non-performing loans to total assets of 0.62% and 2.31% at December
1996 and 1995, respectively.
Future provisions for loan losses will continue to be based on
Management's assessment of the loan portfolio and its underlying collateral,
trends in non-performing loans, current economic conditions and other factors
which warrant recognition in order to maintain the allowance for loan losses at
levels sufficient to provide for estimated future losses. Although Management
uses the best information available, adjustments may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Bank's control
The Company's ratio of non-performing assets to total assets was 0.83% at
December 31, 1996, compared to 3.16% at December 31, 1995. The allowance for
loan losses was $3.1 million and $4.7 million at December 1996 and 1995,
respectively.
Non-Interest Income. Non-interest income increased $400,000, or 201.0%, to
$202,000 for the year ended December 31, 1996, from a loss of $199,000 for the
prior period. The increase is primarily attributable to a $412,000 loss on the
sale of securities held for sale in 1995. The Bank sold $18.2 million of
securities available for sale with below market rates of interest and reinvested
the proceeds in higher yielding securities held to maturity..
Non-Interest Expense. Non-interest expense increased $300,000, or 6.3%, to
$5.1 million exclusive of the one-time SAIF assessment of $1.3 million compared
to $4.8 million for the year ended December 31, 1995. The increase was due
primarily to an increase in net loss from real estate owned of $146,000, or
127.0%, to $261,000 for the year ended December 31, 1996, from $115,000 for
1995. Real estate owned expense increased primarily due to costs incurred by the
Bank to protect the priority of its liens on collateral and the costs associated
with maintaining and managing properties. Compensation and employee benefit
expense increased $190,000, or 8.4%, to $2.4 million for the year ended December
31, 1996, from $2.3 million for 1995.
Income Tax Expense. Income tax expense increased $186,000, or 71.7%, to
$446,000 for the year ended December 31, 1996, as compared to $260,000 for the
prior year. The increase was
50
due to the Company's increased income before taxes for the year ended December
31, 1996, compared to the same period in 1995.
MARKET RISK AND INTEREST RATE SENSITIVITY ANALYSIS
Market risk is the potential loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investment and deposit taking activities. The Company's
profitability is affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Company's
earnings to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent or on the same basis. To
that end, management activity monitors and manages its interest rate risk
exposure.
The principal objective of the Company's asset and liability management
function is to evaluate the interest-rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
focus, operating environment, capital, and liquidity requirements; establish
prudent asset concentration guidelines; and manage the risk consistent with
Board approved guidelines. The Company seeks to reduce the vulnerability of its
operations to changes in interest rates and to manage the ratio of interest-rate
sensitive assets to interest-rate sensitive liabilities within specified
maturities or repricing dates. The Company's actions in this regard are taken
under the guidance of the Asset/Liability Committee (ALCO) of management with
oversight provided by the Board of Directors. The ALCO generally reviews the
Company's liquidity, cash flow needs, maturities of investments, deposits and
borrowings and current market conditions and interest rates.
The Company utilizes the following strategies to manage its interest rate
risk: (1) emphasizing the origination and retention of fixed-rate mortgage loans
having terms to maturity of not more than ten years, (2) purchasing fixed rate
mortgage-backed securities with fixed maturities of no more than 15 years, (3)
the origination and purchase of mortgage loans with maturity dates to 30 years
providing the mortgage loan is market qualified. (4) reducing long-term fixed
rate mortgage-backed securities through principal repayments and prepayments,
and (5) purchasing short term and adjustable rate investment securities,
including U.S. Treasury and agency securities with maturities no greater than 15
years.
One of the monitoring tools used by the ALCO is an analysis of the extent
to which assets and liabilities are interest rate sensitive and measures the
Company's interest rate sensitivity "gap". An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or
reprice within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. Accordingly,
during a period of rising rates, a negative gap may result in the yield on the
institution's assets increasing at a slower rate than the increase in its cost
of interest-bearing liabilities. Conversely, during a period of falling interest
rates, an institution with a negative gap would experience a repricing of its
assets at a slower rate than its interest-bearing liabilities which,
consequently, may result in its net interest income growing.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1998, which are
anticipated by the Company, based upon
51
certain assumptions, to reprice or mature in each of the future time periods
presented. Except as noted, the amount of assets and liabilities which reprice
or mature during a particular period were determined in accordance with the
earlier of the term to repricing or the contractual terms of the asset or
liability. The Company's loan prepayment assumptions are based upon actual
historic prepayment rates and market prepayment speeds, which are 10% per annum
for loans, and a range of 10% to 38% per annum (based upon the underlying
interest rate) for all mortgage-backed securities. Management believes these
assumptions are reasonable. Liability balances are spread upon the FDIC proposed
distribution rules, effective March 1996. Based upon these assumptions, net
interest-bearing assets maturing or repricing within one year of September 30,
1998, exceeded net interest-earning liabilities maturing or repricing within the
same time period by $12.3 million, representing a positive cumulative one-year
interest rate sensitivity gap of 4.31% of total assets. Accordingly, an increase
in market interest rates would be expected to have an adverse impact on net
interest income.
MORE THAN MORE THAN MORE THAN
SIX MONTHS SIX MONTHS ONE YEAR TO THREE YEARS MORE THAN
OR LESS TO ONE YEAR THREE YEARS TO FIVE YEARS FIVE YEARS TOTAL
---------- ----------- ----------- ------------- ---------- -----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans $15,576 $13,462 $31,210 $30,690 $28,164 $119,102
Consumer and other loans 3,699 543 2,064 2,084 5,250 13,640
Interest earning deposits and
FHLB stock 3,714 -- -- -- -- 3,714
Mortgage-backed securities 14,083 7,426 4,224 5,673 12,510 43,916
Investment securities 62,732 28,987 6,522 2,010 5,685 105,936
-------- -------- -------- -------- -------- --------
Total interest-earning assets $99,804 $50,418 $44,020 $40,457 $51,609 $286,308
======== ======== ======== ======== ======== ========
Interest bearing liabilities:
Savings accounts -- -- 27,698 9,233 9,233 46,164
Club accounts -- -- 850 284 284 1,418
NOW accounts 3,999 -- 9,102 3,834 2,232 19,167
Money market accounts 5,531 5,531 11,062 -- -- 22,124
Certificates of deposit 72,562 34,786 31,443 647 -- 139,438
Borrowings 11,500 4,000 3,000 -- 21,000 39,500
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 93,582 44,317 83,155 13,998 32,749 $267,811
-------- -------- -------- -------- -------- ========
Interest sensitivity gap $6,212 $6,101 $(39,135) $26,459 $18,860
======== ======== ======== ======== ========
Cumulative interest sensitivity gap $6,212 $12,313 $(26,822) $(363) $18,497
======== ======== ======== ======== ========
Cumulative interest sensitivity gap as
a percentage of total assets (2.17%) 4.31% (9.39%) (0.13%) 6.46%
======== ======== ======== ======== ========
In addition to the use of interest rate "gap" as a measure of interest
rate risk, the concept of the change in net portfolio value (NPV) has been
utilized by the OTS.
The change in NPV measures an institution's vulnerability to changes in
interest rates by estimating the change in the market value of an institution's
assets, liabilities, and off-balance sheet contracts in response to an
instantaneous change in the general level of interest rates. The NPV is defined
as the current market value of assets, minus the current market value of
liabilities, plus or minus the current value of off-balance sheet items. The
market values are estimated through two cash flow-based valuation methodologies
and an option-based valuation model: (1) static discounted cash flow analysis,
(2) an option-based pricing analysis (modified discounted cash flow
52
analysis to value embedded options), and (3) the Black-Scholes model to value
off-balance sheet items.
The OTS uses, as a critical point, a change of plus or minus 200 basis
points in order to set its "normal" institutional results and peer comparisons.
The greater the change, positive or negative, in NPV, the more interest rate
risk is assumed to exist within the institution. A change in NPV of more than 2%
of the estimated market value of an institution's assets will require the
institution to deduct from its regulatory capital 50% of that excess change. The
following table lists the Bank's percentage change in NPV assuming an immediate
change of plus or minus up to 400 basis points from the level of interest rates
at September 30, 1998.
NET PORTFOLIO VALUE
-------------------
CHANGE IN
INTEREST RATES
IN BASIS POINTS $ AMOUNT $ CHANGE % CHANGE
--------------- -------- --------- --------
(RATE SHOCK) (DOLLARS IN THOUSANDS)
+400 bp 16,013 -22,307 -58
+300 bp 23,127 -15,193 -40
+200 bp 31,254 -7,066 -18
+100 bp 37,405 -915 -2
0 bp 38,319 - -
-100 bp 39,704 1,384 +4
-200 bp 41,230 2,911 +8
-300 bp 43,224 4,904 +13
-400 bp 45,212 6,893 +18
As the table shows, increases in interest rates would result in decreases
in the Bank's NPV, while decreases in interest rates will result in increases in
the Bank's NPV. At September 30, 1998, if the Bank were subject to these
specific OTS regulations, the Bank would not be required to deduct any amount
from total capital for purposes of calculating the Bank's risk-based capital
requirement.
Certain shortcomings are inherent in the methods of analysis presented in
the foregoing tables. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Certain assets, such as adjustable rate mortgage ("ARM") loans, have
features which limit changes in interest rates on a short-term basis and over
the life of the loan. In the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of borrowers to service their ARM
loans may decrease in the event of an interest rate increases.
YEAR 2000
A great deal of information has been disseminated about the global year
2000. Many computer programs that can only distinguish the final two digits of
the year entered (a common
53
programming practice in earlier years) are expected to read entries for the Year
2000 as the Year 1900 and compute payment, interest or delinquency. Rapid and
accurate data processing is essential to the operation of the Company. Data
processing is also essential to most other financial institutions and many other
companies. The Company contracts with a service bureau to provide the majority
of its data processing and is dependent upon purchased application software.
In-house applications are limited to word processing and spreadsheet functions.
The Company has obtained, where appropriate, certification from external vendors
and servicers that the systems and software provided are Year 2000 compliant.
Beginning in the fourth quarter of 1998, the Company has coordinated with the
primary servicer end-to-end tests which allow the Company to simulate daily
processing on sensitive century dates. In the evaluation, the Company will
ensure that critical operations will continue if the servicer or vendors are
unable to achieve the Year 2000 requirements. The Company expects that all
appropriate Year 2000 compliance testing, including third party vendors and
interfaces will be completed by first quarter of 1999. The Company has
identified critical applications and where necessary has begun hardware/software
upgrades and system replacement.
Although contingency plans will be developed, the Company continues to
bear some risk related to the Year 2000 issue and could be adversely affected,
if some other entities ( i.e. vendors ) do not appropriately address their own
compliance. The Company continues to evaluate the estimated costs associated
with attaining Year 2000 readiness. Additional costs for 1998, such as testing,
software purchases and marketing are not anticipated to be material to the
Company.
WHILE ADDITIONAL COSTS WILL BE INCURRED, THE COMPANY BELIEVES, BASED UPON
AVAILABLE INFORMATION, THAT IT WILL BE ABLE TO MANAGE ITS YEAR 2000 TRANSITION
WITHOUT ANY ADVERSE EFFECT ON BUSINESS OPERATION OR FINANCIAL CONDITION.
HOWEVER, ANY DELAYS, MISTAKES OR FAILURES COULD HAVE A SIGNIFICANT ADVERSE
IMPACT ON THE FINANCIAL CONDITION AND RESULTS OF OPERATION OF THE COMPANY.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the
Company's average balance sheets for the nine months ended September 30, 1998
and 1997 and years ended December 31, 1997, 1996 and 1995 and reflects the
average yield on assets and average costs that are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods shown. Average balances are derived from month end balances. Management
does not believe that the use of month end balances instead of average daily
balances has caused any
54
material differences in the information presented. For the purposes of
calculating loan yields, average loan balances include non-accrual loans.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997
--------------------------------- --------------------------------
AVERAGE AVG. YIELD/ AVERAGE AVG. YIELD
BALANCE INTEREST COST(6) BALANCE INTEREST COST(6)
------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans (1) $129,048 $7,707 7.96% $121,317 7,531 8.28%
Mortgage-backed securities - HTM 42,983 2,157 6.69% 53,016 2,619 6.59%
Mortgage-backed securities - AFS(2) 10,820 532 6.56% 5,625 252 5.97%
Investment securities - HTM 42,187 2,162 6.83% 52,894 2,706 6.82%
Investment securities - AFS(2) 63,481 3,280 6.89% 25,492 1,222 6.39%
FHLB stock 2,378 130 7.29% 1,598 77 6.42%
-------- ------ ------ -------- ------ ------
Total interest-earning Assets 290,897 15,968 7.32% 259,942 14,407 7.39%
Non-interest-earning assets (3) 10,395 8,925
--------
Total assets $301,292 $268,867
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $224,000 $7,360 4.38% $211,668 6,937 4.37%
Borrowed funds 40,228 1,745 5.78% 14,242 637 5.96%
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities $264,228 9,105 4.59% $225,910 7,574 4.47%
-------- ------ ------ ------ ------
Non-interest-bearing liabilities 2,133 2,092
-------- --------
Total liabilities 266,361 228,002
Stockholders' equity 34,931 40,865
-------- --------
Total liabilities and
Stockholders' equity $301,292 $268,867
======== ========
Net interest income/net interest rate spread(4) $6,863 2.73% 6,833 2.92%
====== ====== ====== ======
Net interest margin(5) 3.15% 3.50%
====== ======
Ratio of interest-earning assets to
Interest-bearing liabilities 1.13x 1.15x
====== ======
(1) Average balances and rates include non-accrual loans.
(2) Securities available for sale are reflected in this table at amortized
cost.
(3) Includes market value adjustment on securities available for sale.
(4) Net interest spread represents the difference between the weighted average
rates earned on interest-earning assets and the weighted average rates
paid on interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest
income as a percentage of average interest-earning assets.
(6) Average Yields and cost have been reflected on an annualized basis.
55
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans(1) $122,127 $10,047 8.23% $114,396 $9,809 8.58% $116,055 $10,245 8.83%
Mortgage-backed securities - HTM 53,339 3,532 6.62% 54,329 3,360 6.18% 43,925 2,457 5.59%
Mortgage-backed securities AFS(2) 6,211 428 6.89% 2,686 156 5.81% -- -- 0.00%
Investment securities - HTM 50,726 3,670 7.24% 45,277 2,884 6.37% 41,815 2,091 5.00%
Investment securities - AFS(2) 26,636 1,720 6.46% 16,991 933 5.49% 6,589 373 5.66%
FHLB stock 1,606 106 6.60% 1,484 96 6.47% 1,439 110 7.65%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets(3) $260,645 $19,503 7.48% $235,163 $17,238 7.33% $209,823 $15,276 7.28%
Non-interest-earning assets 11,741 11,643 8,244
-------- -------- --------
Total assets $272,386 $246,806 $218,067
======== ======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings Deposits $211,895 $9,370 4.42% $207,121 $9,172 4.43% $200,971 $8,469 4.21%
Borrowed funds 17,554 1,061 6.04% -- -- 0.00% 1,807 111 6.14%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities $229,449 $10,431 4.55% $207,121 $9,172 4.43% $202,778 $8,580 4.23%
------- ---- ------- ---- ------- ----
Non-interest-bearing liabilities 2,927 1,689 922
-------- -------- --------
Total liabilities 232,376 208,810 203,700
Stockholders' equity 40,010 37,996 14,367
-------- -------- --------
Total liabilities and
Stockholders' equity $272,386 $246,806 $218,067
======== ======== ========
Net interest income/net interest rate
spread (4) $9,072 2.93% $8,066 2.90% $6,696 3.05%
======= ==== ======= ==== ======= =====
Net interest margin(5) 3.48% 3.43% 3.19%
==== ==== =====
Ratio of interest-earning assets to
Interest-bearing liabilities 1.14x 1.14x 1.03x
==== ==== =====
(1) Average balances and rates include non-accrual loans.
(2) Securities available for sale are reflected in this table at amortized
cost.
(3) Includes market value adjustment on securities available for sale.
(4) Net interest spread represents the difference between the weighted average
rates earned on interest-earning assets and the weighted average rates
paid on interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest
income as a percentage of average interest-earning assets.
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of
changing interest rates and changing volumes. The following table presents the
extent to which changes in interest rates and changes in the volume of
interest-earning assets and interest-bearing liabilities have affected the
Company's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in average volume multiplied by prior
rate), (ii) changes attributable to changes in rate (changes in rate multiplied
by prior average volume), and (iii) changes in rate volume (changes in rate
multiplied by changes in average volume). For the purpose of calculating loan
yields, average loan balances include non-accrual loans.
56
NINE MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED DECEMBER 31, 1997
COMPARED TO COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31, 1996
INCREASE (DECREASE) INCREASE (DECREASE)
IN NET INTEREST INCOME DUE TO IN NET INTEREST INCOME DUE TO
------------------------------------------ -----------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME NET VOLUME RATE VOLUME NET
------ ---- ------ --- ------ ---- ------ ---
(IN THOUSANDS)
Interest-earning assets:
Loans $ 640 $(382) $ (82) $ 176 $ 663 $(398) $ (27) $ 238
Mortgage-backed securities - HTM (661) 55 144 (462) (61) 238 (5) 172
Mortgage-backed securities - AFS 310 33 (63) 280 205 29 38 272
Investment securities - HTM (730) 6 180 (544) 347 392 47 786
Investment securities - AFS 2,428 127 (497) 2,058 530 164 93 787
FHLB stock 50 14 (11) 53 8 2 -- 10
------- ----- ----- ------- ------- ----- ----- ------
Total change in interest
income $ 2,037 $(147) $(330) $ 1,561 $ 1,692 $ 427 $ 146 $2,265
======= ===== ===== ======= ======= ===== ===== ======
Interest-bearing liabilities:
Savings, NOW, Club and money
Market accounts 178 (133) (19) 25 101 (71) (3) 27
Certificates of deposit 317 205 (124) 398 67 103 1 171
Borrowed funds 1,550 (26) (416) 1,108 1,061 -- -- 1,061
------- ----- ----- ------- ------- ----- ----- ------
Total change in interest
expense $ 2,044 $ 46 $(559) $ 1,531 $ 1,229 $ 32 $ (2) $1,259
======= ===== ===== ======= ======= ===== ===== ======
Change in net interest income $ (7) $(193) $ 230 $ 30 $ 463 $ 395 $ 148 $1,006
======= ===== ===== ======= ======= ===== ===== ======
YEAR ENDED DECEMBER 31, 1996
COMPARED TO
YEAR ENDED DECEMBER 31, 1995
INCREASE (DECREASE)
IN NET INTEREST INCOME DUE TO
-------------------------------------------
RATE/
VOLUME RATE VOLUME NET
------ ---- ------ ---
(IN THOUSANDS)
Interest-earning assets:
Loans $ (146) $(294) $ 4 $ (436)
Mortgage-backed securities - HTM 583 259 61 903
Mortgage-backed securities - AFS -- -- 156 156
Investment securities - HTM 173 573 47 793
Investment securities - AFS 589 (11) (18) 560
FHLB stock 3 (16) (1) (14)
------- ----- ----- -------
Total change in interest
income $ 1,202 $ 511 $ 249 $ 1,962
======= ===== ===== =======
Interest-bearing liabilities:
Savings, NOW, Club and money
Market accounts (14) 32 -- 18
Certificates of deposit 340 327 18 685
Borrowed funds (111) -- -- (111)
------- ----- ----- -------
Total change in interest
expense $ 215 $ 359 $ 18 $ 592
======= ===== ===== =======
Change in net interest income $ 987 $ 152 $ 231 $ 1,370
======= ===== ===== =======
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of a bank's ability to fund loans and withdrawals
of deposits in a cost-effective manner. The Company's principal sources of funds
are deposits, scheduled amortization and prepayments of loan principal and
mortgage-backed securities, maturities of investment securities and funds
provided by operations. Liquidity is also available through borrowings from the
Federal Home Loan Bank of New York.
While loan repayments and maturing investment securities are a relatively
predictable source of funds, deposit flows, prepayments and calls of investment
securities and prepayment of mortgage-backed securities are influenced by
interest rates, general economic conditions and competition in the marketplace.
At September 30, 1998, total liquid assets, consisting of cash, interest-bearing
deposits in other banks, investment securities and mortgage-backed securities,
all with final maturities of five years or less, were $45.3 million, or 14.8%,
of total assets. This amount includes $31.2 million scheduled to mature within
one year, which represented 10.2% of total assets and 13.7% of total deposits at
September 30, 1998.
At September 30, 1998, the Bank had commitments to originate loans
totalling $1.2 million and outstanding unused lines of credit of $5.6 million.
The Company is committed to maintaining a strong liquidity position and
anticipates that it will have sufficient funds to meet its current funding
commitments. The Bank does not have any balloon or other payments due on any
long-term obligations or any off-balance sheet items other than the loan
commitments and unused lines of credit noted above.
The OTS requires that the Bank meet minimum tangible, core and risk-based
capital requirements. As of September 30, 1998, the Bank had total risked-based
capital ratio of 26.5%, a core-capital ratio of 10.9% and a tangible capital
ratio of 10.9%, which exceeded all regulatory capital requirements. The Company
is considered well capitalized as of September 30, 1998.
LENDING PORTFOLIO
General. The primary source of income to the Company is interest from
lending activities and mortgage-backed and other investment securities. The
principal lending activity of the Company is originating
57
first mortgage real estate loans to enable borrowers to purchase or refinance
one- to two-family residential properties and, to a lesser extent, originating
home equity and other consumer loans. Management considers its purchase of loans
and mortgage-backed securities to be part of its lending activities and an
alternative to originating loans.
Loan Portfolio Composition. At September 30, 1998, the Company had total
loans of $132.7 million, of which $109.1 million, or 82.2%, were one-to
four-family first mortgage loans. The loan portfolio increased by $1.5 million
over the balance of $131.2 million at December 31, 1997. The increase was
primarily attributable to the origination and purchase of new loans as the
Company began a more aggressive marketing program in conjunction with its
planned franchise expansion. Of the one-to four-family first mortgage loans
outstanding at September 30, 1998, 51.4% were ARM loans and 48.6% were
fixed-rate loans. Non-residential real estate and multi-family mortgage loans
outstanding at September 30, 1998, totalled $6.1 million, or 4.6% of total
loans, and $3.9 million, or 2.9% of total loans, respectively. The remainder of
the Bank's loans at September 30, 1998, consisted of consumer loans of $13.6
million, or 10.3% of total loans, primarily home equity and deposit account
loans. At September 30, 1998, 48.0% of the gross loan portfolio had adjustable
rates.
The types of loans that the Company may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, monetary
policies of the federal government, including the Federal Reserve Board,
legislative tax policies and governmental budgetary matters.
The following table sets forth the composition of the Company's loan and
mortgage-backed securities portfolio in dollar amounts and in percentages of the
total portfolio at the dates indicated:
58
SEPTEMBER 30, DECEMBER 31,
------------ --------------------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
First mortgage loans:
One- to four-family $109,100 82.2% $108,891 83.0% $103,722 81.4% $ 88,275 77.3%
Multi-family 3,854 2.9% 3,934 3.0% 4,548 3.6% 5,892 5.2%
Non-residential 6,148 4.6% 8,112 6.2% 9,628 7.6% 13,279 11.6%
-------- -------- -------- -------- -------- -------- -------- --------
Total first mortgage loans 119,102 89.7% $120,937 92.2% $117,898 92.6% $107,446 94.1%
Consumer loans:
Home equity lines of credit $ 12,698 9.6% $ 9,513 7.3% $ 8,800 6.9% $ 6,331 5.6%
Auto 111 0.1% 151 0.1% 26 0.0% 7 0.0%
Student -- -- -- 0.0% 24 0.0% 21 0.0%
Deposit Account 556 0.4% 421 0.3% 496 0.4% 371 0.3%
Unsecured 72 0.0% 31 0.0% -- 0.0% -- 0.0%
Commercial:
Small business administration 192 0.2% 105 0.1% 73 0.1% -- 0.0%
Unsecured 11 0.0% 20 0.0% 4 0.0% -- 0.0%
-------- -------- -------- -------- -------- -------- -------- --------
Total other loans $ 13,640 10.3% $ 10,241 7.8% $ 9,423 7.4% $ 6,730 5.9%
-------- -------- -------- -------- -------- -------- -------- --------
Total loans $132,742 100.0% $131,178 100.0% $127,321 100.0% $114,176 100.0%
Less:
Deferred loan fees 229 299 370 379
Allowance for loan losses 3,226 3,061 3,126 4,746
-------- -------- -------- --------
Total loans, net 129,287 $127,818 $123,825 $109,051
======== ======== ======== ========
Mortgage-backed Securities - HTM:
GNMA $ 11,892 27.1% $ 17,335 27.7% $ 12,905 23.6% $ 13,896 25.3%
FHLMC 17,184 39.1% 28,696 45.5% 31,351 57.4% 36,639 66.8%
FNMA 4,709 10.7% 6,427 10.3% 7,513 13.8% 4,334 7.9%
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed securities - HTM $ 33,785 76.9% $ 52,458 83.5% $ 51,769 94.8% $ 54,869 100.0%
Mortgage-backed Securities - AFS:
FNMA 10,131 23.1% 10,445 16.5% 2,824 5.2% -- 0.0%
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed securities - AFS 10,131 23.1% 10,445 16.5% 2,824 5.2% -- 0.0%
Total mortgage-backed securities $ 43,916 100.0% $ 62,903 100.0% $ 54,593 100.0% $ 54,869 100.0%
======== ======== ======== ======== ======== ======== ======== ========
DECEMBER 31,
-------------------------------------------
1994 1993
---- ----
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One- to four-family $ 97,419 77.1% $ 99,296 74.6%
Multi-family 6,192 4.9% 7,710 5.8%
Non-residential 16,055 12.7% 17,985 13.5%
-------- -------- -------- --------
Total first mortgage loans $119,666 94.7% $124,991 93.9%
Consumer loans:
Home equity lines of credit $ 6,223 4.9% $ 6,902 5.2%
Auto -- 0.0% -- 0.0%
Student 20 0.0% 502 0.4%
Deposit Account 430 0.4% 631 0.5%
Unsecured -- 0.0% -- 0.0%
Commercial:
Small business administration -- 0.0% -- 0.0%
Unsecured -- 0.0% -- 0.0%
-------- -------- -------- --------
Total other loans $ 6,673 5.3% $ 8,035 6.1%
-------- -------- -------- --------
Total loans $126,339 100.0% $133,026 100%
Less:
Deferred loan fees 435 405
Allowance for loan losses 5,073 3,055
-------- --------
Total loans, net $120,831 $129,566
======== ========
Mortgage-backed Securities - HTM:
GNMA $ 1,039 2.5% $ 1,317 4.7%
FHLMC 34,854 84.6% 26,189 92.5%
FNMA 5,329 12.9% 809 2.9%
-------- -------- -------- --------
Total mortgage-backed securities - HTM $ 41,222 100.0% $ 28,315 100.0%
Mortgage-backed Securities - AFS:
FNMA -- 0.0% -- 0.0%
-------- -------- --------
Total mortgage-backed securities - AFS -- 0.0% -- 0.0%
Total mortgage-backed securities $ 41,222 100.0% $ 28,315 100.0%
======== ======== ======== -------
Loans and Mortgage-Backed Securities Maturity. The following table shows the
contractual maturity of the Company's loans and mortgage-backed securities at
September 30, 1998. The table does not include the effect of prepayments or
scheduled principal amortization.
59
SEPTEMBER 30, 1998
------------------
ONE- TO MULTI- MORTGAGE-
FOUR- FAMILY NON- OTHER TOTAL BACKED
FAMILY RESIDENTIAL RESIDENTIAL LOANS LOANS SECURITIES TOTAL
------ ----------- ----------- ----- ----- ---------- -----
(IN THOUSANDS)
Amounts due:
Within one year $ 6,978 $ 948 $ 2,420 $ 38 $ 10,383 $ 5,931 $ 16,314
After 1 year:
1 to 3 years 6,282 459 544 380 7,665 19 7,684
3 to 5 years 4,943 793 524 1,829 8,089 91 8,180
5 to 10 years 9,415 168 364 5,111 15,058 3,441 18,499
10 to 20 years 9,971 1,486 1,922 6,282 19,661 3,688 23,349
Over 20 years 71,512 -- 374 -- 71,886 30,746 102,632
-------- -------- -------- -------- -------- -------- --------
Total due after 1 year 102,123 2,906 3,728 13,602 122,359 37,985 160,344
Total loans and mortgage-
Backed securities $109,101 $ 3,854 $ 6,148 $ 13,640 $132,742 $ 43,916 $176,658
======== ======== ======== ======== ======== ======== ========
Less deferred loan fees 229 -- 229
Less allowance for loan
Losses 3,226 -- 3,226
-------- -------- --------
Total loans and mortgage-
Backed securities, net $129,287 $ 43,916 $173,203
======== ======== ========
The following table sets forth, as of September 30, 1998, the dollar
amount of all loans and mortgage-backed securities due after September 30, 1999,
and whether such loans have fixed interest rates or adjustable interest rates:
DUE AFTER SEPTEMBER 30, 1999
----------------------------
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
First mortgage loans $52,856 $55,901 $108,757
Mortgage-backed securities 12,803 25,182 37,985
Consumer loans 9,866 3,736 13,602
------- ------- --------
Total loans and mortgage-backed securities due after
September 30, 1999 $75,525 $84,819 $160,344
======= ======= ========
The following table sets forth originations, loan purchases, sales and
principal payments in the Company's loan and mortgage-backed securities
portfolios for the periods indicated:
60
FOR NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- -----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Loans receivable, net at beginning of period $ 127,818 $ 123,825 $ 123,825 $ 109,051 $ 120,831
Loans originated:
First Mortgage:
One- to four-family 7,070 5901 12,672 22,208 2,967
Consumer loans:
Home equity 6,415 2,303 2,853 4,543 2,246
Deposit account 358 170 170 658 568
Student -- -- -- 42 46
Auto 9 134 161 29 7
Unsecured 68 28 35 -- --
Commercial 875 16 58 80 --
--------- --------- --------- --------- ---------
Total loans originated 14,795 8552 15,949 27,560 5,834
Loans purchased 6,549 1,988 6,052 8,112 485
--------- --------- --------- --------- ---------
Total loans originated and purchased 21,344 10,540 22,001 35,672 6,319
Loans Sold:
First Mortgage:
One- to four-family -- -- -- 1,255 --
Non-residential -- -- 523 -- --
Consumer Loans:
Student -- -- -- 38 45
--------- --------- --------- --------- ---------
Total loans sold -- 523 1,293 45
Principal repayments (19,737) (13,191) (17,082) (19,419) (15,820)
Transfer of mortgage loans to real estate owned, net (43) (303) (539) (1,815) (2,616)
Amortization of deferred fees 70 38 71 9 55
(Increase) decrease in allowance for loan losses (165) 62 65 1,620 327
--------- --------- --------- --------- ---------
Net loan activity 1,469 (2,854) 3,993 14,774 (11,780)
Total loans receivable, net at end of period $ 129,287 120,971 $ 127,818 $ 123,825 $ 109,051
========= ========= ========= ========= =========
Mortgage-backed securities at beginning of period $ 62,903 $ 54,593 $ 54,593 $ 54,869 $ 41,222
Mortgage-backed securities purchased 2,024 19,790 24,862 12,844 20,654
Principal reductions (21,120) (11,302) (16,651) (13,001) (6,926)
Net change in unrealized gain/loss on AFS 117 152 186 (56) --
Amortization of premium (8) (81) (87) (63) (81)
--------- --------- --------- --------- ---------
Mortgage-backed securities at end of period $ 43,916 $ 63,152 $ 62,903 $ 54,593 $ 54,869
========= ========= ========= ========= =========
Residential Mortgage Lending. Although the Company previously offered
loans secured by up to four family residences, since 1993 it only offers first
mortgages on one- to two-family owner occupied residences. Loan originations are
generally obtained from existing or past customers and referrals from real
estate agents, builders and members of the local communities in which the
Company has offices, as well as through correspondent relationships with
mortgage brokers. Residential loan originations are secured by owner-occupied
residences within the State of New Jersey. The Company also purchases loans from
other sources such as mortgage bankers and other financial intermediaries. At
September 30, 1998, the Company had $25.7 million of purchased loans. Purchased
loans are underwritten pursuant to the Company's criteria and are secured by
one- to four-family residential properties located within the State of New
Jersey.
61
At September 30, 1998, 82.2% of the Company gross loans consisted of one-
to four-family residential loans. The Company commenced offering ARM loans in
1994, and currently emphasizes ARM loans. Because of consumer preference during
a low interest rate environment, the majority of the portfolio, 49.4%, are still
fixed rate loans. The Company generally originates one and two family
residential mortgage loans in amounts up to 80% of the appraised value of the
mortgaged property, but will consider loan-to-value ratios of up to 95% if the
loan amount exceeding the 80% loan-to-value ratio is insured by a private
mortgage insurance company. The Company retains the ARM loans it originates for
its loan portfolio.
Non-residential and Multi-Family Real Estate Lending. At September 30,
1998, the Company's non-residential and multi-family real estate loan portfolio
totalled $6.1 million and $3.9 million, or 4.62% and 2.9% respectively of the
total loan portfolio. Non-residential loans consist mainly of first mortgages on
mixed-use properties. Mixed use properties consist of properties containing both
residential and mercantile uses. Although the Company ceased making these loans
for a time, the Company has recently instituted a new program pursuant to which
it will make loans secured by these types of properties on a case by case basis.
These loans may entail additional risk beyond that incurred by the Company in
its traditional one- to two-family owner-occupied lending, although loans of
this type generally have higher yields and shorter terms.
Consumer Loans. As of September 30, 1998, consumer loans totalled $13.6
million or 10.2% of the Company's total loan portfolio. The Company offers
consumer loans in the form of home equity, auto, guaranteed student and passbook
loans. The Company's home equity loans consist of first or second mortgage loans
secured by owner occupied one- to two-family residences. Where the Company is a
second mortgagee, the total debt secured by the residence may not exceed 75% of
the market value of the residence. During 1997 the Company began to offer
personal unsecured loans as well as personal and business overdrafts or cash
reserve accounts.
The Company originates owner occupied home equity loans secured by one and
two family residences. Fixed rate loans are offered for up to 7- or 15-year
periods. Home equity lines of credit and adjustable rate home equity loans are
offered for a period not to exceed 15 years. On these loans, the Company
requires that it be in either a first or second lien position. The loans are
generally subject to 75% combined loan-to-value limitation, including any other
outstanding mortgages or liens. The Company currently retains all home equity
loans for its portfolio. These loans currently represent 9.6% of the Bank's
portfolio and are classified as consumer loans.
MORTGAGE-BACKED SECURITIES
The Company invests in mortgage-backed securities and utilizes such
investments to complement its investment and mortgage lending activities. At
September 30, 1998, mortgage-backed securities, totalled $43.9 million or 14.3%
of total assets, a decrease of $19.0 million, or 30.2%, over mortgage-backed
securities of $62.9 million at December 31, 1997. This increase is attributable
to the application of repayments in excess of loan origination requirements.
At September 30, 1998, the Bank's entire mortgage-backed securities
portfolio was directly insured or guaranteed by the GNMA, the FNMA or the FHLMC.
Balloon and ARM backed loans comprise $24.4 million, or 55.5%, of the
mortgage-backed securities portfolio the balance is represented by 10-, 20- and
30-year fixed rate loans.
62
DELINQUENT LOANS AND FORECLOSED ASSETS
Maintenance of asset quality is one of management's most important tasks.
Management reviews delinquent loans on a continuous basis and the Board of
Directors reviews delinquent loans monthly. The Company retains counsel
experienced in real estate law and foreclosure procedures.
The level of non-performing assets was $2.2 million at September 30, 1998,
and December 31, 1997. At September 30, 1998, the Company held one parcel of REO
with a value of $43,000, a decrease of $75,000, or 63.6%, from $118,000 at
December 31, 1997. The decrease reflects Management's continued efforts to
resolve the Company's non-performing assets.
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered by the OTS to be of lesser
quality as "substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the distinct possibility
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management. Loans designated as
special mention are generally loans that have experienced past delinquencies or
have exhibited some potential weaknesses that, if not corrected, could increase
the level of risk in the future.
At September 30, 1998, the Company had special mention loans of $1.2
million. These loans consist of 17 loans with an average balance of $72,074.
At September 30, 1998, the Company had loans 90 days or more past due of
$2.1 million, or 1.6% of total loans. Loans 90 days or more past due consisted
of 16 loans with an average balance of $ 132,503, of which 11 are secured by
one- to four-family properties, 3 loans secured by mixed use properties and two
consumer loans. The largest balance due on any of these loans was $262,347.
The tables below set forth information concerning delinquent loans as of
the periods indicated. The amounts represent the total remaining balances of the
related loans and percentage of total loans outstanding, rather than the actual
payment amounts which are overdue:
63
AT SEPTEMBER 30, 1998
---------------------
60-89 DAYS 90 DAYS OR MORE
---------- ---------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
One- to four-family 3 $ 178 11 $1,639
Multi-family residential/Non-residential 1 162 3 359
Consumer Loans 1 8 2 122
Commercial -- -- -- --
--- ------ --- ------
Total delinquent loans 5 $ 348 16 $2,120
=== ====== === ======
Delinquent loans to gross loans 0.26% 1.60%
Interest is not accrued on loans where interest or principal is 90 days or
more past due, unless the loans are well secured and in the process of
collection. Once the loans reach non-accrual status, accrued but unpaid interest
is reversed and interest income is subsequently recognized only to the extent
that payments are received. Interest on loans that have been restructured is
accrued according to the renegotiated terms.
The table below sets forth information regarding the Company's
non-performing assets and restructured loans:
AT DECEMBER 31,
----------------------------------------------
AT 1997 1996 1995 1994 1993
SEPTEMBER 30, 1998 ---- ---- ---- ---- ----
------------------
(DOLLARS IN THOUSANDS)
Non-accrual delinquent mortgage loans $1,998 $2,054 $1,522 $5,194 $7,756 $6,796
Other non-accrual loans delinquent 90 days or more 122 3 -- -- 60 --
------ ------ ------ ------ ------ ------
Total non-performing loans 2,120 2,057 1,522 5,194 7,816 6,796
Total REO 43 118 537 1,926 265 525
------ ------ ------ ------ ------ ------
Total non-performing assets $2,163 $2,175 $2,059 $7,120 $8,081 $7,321
====== ====== ====== ====== ====== ======
Restructured loans $ 445 $ 551 $1,207 $1,123% $ 687 $ 698
Non-performing loans to total gross loans 1.60% 1.57% 1.20% 4.55% 6.19% 5.11%
Non-performing assets to total gross loans and REO 1.63% 1.66% 1.61% 6.13% 6.38% 5.48%
Non-performing loans to total assets 0.69% 0.71% 0.62% 2.31% 3.63% 3.10%
Non-performing assets to total assets 0.71% 0.75% 0.83% 3.16% 3.76% 3.34%
Not included as non-accrual loans in the table above are balloon real
estate loans which are still performing but which are beyond their original
maturity date. Historically, those loans have either been paid off or extended
at current market rates of interest by the Bank. These loans amounted to $0,
$84,758, $610,259, $808,192, $0, and $973,038 at September 30, 1998, and
December 31, 1997, 1996, 1995, 1994 and 1993, respectively. Restructured loans
consisted of 6 properties, current as to principal and interest according to
their restructured terms.
In addition to the loans included in the risk elements table above, and in
the preceding paragraph, the Bank's internal loan review identified
approximately $1.1 million in loans which were performing but were classified as
special mention at September 30, 1998. These loans, as well as the loans
included in the risk elements table, and in the preceding paragraph, have been
considered in the analysis of the adequacy of the allowance for loan losses.
For the nine months ended September 30, 1998, and for the years ended
December 31, 1997, 1996 and 1995, the amounts of interest income that would have
been recorded on non-accrual loans, had they been current, approximated $9,536,
$163,000, $277,030 and $951,300, respectively. Also, for the nine months
64
ended September 30, 1998, and the years ended December 31, 1997, 1996 and 1995,
the amounts of interest income on non-performing loans that was included in
income approximated $0, $57,626, $37,426 and $100,434, respectively.
ALLOWANCE FOR LOAN LOSSES
The following table sets forth the Company's allowance for loan losses at
or for the dates indicated:
AT OR FOR THE PERIOD
ENDED SEPTEMBER 30 AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------ ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance, beginning of period 3,061 $3,126 $3,126 $4,746 $5,073 $3,055 $4,305
Provisions charged to operations 225 400 475 725 1,005 2,540 3,042
Loans charged off:
One- to four-family residential 57 176 177 1,327 635 500 2,845
Multi-family residential -- -- 0 -- -- 8 335
Non-residential 4 285 413 863 737 200 1,144
Land & construction loans -- -- -- 155 -- 33 --
----- ------ ------ ------ ------ ------ ------
Total loans charged off 61 461 590 2,345 1,372 741 4,324
Recovery on loans:
One- to four-family residential -- -- -- -- 40 219 1
Multi-family residential -- -- -- -- -- -- --
Non-residential 1 -- 50 -- -- -- 31
Land & construction loans -- -- -- -- -- -- --
----- ------ ------ ------ ------ ------ ------
Total recovery on loans 1 -- 50 -- 40 219 32
----- ------ ------ ------ ------ ------ ------
Net loans charged off 1 461 540 2,345 1,332 522 4,292
----- ------ ------ ------ ------ ------ ------
Balance, end of period 3,226 $3,065 $3,061 $3,126 $4,746 $5,073 $3,055
===== ====== ====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.38% 0.38% 0.44% 2.05% 1.15% 0.43% 3.06%
Ratio of allowance for loans losses to
non-performing loans 152.17% 139.80% 148.81% 205.39% 91.37% 64.91% 44.95%
The following table sets forth the allocation of the Company's allowance for
loan losses by loan type at the dates indicated:
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF LOANS OF LOANS OF LOANS OF LOANS
TO GROSS TO GROSS TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Allocation of allowance
for loan losses
One- to four-family $ 2,548 82.19% $ 2,541 83.01% $ 2,547 81.47% $ 3,669 77.32%
Multi-family 255 2.90% 92 3.00% 112 3.57% 245 5.16%
Non-residential 204 4.63% 189 6.18% 236 7.56% 552 11.63%
Consumer loans 219 10.28% 236 7.71% 229 7.34% 280 5.89%
Commercial -- -- 3 0.10% 2 0.06% -- 0.00%
------- ------- ------- ------- ------- ------- ------- -------
Balance, end of period $ 3,226 100.00% $ 3,061 $100.00% $ 3,126 100.00% $ 4,746 100.00%
======= ======= ======= ======= ======= ======= ======= =======
DECEMBER 31,
------------
1994 1993
---- ----
PERCENTAGE PERCENTAGE
OF LOANS OF LOANS
TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Allocation of allowance
for loan losses
One- to four-family $ 3,912 77.11% $ 2,280 74.64%
Multi-family 249 4.90% 177 5.80%
Non-residential 645 12.71% 413 13.52%
Consumer loans 267 5.28% 185 6.04%
Commercial -- 0.00% -- 0.00%
------- ------- ------- -------
Balance, end of period $ 5,073 100.00% $ 3,055 100.0%
======= ======= ------- =======
The allowance for loan losses is established through charges (provisions
for loan losses) to earnings. Loan losses (loans charged off, net of recoveries)
are charged against the allowance for loan losses when management believes that
the recovery of principal is unlikely. If, as a result of loans charged off or
65
increases in non-performing, restructured or total loans or risk
characteristics of the loan portfolio, management considers the allowance to be
below the level necessary to absorb future loan losses on existing loans, an
additional provision for loan losses is made to increase the allowance for loan
losses to the level considered necessary to absorb possible losses on existing
loans that may become uncollectible. Management considers such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans including restructured loans and
economic conditions that may affect the borrowers' ability to pay and the
realization of collateral in determining the adequacy of the allowance.
The company allocates the allowance for loan losses based on risk
characteristics and balances within each category. The Company experienced
significant delinquencies and charge offs in the non-residential portfolio in
the early 1990's. As a consequence, the Company ceases originating these loans
except on a case-by-case basis. The allocation of the allowance for loan losses
to this category reflects the reductions in balances and activity.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in their market area. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
INVESTMENT ACTIVITIES
The Company's assets, other than loans receivable and mortgage-backed
securities, are invested primarily in U.S. Government and agency securities and
FHLB overnight deposits. In addition, the Company holds an investment in the
Prudential Government Securities Trust. The Prudential Government Securities
Trust is a mutual fund comprised of investments principally in a diversified
portfolio of intermediate term securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
Under the Bank's investment policy, the Bank is authorized to purchase
agency securities with maturities as determined by an investment committee of
the Bank's Board from time to time based upon several factors, including the
Bank's interest rate risk profile, liquidity needs and other factors. The Bank's
investment policy also prohibits the Bank from engaging in futures transactions,
options transactions, investment in high-risk mortgage derivatives such as
collateralized mortgage obligations, residual interests, real estate mortgage
investment conduit residual interests, stripped mortgage-backed securities, or
any other related products that exhibit a high degree of volatility.
At September 30, 1998, the Company's investment portfolio totalled $105.8
million, an increase of $17.8 million, or 20.2%, over total securities of $88.0
million at December 31, 1997.
The following table shows the cost, market value, weighted average yield,
and maturities of the Company's investment securities portfolio, excluding
FHLBNY stock at September 30, 1998:
66
SEPTEMBER 30, 1998
------------------
LESS THAN 1-5 5-10 OVER 10 TOTAL INVESTMENT
1 YEAR YEARS YEARS YEARS SECURITIES
---------------- ----------------- ----------------- ----------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE MARKET AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST VALUE YIELD
------ -------- ------- -------- ------- -------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Investments held to maturity:
U.S. Government and
agency securities $ -- -- $ 3,000 6.28% $12,000 6.99% $13,954 7.58% $28,954 $29,356 7.21%
------ ---- ------- ---- ------- ---- ------- ---- ------- ------- ----
Total investments held
to maturity $ -- -- $ 3,000 6.28% $12,000 6.99% $13,954 7.58% $28,954 $29,356 7.21%
====== ==== ======= ==== ======= ==== ======= ==== ======= ======= ====
Investment securities
Available for sale:
Prudential Securities
Trust $7,053 4.83% -- -- -- -- -- -- $ 7,053 $ 6,834 4.93%
Trust Preferred Securities -- -- -- -- -- -- $ 1,710 8.63% $ 1,710 $ 1,710 7.23%
U.S. Government and
Agency securities -- -- $13,000 6.21% $26,777 6.72% $27,992 7.00% $67,769 $68,263 6.76%
------ ---- ------- ---- ------- ---- ------- ---- ------- ------- ----
Total securities
Available for sale $7,053 4.93% $13,000 6.21% $26,777 6.72% $29,702 7.09% $76,532 $76,807 6.69%
====== ==== ======= ==== ======= ==== ======= ==== ======= ======= ====
The following table sets forth the composition of the Bank's investment in
FHLB overnight deposits, investment securities portfolio and FHLBNY stock at the
dates indicated:
SEPTEMBER 30, DECEMBER 31,
------------- ----------------------------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
CARRYING % OF CARRYING % OF CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL VALUE TOTAL
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
FHLB overnight deposits -- 0.0% -- 0.0% $ 2,500 6.7% $ 2,000 4.7%
FHLBNY stock $ 2,617 8.3% $ 1,627 3.4% 1,487 4.0% 1,447 3.3%
Investments held to maturity:
U.S. Government & agency securities $28,954 91.7% $46,903 96.6% $33,136 89.3% $39,510 92.0%
------- ------- ------- ------- ------- ------- ------- -------
Total FHLB overnight deposits,
FHLBNY stock and investment
securities held to maturity $31,571 100.0% $48,530 100.0% $37,123 100.0% $42,957 100.0%
======= ======= ======= ======= ======= ======= ======= =======
Investment securities available for sale:
Marketable Securities -
Prudential Securities Trust $ 6,834 8.9% $ 6,751 16.4% $ 6,688 34.1% $ 6,778 100.0%
Trust Preferred Securities $ 1,710 2.2% -- -- -- -- -- --
U.S. Government & Agency Securities $68,263 88.9% $34,340 83.6% $12,909 65.9% -- 0.0%
------- ------- ------- ------- ------- ------- ------- -------
Total securities available for sale $76,807 100.0% $41,091 100.0% $19,597 100.0% $ 6,778 100.0%
======= ======= ======= ======= ======= ======= ======= =======
SOURCES OF FUNDS
General. Deposit accounts have traditionally been the principal source of
the Company's funds for use in lending and for other general business purposes.
In addition to deposits, the Company's applicable sources of funds are loan and
mortgage-backed security repayments, cash flow generated from operations
including interest payments on loans and investment securities and fees, and
FHLBNY advances.
Deposits. The Company offers a variety of deposit accounts having a range
of interest rates and terms. The Bank presently offers passbook accounts,
checking accounts, NOW accounts, money market accounts, fixed interest rate
certificates of deposit with varying maturities and individual retirement
accounts ("IRAs"). The Company emphasizes retention of its core deposits, and
depending on its funding needs, interest rate risk
67
management and other considerations, the Bank from time to time emphasizes the
originations of certificates of deposit.
The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. The Company's deposits are primarily obtained from areas
surrounding its offices, and the Bank relies primarily on paying competitive
rates, service and long-standing relationships with customers to attract and
retain these deposits. The Bank does not use brokers to obtain deposits.
When management determines the levels of the Company's deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings
and the rates charged on other sources of funds.
At September 30, 1998, the Company had total deposits of $228.3 million,
an increase of $10.9 million, or 5.1%, from total deposits of $217.4 million at
December 31, 1997. This decrease resulted from rate competition on certificates
of deposit, as the Company's competitors raised their rates to attract
additional deposits, while the Company maintained its rates.
The table below sets forth the average dollar amount of deposits in the
various types of savings programs, along with the weighted average effective
interest rate paid for the periods indicated:
NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------------------------- --------------------------------------------------------------
1998 1997 1996
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
AVERAGE OF TOTAL EFFECTIVE AVERAGE OF TOTAL EFFECTIVE AVERAGE OF TOTAL EFFECTIVE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- --------- ------- -------- --------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
NOW accounts $ 18,590 8.30% $ 14,107 6.66% $ 10,569 5.10%
Money market accounts 19,564 8.73% 19,773 9.33% 21,456 10.36%
Savings accounts 49,510 22.10% 47,076 22.22% 45,208 21.83%
Club accounts 922 0.41% 731 0.34% 819 0.39%
-------- ----- -------- ------ -------- ------
Total core deposits 88,586 39.54% 81,687 38.55% $ 78,052 37.68%
Certificates of deposit 134,885 60.22% 129,708 61.21% 128,471 62.03%
Accrued dividends
payable 529 0.24% 500 0.24% 598 0.29%
-------- ----- -------- ------ -------- ------
Total deposits $224,000 100.0% 4.38% $211,895 100.00% 4.42% $207,121 100.00% 4.43%
-------- ----- ---- -------- ------ ---- -------- ------ ----
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995
----
WEIGHTED
PERCENT AVERAGE
AVERAGE OF TOTAL EFFECTIVE
BALANCE DEPOSITS RATE
------- -------- ---------
(DOLLARS IN THOUSANDS)
(Dollars in thousands) $ 9,701 4.83%
NOW accounts 23,011 11.45%
Money market accounts 44,991 22.39%
Savings accounts 863 0.43%
Club accounts -------- ------
78,566 39.10%
Total core deposits 121,833 60.62%
Certificates of deposit
Accrued dividends 572 0.28%
payable -------- ------
$200,971 100.00% 4.21%
Total deposits -------- ------ ----
The following table shows rate information for the Bank's certificates of
deposit and maturity information at September 30, 1998:
PERIOD TO MATURITY FROM SEPTEMBER 30, 1998
------------------------------------------
WITHIN ONE TO TWO TO OVER
ONE YEAR TWO YEARS THREE YEARS THREE YEARS TOTAL
-------- --------- ----------- ----------- -----
(IN THOUSANDS)
Certificates of Deposit
3.99% or less $ 31 $ 43 $ -- $ -- $ 74
4.00-4.99% $ 1,951 $ -- $ -- $ -- $ 1,951
5.00-5.99% $ 87,307 $ 39,440 $ 7,958 $ 585 $135,290
6.00-6.99% $ -- $ 2,615 $ -- $ -- $ 2,615
7.00-7.99% $ -- $ -- $ -- $ -- $ --
8.00-8.99% $ -- $ -- $ -- $ -- $ --
-------- -------- -------- -------- --------
Total $ 89,289 $ 42,098 $ 7,958 $ 585 $139,930
68
The following table sets forth the maturity dates of the Bank's
certificates of deposit of $100,000 or more at September 30, 1998:
MATURITY PERIOD AMOUNT
--------------- (IN THOUSANDS)
--------------
Three to six months $2,070
Three through six months 1,787
Six through twelve months 2,483
Over twelve months 2,587
------
Total $8,927
======
Borrowings. The Company's principal source of borrowings in past years has
been advances from the FHLBNY. The Company utilizes these advances when
available loan and investment yields exceed the cost of borrowings. The
following table sets forth the maximum month-end balance and average balance of
FHLBNY advances for the periods indicated:
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- --------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Maximum balance $52,334 $31,334 -- $5,157
Average balance $40,228 $17,553 -- $1,807
Weighted average 5.78% 6.05% -- 6.14%
interest rate
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes in, or disagreements with, the Company's
accountants.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference should be made to the disclosure set forth in the section
entitled "Market Risk and Interest Rate sensitivity Analysis" in Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
discussion of market risk as it affects the Company.
EXPERTS
The consolidated financial statements of 1st Bergen Bancorp as of December
31, 1997 and 1996 and for each of the years in the three-year period ended
December 31, 1997, have been included herein in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
69
Representatives of KPMG LLP, the Company's auditors, are expected to
attend the Special Meeting. They will be given the opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions from stockholders present at the Special Meeting.
STOCKHOLDER PROPOSALS
In the event the Merger is not consummated, to be considered for inclusion
in the Company's proxy statement in connection with the annual meeting of
stockholders to be held following the fiscal year ending Decmber 31, 1998, a
stockholder proposal must be received by the Secretary of the Company, at the
address set forth on the first page of this Proxy Statement, no later than June
1, 1999. Any stockholder proposal submitted to the Company will be subject to
SEC Rule 14a-8 under the Securities Exchange Act of 1934.
OTHER MATTERS
The Board of Directors knows of no additional matters that will be
presented for consideration at the Special Meeting. Execution of a proxy,
however, confers on the designated proxy-holders discretionary authority to vote
the shares in accordance with their best judgment on such other business, if
any, that may properly come before the Special Meeting or any adjournments
thereof.
By Order of the Board of Directors
/s/ Robert Maison
Robert Maison
Secretary
Wood-Ridge, New Jersey
March 5, 1999
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. WHETHER OR NOT
YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE REQUESTED TO SIGN AND PROMPTLY
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
70
1ST BERGEN BANCORP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT.................................................F-2
CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
September 30, 1998 and December 31, 1997..................................F-3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine months ended September 30, 1998 and 1997.............................F-4
UNAUDITED CONSENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1997.............................F-5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS................................................................F-6
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996................................................F-9
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995.............................F-10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995.............................F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995.............................F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995.............................F-14
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
1st Bergen Bancorp and Subsidiaries:
We have audited the consolidated statements of financial condition of 1st Bergen
Bancorp and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 1st Bergen Bancorp
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
February 2, 1998
F-2
1ST BERGEN BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
September 30, 1998 December 31, 1997
------------------ -----------------
ASSETS:
Cash and due from banks $ 15,915 $ 3,199
Interest-bearing deposits in other banks 1,097 0
--------- ---------
Total cash and cash equivalents $ 17,012 $ 3,199
Investment securities held to maturity $ 28,954 $ 46,903
Investment securities available for sale 76,807 41,090
Mortgage-backed securities held to maturity 33,785 52,458
Mortgage-backed securities available for sale 10,131 10,444
Loans receivable, net 129,287 127,818
Premises and equipment 3,006 3,019
Real estate owned 43 118
FHLB stock 2,617 1,627
Accrued interest and dividends receivable 2,449 2,094
Deferred income taxes 1,456 1,187
Other assets 688 388
--------- ---------
TOTAL ASSETS $ 306,235 $ 290,345
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 228,311 $ 217,426
FHLB Borrowings 39,500 31,334
Escrow 971 986
Accrued income taxes 64 507
Other liabilities 1,019 822
--------- ---------
TOTAL LIABILITIES $ 269,865 $ 251,075
========= =========
STOCKHOLDERS' EQUITY:
Preferred Stock - authorized 2,000,000 shares;
issued and outstanding - none -- --
Common Stock - no par value; authorized 6,000,000 shares
issued 3,174,000 shares and outstanding 2,585,243
and 2,864,535 shares in 1998 and 1997 -- --
Additional paid-in-capital 30,882 30,765
Retained earnings - substantially restricted 18,760 17,614
Accumulated other comprehensive income -
Net unrealized gain (loss) on securities available for sale, net of tax 344 (580)
Unallocated common stock held by the ESOP (2,250) (2,381)
Unamortized common stock held by the RRP (97,006 shares in 1998
And 112,864 shares in 1997) (1,334) (1,552)
Treasury stock at cost (588,757 shares in 1998 and 309,465 shares in 1997) (10,032) (4,596)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 36,370 $ 39,270
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 306,235 $ 290,345
========= =========
See accompanying notes to unaudited condensed consolidated financial statements
F-3
1ST BERGEN BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER 30
-----------------------------
1998 1997
---- ----
INTEREST INCOME
Interest on loans $ 7,707 $ 7,531
Interest on investment securities held to maturity 1,949 2,388
Interest on investment securities available for sale 3,280 1,222
Interest on mortgage-backed securities held to maturity 2,157 2,618
Interest on mortgage-backed securities available for sale 532 252
Interest on FHLB deposits 213 319
FHLB stock dividends 130 77
-------- --------
TOTAL INTEREST INCOME $ 15,968 $ 14,407
INTEREST EXPENSE
Deposits 7,360 6,937
FHLB borrowings 1,745 637
-------- --------
TOTAL INTEREST EXPENSE $ 9,105 $ 7,574
NET INTEREST INCOME 6,863 6,833
Provision for loan losses 225 400
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES $ 6,638 $ 6,433
NON-INTEREST INCOME:
Loan fees and service charges $ 145 $ 134
Annuity commissions 1 --
Other income 133 70
-------- --------
Total other income $ 279 $ 204
NON-INTEREST EXPENSE:
Compensation and employee benefits $ 2,644 $ 2,389
Commission expense 1 --
Occupancy expense 219 228
Equipment 402 334
Advertising 165 152
Federal deposit insurance premiums 104 104
Net gain (loss) from real estate owned 24 (33)
Insurance and bond premiums 83 97
Other 845 919
-------- --------
Total non-interest expense $ 4,487 $ 4,190
Income before income taxes 2,430 2,447
Federal and state tax expense 830 883
-------- --------
Net Income $ 1,600 $ 1,564
======== ========
Earnings per share - Basic $0.71 $0.57
Earnings per share - Diluted $0.69 $0.57
See accompanying notes to unaudited condensed consolidated financial statements
F-4
1ST BERGEN BANCORP AND SUBSIDIARIES
1ST BERGEN BANCORP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
SEPTEMBER 30,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,600 $ 1,564
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan loss 225 400
Net gain on sales of real estate owned (1) (45)
Depreciation of premises and equipment 187 163
Amortization of MRP shares 218 121
Amortization of ESOP shares 247 177
Net accretion of premiums and amortization of discounts (8) 77
Net (increase) decrease in deferred loan fees (70) 27
Increase in interest and dividends receivable (355) (342)
Decrease in other assets (300) (178)
Increase in other liabilities 197 795
Increase in deferred income taxes (45) 1
(Decrease) increase in income taxes payable (443) 477
-------- --------
Net cash provided by operating activities $ 1,452 $ 3,237
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans receivable $ 4,932 $ 2,259
Purchases of investment securities held to maturity -- (29,986)
Purchases of investment securities available for sale (50,132) (24,550)
Purchases of Loans (6,599) --
Proceeds from sales of real estate owned 119 541
Purchases of mortgage-backed securities held to maturity -- (10,169)
Purchases of mortgage-backed securities available for sale (2,024) (9,621)
Investment securities held to maturity called 17,000 7,000
Investment securities available for sale called 15,000 24,550
Principle payments on investment securities held to maturity 965 1,045
Principle payments on mortgage-backed securities held to maturity 18,665 9,389
Principle payments on mortgage-backed securities available for sale 2,454 1,913
Purchases of premises and equipment (174) (470)
Purchases of FHLB-NY stock (990) (140)
-------- --------
Net cash used in investing activities $ (784) $(28,239)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 10,885 $ 11,362
Purchase of shares by MRP -- (1,745)
Purchase of treasury stock (5,436) (2,414)
Net (decrease) increase in advances by borrowers (taxes & insurance) (15) 51
Net increase in borrowings 8,166 27,334
Dividends paid (455) (327)
-------- --------
Net cash provided by financing activities 13,145 34,261
Net increase in cash and cash equivalents 13,813 9,259
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 3,199 7,731
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 17,012 $ 16,990
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest 7,376 6,907
Income taxes 409 190
Non-cash investing and financing activities:
Transfer of loans to real estate owned $ 43 $ 168
See accompanying notes to unaudited condensed consolidated financial statements
F-5
1ST BERGEN BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The Consolidated Financial Statements include the accounts of 1st Bergen
Bancorp, (the "Company") and its wholly owned subsidiary South Bergen Savings
Bank (the "Bank") and the Bank's wholly owned subsidiary South Bergen Financial
Services, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation. The Bank provides a full range of banking services
to individuals and corporate customers through its branch system consisting of
offices in Bergen, Morris and Passaic Counties. The Bank is subject to
competition from other financial institutions and to the regulations of certain
regulatory agencies and undergoes periodic examinations by those regulatory
authorities.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP") for interim
financial information and in conformity with the instructions to Form 10-Q and
Article 10 of Regulation S-X for the Company and its subsidiary.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial condition,
results of operations, and changes in cash flows have been made for the
nine-month period ended September 30, 1998. The results of operations for the
three- and nine-month periods ended September 30, 1998, are not necessarily
indicative of results that may be expected for the entire year ending December
31, 1998.
2. ORGANIZATION OF THE HOLDING COMPANY AND CONVERSION TO STOCK FORM OF OWNERSHIP
On November 28, 1995, the Company was organized for the purpose of acquiring all
of the capital stock of the Bank to be issued in the Bank's conversion from the
mutual to stock form of ownership. On March 29, 1996, the Company completed an
initial public offering. The offering resulted in the sale of 3,174,000 shares
of common stock without par value of the Company ("Common Stock"), including the
sale of 253,920 shares to the Bank's tax qualified Employee Stock Ownership Plan
(the "ESOP").
In connection with the conversion from a mutual to a capital stock form, the
Company established the ESOP for the benefit of the employees of the Company and
the Bank. The ESOP purchased 253,920 shares, or 8% of the total stock sold in
the subscription, for $2,539,200 which was financed by a loan from the Company.
The ESOP was effective upon completion of the conversion. Full-time employees of
the Company or the Bank who have been credited with at least 1,000 hours of
service during a twelve-month period and who have attained the age of 21 are
eligible to participate in the ESOP. The loan to the ESOP will be repaid
principally from the Bank's discretionary contributions to the ESOP over a
period of ten years, and the collateral for the loan will be the Common Stock
purchased by the ESOP that has not been committed to be released.
3. NET INCOME PER SHARE
The Company earned $0.24 cents per share and $0.23 cents per share on a basic
and diluted basis, respectively, for the quarter ended September 30, 1998. The
earnings per share on a basic and diluted basis were $0.18 cents for the quarter
ended September 30, 1997.
F-6
4. NON-PERFORMING LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Non-performing loans were as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
(Dollars in Thousands)
Loans delinquent 90 days or more
and other non-performing loans $2,120 $2,057
Loans delinquent 90 days or more and other
Non-performing loans as a percentage of gross loans 1.60% 1.57%
An analysis of the allowance for loan losses for the nine-month periods
ended September 30, 1998 and 1997 follows:
September 30, 1998 September 30, 1997
------------------ ------------------
(Dollars in Thousands)
Balance at the beginning of the period $3,061 $3,126
Provision charged to operations 225 400
Charge-offs, net 60 461
------ ------
Balance at end of period $3,226 $3,065
====== ======
5. RECENT ACCOUNTING PRONOUNCEMENT
In accordance with the provisions of SFAS 130 for interim period reporting, the
Company's total comprehensive income for the nine months ended September 30,
1998 and 1997, was $2.5 million and $1.8 million, respectively. The difference
between the Company's net income and total comprehensive income for these
periods relates to the change in the net unrealized (losses) on securities
available for sale during the applicable period of time.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This Statement standardizes the
disclosure requirements for pension and other postretirement benefits by
requiring additional information that will facilitate financial analysis, and
eliminating certain disclosures that are considered no longer useful. SFAS No.
132 supersedes the disclosure requirements in SFAS 87, 88, and 106. This
Statement is effective for fiscal years beginning after December 15, 1997, and
will be adopted December 31, 1998.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), was issued by the Financial
Accounting Standards Board ("FASB") in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial position at fair value.
The Company must adopt SFAS No. 133 by January 1, 2000; however, early adoption
is permitted. On adoption, the provisions of SFAS No. 133 must be applied
prospectively. The Company anticipates that the adoption of SFAS No. 133 will
not have a material impact in the financial statements.
F-7
6. SUBSEQUENT EVENT
On October 14, 1998, the Company entered into an Agreement and Plan of
Reorganization ("Merger") with Kearny Federal Savings Bank ("Kearny") whereby
Kearny will purchase all the outstanding common stock of the Company for $24.00
per share. The merger is subject to regulatory and stockholder approval and is
expected to occur in the first quarter of 1999.
F-8
1ST BERGEN BANCORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
ASSETS 1997 1996
---- ----
Cash and due from banks $ 3,199,133 5,230,770
Interest-bearing deposits in other banks -- 2,500,000
------------- -------------
Total cash and cash equivalents 3,199,133 7,730,770
Investment securities held to maturity, estimated market value
of $47,252,311 in 1997 and $33,180,975 in 1996 (note 2) 46,903,262 33,135,851
Investment securities available for sale at market value (note 2) 41,090,336 19,596,895
Mortgage-backed securities held to maturity, net, estimated
market value of $53,008,777 in 1997 and $51,946,901
in 1996 (note 3) 52,457,620 51,768,925
Mortgage-backed securities available for sale (note 3) 10,444,559 2,824,044
Loans receivable, net (note 4) 127,817,620 123,824,912
Premises and equipment, net (note 6) 3,018,603 2,699,113
Real estate owned, net 117,500 536,700
Stock in the Federal Home Loan Bank of New York, at cost 1,627,100 1,487,200
Accrued interest and dividends receivable (note 5) 2,094,060 1,466,434
Deferred income taxes (note 9) 1,186,983 1,297,323
Other assets 388,481 184,704
------------- -------------
Total assets $ 290,345,257 246,552,871
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 7) 217,426,098 204,154,213
Advances from the Federal Home Loan Bank of New York 31,334,000 --
Advance payments by borrowers for taxes and insurance (note 8) 986,166 932,117
Accrued income taxes and other liabilities 1,329,301 231,958
------------- -------------
Total liabilities 251,075,565 205,318,288
------------- -------------
Stockholders' equity:
Preferred stock - authorized 2,000,000 shares; issued and
outstanding - none -- --
Common stock - no par value; authorized 6,000,000 shares, issued
3,174,000 shares and outstanding 2,864,535 and
3,015,300 shares in 1997 and 1996 -- --
Additional paid-in capital 30,764,831 30,620,838
Retained earnings - substantially restricted (notes 9 and 13) 17,614,271 15,956,900
Net unrealized loss on securities available for
sale, net of tax (notes 2, 3 and 9) (579,813) (909,474)
Less:
Unallocated common stock held by the ESOP (2,381,381) (2,539,200)
Unamortized common stock held by the RRP (112,864
shares) (1,551,884) --
Treasury stock at cost (309,465 shares in 1997 and
158,700 shares in 1996 (4,596,332) (1,894,481)
------------- -------------
Total stockholders' equity 39,269,692 41,234,583
Commitments and contingencies (note 11)
------------- -------------
Total liabilities and stockholders' equity $ 290,345,257 246,552,871
============= =============
See accompanying notes to consolidated financial statements
F-9
1ST BERGEN BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Interest income:
Loans $10,046,561 9,808,831 10,245,315
Mortgage-backed securities held to maturity 3,531,853 3,359,618 2,456,766
Mortgage-backed securities available for sale 427,662 156,013 --
Investment securities held to maturity 3,775,791 2,980,394 2,200,689
Investments securities available for sale 1,720,302 933,451 372,872
----------- ----------- -----------
Total interest income 19,502,169 17,238,307 15,275,642
----------- ----------- -----------
Interest expense:
Deposits (note 7) 9,370,020 9,172,420 8,468,717
Advances from Federal Home Loan Bank of
New York 1,061,421 -- 110,679
----------- ----------- -----------
Total interest expense 10,431,441 9,172,420 8,579,396
----------- ----------- -----------
Net interest income before pro-
vision for loan losses 9,070,728 8,065,887 6,696,246
Provision for loan losses (note 4) 475,000 725,000 1,005,000
----------- ----------- -----------
Net interest income after provi-
sion for loan losses 8,595,728 7,340,887 5,691,246
----------- ----------- -----------
Non-interest income (loss):
Loan fees and service charges 135,643 158,220 139,655
Loss on sale of loans or securities -- -- (411,875)
Other 153,550 42,817 73,548
----------- ----------- -----------
Total non-interest income (loss) 289,193 201,037 (198,672)
----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits (note 10) 3,241,224 2,449,952 2,259,618
Occupancy 303,454 281,485 249,810
Equipment 465,184 398,246 383,479
Advertising 214,674 190,848 193,334
Federal insurance premiums (note 12) 139,272 1,652,772 451,449
Net loss from real estate owned 11,411 261,414 115,017
Insurance and bond premium 123,337 103,086 93,265
Other expenses 1,209,917 1,002,324 1,028,570
----------- ----------- -----------
Total non-interest expense 5,708,473 6,340,127 4,774,542
----------- ----------- -----------
Income before federal and state
income tax expense 3,176,448 1,201,797 718,032
Federal and state income tax expense (note 9) 1,059,338 445,701 259,610
----------- ----------- -----------
Net income $ 2,117,110 756,096 458,422
=========== =========== ===========
Basic earnings per share $ .80 .19 --
=========== =========== ===========
Basic weighted average shares 2,616,495 3,058,793 --
=========== =========== ===========
Diluted earnings per share $ .80 .19 --
=========== =========== ===========
Diluted weighted average shares 2,639,914 3,058,793 --
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-10
1ST BERGEN BANCORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
Net
unrealized
loss on
securities Unallocated
available common stock
Additional Retained for sale, held
paid-in capital earnings net of tax by ESOP
--------------- -------- ---------- -------
Balance at December 31, 1994 $ -- 14,933,264 (1,154,797) --
Net income -- 458,422 -- --
Net change in unrealized loss on securities available
for sale, net of tax -- -- 429,705 --
-------------- ---------- ---------- ----------
Balance at December 31, 1995 -- 15,391,686 (725,092) --
Net proceeds from common stock offering 30,620,838 -- -- --
Common stock acquired by ESOP -- -- -- (2,539,200)
Net income -- 756,096 -- --
Cash dividend -- (190,882) -- --
Net change in unrealized loss on securities available
for sale, net of tax -- -- (184,382) --
Purchase of treasury stock (158,700 shares) -- -- -- --
-------------- ---------- ---------- ----------
Balance at December 31, 1996 30,620,838 15,956,900 (909,474) (2,539,200)
Net income -- 2,117,110 -- --
Cash dividend -- (459,739) -- --
Net change in unrealized loss on securities
available for sale, net of tax -- -- 329,661 --
Purchase of shares for RRP -- -- -- --
RRP shares amortized 25,760 -- -- --
ESOP shares allocated 118,233 -- -- 157,819
Purchase of treasury stock (150,765 shares) -- -- -- --
-------------- ---------- ---------- ----------
Balance at December 31, 1997 $ 30,764,831 17,614,271 (579,813) (2,381,381)
============== ========== ========== ==========
Un-
amortized
common stock
held Treasury Total stock-
by RRP stock holders' equity
------ ----- ---------------
Balance at December 31, 1994 -- -- 13,778,467
Net income -- -- 458,422
Net change in unrealized loss on securities available
for sale, net of tax -- -- 429,705
---------- ---------- ----------
Balance at December 31, 1995 -- -- 14,666,594
Net proceeds from common stock offering -- -- 30,620,838
Common stock acquired by ESOP -- -- (2,539,200)
Net income -- -- 756,096
Cash dividend -- -- (190,882)
Net change in unrealized loss on securities available
for sale, net of tax -- -- (184,382)
Purchase of treasury stock (158,700 shares) -- (1,894,481) (1,894,481)
---------- ---------- ----------
Balance at December 31, 1996 -- (1,894,481) 41,234,583
Net income -- -- 2,117,110
Cash dividend -- -- (459,739)
Net change in unrealized loss on securities
available for sale, net of tax -- -- 329,661
Purchase of shares for RRP (1,745,700) -- (1,745,700)
RRP shares amortized 193,816 -- 219,576
ESOP shares allocated -- -- 276,052
Purchase of treasury stock (150,765 shares) -- (2,701,851) (2,701,851)
---------- ---------- ----------
Balance at December 31, 1997 (1,551,884) (4,596,332) 39,269,692
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-11
1ST BERGEN BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 2,117,110 756,096 458,422
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 475,000 725,000 1,005,000
Net gains on sales of real estate owned (36,207) (90,195) (50,225)
Net loss on sales of securities available for sale -- -- 411,875
Depreciation 221,019 168,181 164,213
Amortization of RRP shares 193,816 -- --
Allocation of ESOP shares 276,052 -- --
Net amortization of premiums and discounts on
mortgage-backed securities 87,217 62,956 80,999
Net amortization of premiums and discounts on
investment securities (13,018) (6,924) (36,947)
Amortization of deferred loan fees (70,634) (9,208) (54,874)
(Increase) decrease in accrued interest and
dividends receivable (627,625) (425,427) 36,539
Decrease (increase) in deferred income taxes 561,389 288,604 (215,840)
(Increase) decrease in other assets (203,777) 390,118 (410,557)
Increase (decrease) in accrued income taxes
payable 5,269 241,517 (701,841)
Increase in other liabilities 662,272 26,500 18,177
------------ ------------ ------------
Net cash provided by operating activities $ 3,647,883 2,127,218 704,941
------------ ------------ ------------
Cash flows from investing activities:
Purchases of mortgage-backed securities held to
maturity (15,240,171) (9,715,498) (20,653,956)
Purchases of mortgage-backed securities available
for sale (9,621,002) (3,128,447) --
Principal repayments on mortgage-backed securities
held to maturity 14,465,609 12,754,900 6,925,241
Principal repayments on mortgage-backed securities
available for sale 2,184,871 246,350 --
Purchases of investment securities held to maturity (29,985,938) (29,948,500) (22,509,901)
Purchases of investment securities available for sale (45,895,000) (13,000,000) --
Principal repayments on investment securities held
to maturity 1,231,545 659,746 --
Calls/maturities of investment securities held to
maturity 15,000,000 35,670,000 3,000,000
Calls/maturities of investment securities available
for sale 24,550,000 -- --
Purchases of loans (6,051,825) (8,112,177) (484,800)
Proceeds from sale of loans 523,166 1,293,321 45,000
Proceeds from sale of investment securities available
for sale -- -- 18,588,125
Net decrease (increase) in loans receivable 591,445 (10,486,170) 8,654,100
Additions to premises and equipment (540,509) (197,418) (77,948)
Proceeds from sales of real estate owned 994,645 3,294,253 1,005,365
Purchases of Federal Home Loan Bank
of New York stock (139,000) (40,700) (96,800)
------------ ------------ ------------
Net cash used in investing activities $(47,932,164) (20,710,340) (5,605,574)
------------ ------------ ------------
F-12
1ST BERGEN BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1997 1996 1995
---- ---- ----
Cash flows from financing activities:
Net proceeds from stock offering $ -- 30,620,838 --
Federal Home Loan Bank of New York advances 31,334,000 -- (4,250,000)
Net increase (decrease) in deposits 13,271,885 (5,059,042) 14,375,076
Increase (decrease) in advance payments by
borrowers for taxes and insurance 54,049 249,734 (413,877)
Dividends paid (459,739) (190,882) --
Purchase of shares by ESOP -- (2,539,200) --
Purchase of treasury stock (2,701,851) (1,894,481) --
Purchase of shares by RRP (1,745,700) -- --
------------ ------------ ------------
Net cash provided by financing
activities 39,752,644 21,186,967 9,711,199
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents (4,531,637) 2,603,845 4,810,566
Cash and cash equivalents at beginning of year 7,730,770 5,126,925 316,359
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,199,133 7,730,770 5,126,925
============ ============ ============
Cash paid during the year for:
Federal and state income taxes $ 460,000 -- 463,000
============ ============ ============
Interest on deposits and advances $ 9,816,967 9,217,182 8,482,190
============ ============ ============
Noncash investing and financing activities - transfers
to real estate owned $ 539,238 1,814,984 2,616,312
============ ============ ============
See accompanying notes to consolidated financial statements
F-13
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 1st Bergen
Bancorp (the Company) and its wholly-owned subsidiaries, South Bergen
Savings Bank (the Bank) and South Bergen Financial Services, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
CHANGE IN REPORTING YEAR END
During 1997, the Company changed its reporting year end to December 31
from September 30. In addition, the Company reconfigured its previously
issued consolidated financial statements for September 30, 1996 and 1995
to December 31, 1996 and 1995.
CHARTER CONVERSION
On November 14, 1995, the Bank converted from a state mutual savings bank
(South Bergen Savings and Loan Association) to a federally chartered
mutual savings bank called South Bergen Savings Bank.
ORGANIZATION OF THE HOLDING COMPANY AND CONVERSION TO STOCK FORM OF
OWNERSHIP
On November 28, 1995, the Company was organized for the purpose of
acquiring all of the capital stock of the Bank to be issued in the Bank's
conversion from the mutual to stock form of ownership. On March 29, 1996,
the Company completed an initial public offering. The offering resulted in
the sale of 3,174,000 shares of common stock including the sale of 253,920
shares to the Bank's tax qualified Employee Stock Ownership Plan (the
ESOP).
LIQUIDATION RIGHTS - DEPOSITORS
The conversion plan adopted by the Bank provides for the establishment of
a special "liquidation account" for the benefit of account holders in an
amount equal to the retained earnings of the Bank as of September 30,
1995. Each account holder, if he or she were to continue to maintain his
or her deposit account at the Bank, would be entitled, upon complete
liquidation of the Bank after the conversion, to an interest in the
liquidation account prior to any payment to the stockholder of the Bank,
but following all liquidation payments to creditors. Each account holder
would have an initial interest in such liquidation account for each
deposit account (including regular accounts, transaction accounts such as
NOW accounts, money market deposit accounts, and certificates of deposit)
with a balance of $50 or more held in the Bank on September 30, 1995. Each
F-14
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
account holder will have a pro rata interest in the total liquidation
account for each of his or her deposit accounts based on the proportion
that the balance of each deposit account on September 30, 1995 bore to the
balance of all deposit accounts in the Bank on such date.
If, however, on any September 30 annual closing date of the Bank,
commencing after September 30, 1995, the amount in any deposit account is
less than the amount in such deposit account on September 30, 1995, or any
other annual closing date, then the interest in the liquidation account
relating to such deposit account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if
such deposit account is closed. In addition, no interest in the
liquidation account will ever be increased despite any subsequent increase
in the related deposit account. Any assets remaining after the above
liquidation rights of account holders are satisfied would be distributed
to the Company as the sole stockholder of the Bank.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers through its four offices. Two are located in Bergen
County, one in Morris County and one in Passaic County. The Bank is
subject to competition from other financial institutions and to the
regulations of certain regulatory agencies and undergoes periodic
examinations by those regulatory authorities. South Bergen Financial
Services, Inc. was incorporated to engage in the sale of annuity
investment products.
The following is a description of the significant accounting and reporting
policies followed by the Company in preparing and presenting these
consolidated financial statements.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated 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 consolidated statement of financial
condition and revenues and expenses for the period. Actual results could
differ significantly from these estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures or in settlement of loans. In connection with the
determination of the allowance for loan losses and valuation of real
estate owned, management generally obtains independent appraisals for
significant properties.
F-15
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and due from banks and interest-bearing deposits in other
banks.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities that are not categorized as
either held to maturity or trading account are classified as securities
available for sale. Securities available for sale include debt securities
that are held for an indefinite period of time and are not intended to be
held to maturity, as well as marketable equity securities. Securities
available for sale include securities that management intends to use as
part of its overall asset/liability management strategy and that may be
sold in response to changes in interest rates and resultant prepayment
risk and other factors related thereto. Securities available for sale are
carried at fair value, and unrealized gains and losses (net of related tax
effects) on such securities are excluded from earnings but are included in
stockholders' equity. Upon realization, such gains and losses will be
included in earnings using the specific identification method. Gains and
losses on sales of mutual fund shares are based upon the weighted average
cost method. Management determines the appropriate classification of
investment and mortgage-backed securities as either available for sale,
held to maturity, or held for trading at the purchase date. Investment
securities and mortgage-backed securities, other than those designated as
available for sale or trading, are comprised of debt securities that the
Company has the positive intent and ability to hold to maturity.
Securities held to maturity are carried at cost, adjusted for amortization
of premiums and accretion of discounts using the level-yield method over
the estimated lives of the securities.
Mortgage-backed securities held to maturity are carried at the outstanding
principal balance, adjusted for amortization of premiums and accretion of
discounts using the level-yield method over the estimated lives of the
securities.
Trading account securities are adjusted to market value through earnings.
There are no trading account securities outstanding at December 31, 1997
and 1996.
The Company is required to maintain shares of stock in the Federal Home
Loan Bank of New York (FHLB-NY) based on the Company's level of
residential mortgage loans and mortgage-backed securities or outstanding
advances from the FHLB-NY, whichever is larger. Such shares are carried at
cost.
F-16
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to income. Losses on loans are charged against the
allowance when management believes the collectibility of principal is
unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is based upon factors such as individual
loan characteristics, changes in composition and volume of the loan
portfolio, economic conditions, and other factors that may warrant
recognition in maintaining the allowance at a level sufficient to provide
for estimated loan losses. Management believes that the allowance for loan
losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions, particularly in New
Jersey. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions
to the allowance based on their judgments about information available to
them at the time of their examination.
LOANS
Loans are stated at principal amounts outstanding, net of unearned
discounts and net deferred loan origination fees and costs. Interest
income on loans is accrued and credited to interest income as earned.
Loan origination and commitment fees are netted against certain direct
costs associated with the loan origination process with the net resulting
amount accreted over the estimated life of the loan using the level-yield
method as an adjustment to the loan's yield.
Loans are generally placed on nonaccrual status when a loan becomes more
than 90 days past due or it appears that interest is uncollectible.
Previously accrued and unpaid interest is reversed when a loan is placed
on nonaccrual status. Interest income on nonaccrual loans is recognized
only in the period in which it is ultimately collected. After principal
and interest payments have been brought current and future collectibility
is reasonably assured, loans are returned to accrual status.
The Company has defined the population of impaired loans to be all
nonaccrual and restructured commercial real estate loans, multifamily
loans, land loans, and performing loans considered to be impaired as to
principal and interest. Impaired loans are individually assessed to
determine that the loan's carrying value is not in excess of the fair
value of the collateral or the present value of the loan's expected future
cash flows. Smaller balance homogeneous loans that are collectively
evaluated for impairment, such as residential mortgage loans and
installment loans, are specifically excluded from the impaired loan
portfolio.
F-17
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
REAL ESTATE OWNED
Real estate owned, acquired through foreclosure, is carried at the lower
of estimated fair value or cost at the date of acquisition and at the
lower of estimated fair value, less estimated costs to sell, or cost
thereafter. Estimated fair value of the property is generally based on an
appraisal. If appropriate, the Company maintains an allowance for other
real estate losses for subsequent declines in estimated fair value. Gains
and losses from sales of such properties are recognized as incurred.
Certain costs incurred in preparing properties for sale are generally
expensed as incurred.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change is tax rates is recognized
in income in the period that includes the enactment date.
RECOGNITION AND RETENTION PLANS (RRP)
RRP awards are granted in the form of shares of common stock held by the
RRP and are payable over a five year vesting period at a rate of 20% per
year, commencing on the date of the award grant. Compensation expense is
recorded at the fair value of the shares at the grant date ratably over
the vesting period.
PENSION PLAN
Pension plan costs based on actuarial computation of current and future
benefits for employees are charged to expense and are funded based on the
maximum amount that can be deducted for federal income tax purposes.
F-18
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
ESOP
The Company accounts for its ESOP in accordance with Statement of Position
93-6. Accordingly, the shares pledged as collateral are reported as
unallocated ESOP shares in the consolidated statements of financial
position. As shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares, and
the shares become outstanding for earnings per share computations.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), effective December 15, 1997. Basic
earnings per share is calculated by dividing net income attributable to
common stockholders by the average number of common shares outstanding for
the year. Allocated ESOP and vested RRP shares are included as
outstanding.
Diluted earnings per share is calculated similar to basic earnings per
share except that the number of shares outstanding is increased to include
the number of common shares that would be outstanding if all potential
dilutive shares were issued. Dilutive shares are determined using the
treasury stock method and totaled 23,419 in 1997.
The Company completed its initial public offering on March 29, 1996 and,
accordingly, per share data is not presented for any prior periods.
F-19
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) INVESTMENT SECURITIES
At December 31, 1997 and 1996, investment securities held to maturity and
available for sale are summarized as follows:
1997
-----------------------------------------------------
Gross Gross Un- Estimated
Amortized Unrealized Realized market
cost gains losses value
---- ----- ------ -----
Investment securities held to
Maturity - debt securities -
U.S. Agency obligations $46,903,262 441,368 92,319 47,252,311
=========== =========== =========== ===========
Investment securities avail-
Able for sale - marketable
Equity/debt securities:
Prudential securities trust 7,503,337 -- 752,816 6,750,521
U.S. Agency obligations 34,345,000 -- 5,185 34,339,815
----------- ----------- ----------- -----------
Total investment
securities avail-
able for sale $41,848,337 -- 758,001 41,090,336
=========== =========== =========== ===========
1996
-----------------------------------------------------
Gross Gross Un- Estimated
Amortized Unrealized Realized market
cost gains losses value
---- ----- ------ -----
Investment securities held to
maturity - debt securities -
U.S. Agency obligations $33,135,851 317,141 272,017 33,180,975
=========== =========== =========== ===========
Investment securities avail-
able for sale - marketable
equity/debt securities:
Prudential securities
trust 7,503,337 -- 815,192 6,688,145
U.S. Agency obligations 13,000,000 12,500 103,750 12,908,750
----------- ----------- ----------- -----------
Total investment
securities avail-
able for sale $20,503,337 12,500 918,942 19,596,895
=========== =========== =========== ===========
F-20
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The cost and estimated fair value of debt securities at December 31, 1997,
by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call
or repay obligations at par value without prepayment penalties.
Estimated
Amortized market
cost value
---- -----
Investment securities held to maturity
due in:
One to five years $ 3,000,000 3,004,680
Five to ten years 28,952,638 29,301,800
Over ten years 14,950,624 14,945,831
----------- -----------
$46,903,262 47,252,311
=========== ===========
Investment securities available for
sale due in:
One to five years 5,000,000 4,976,500
Five to ten years 29,345,000 29,363,315
----------- -----------
$34,345,000 34,339,815
=========== ===========
There were no sales of investments securities available for sale during
the years ended December 31, 1997 and 1996. Proceeds from sales of
investment securities available for sale and the realized gross losses
from those sales were $18,588,125 and $411,875, respectively, for the year
ended December 31, 1995.
F-21
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) MORTGAGE-BACKED SECURITIES
A summary of the carrying value and estimated market value of
mortgage-backed securities held to maturity and available for sale at
December 31, 1997 and 1996 is as follows:
1997
-----------------------------------------------------
Gross un- Gross un- Estimated
Amortized realized realized market
Cost gains losses value
---- ----- ------ -----
Mortgage-backed securities held to
maturity:
FHLMC $28,695,578 327,827 142,269 28,881,136
FNMA 6,426,964 110,582 14,439 6,523,107
GNMA 17,335,078 269,845 389 17,604,534
----------- ----------- ----------- -----------
Total mortgage-backed
securities held to
maturity $52,457,620 708,254 157,097 53,008,777
=========== =========== =========== ===========
Mortgage-backed securities avail-
able for sale - FNMA $10,314,890 152,284 22,615 10,444,559
=========== =========== =========== ===========
1996
-----------------------------------------------------
Gross un- Gross un- Estimated
Amortized realized realized market
Cost gains losses value
---- ----- ------ -----
Mortgage-backed securities held to
maturity:
FHLMC $31,351,088 275,802 250,717 31,376,173
FNMA 7,512,445 103,270 47,203 7,568,512
GNMA 12,905,392 119,812 22,988 13,002,216
----------- ----------- ----------- -----------
Total mortgage-backed
securities held to
maturity $51,768,925 498,884 320,908 51,946,901
=========== =========== ----------- ===========
Mortgage-backed securities avail-
able for sale - FNMA $ 2,880,109 -- 56,065 2,824,044
=========== =========== =========== ===========
F-22
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
There were no sales of mortgage-backed securities during the years ended
December 31, 1997, 1996 and 1995.
The amortized cost and estimated market value of mortgage-backed
securities at December 31, 1997 are shown below. The expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalties.
Estimated
Amortized market
cost value
---- -----
Mortgage-backed securities held to
maturity:
Less than one year $ 4,166,969 4,145,300
One to five years 9,134,655 9,064,180
Five to ten years 4,053,426 4,136,950
Over ten years 35,102,570 35,662,347
----------- -----------
$52,457,620 53,008,777
=========== ===========
Mortgage-backed securities available for
sale due in over ten years $10,314,890 10,444,559
=========== ===========
F-23
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) LOANS RECEIVABLE, NET
A summary of loans receivable at December 31, 1997 and 1996 is as follows:
1997 1996
---- ----
First mortgage loans:
One- to four-family $108,890,609 103,721,738
Multifamily 3,934,387 4,548,515
Nonresidential 8,111,563 9,628,183
------------ ------------
Total first mortgage loans 120,936,559 117,898,436
------------ ------------
Other loans:
Other loans 307,481 127,450
Deposit account loans 420,804 495,675
Home equity loans 9,512,889 8,799,609
------------ ------------
Total other loans 10,241,174 9,422,734
------------ ------------
Total loans 131,177,733 127,321,170
------------ ------------
Allowance for loan losses 3,060,969 3,126,480
Deferred loan fees, net 299,144 369,778
------------ ------------
3,360,113 3,496,258
------------ ------------
$127,817,620 123,824,912
============ ============
At December 31, 1997, 1996 and 1995, loans in the amount of $2,057,000,
$1,522,000 and $5,193,750, respectively, were on nonaccrual status. If
nonaccrual loans had continued to realize interest in accordance with
their contractual terms, approximately $163,000, $277,030 and $951,300 of
interest income would have been realized for the years ended December 31,
1997, 1996 and 1995, respectively.
Interest income on nonaccrual loans included in net income amounted to
$57,626, $37,426 and $100,434 for the years ended December 31, 1997, 1996
and 1995, respectively. The Company was not committed to lend additional
funds on any nonaccrual loans at December 31, 1997.
F-24
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At December 31, 1997 and 1996, the Company has impaired loans totaling
$261,000 and $657,000, respectively, requiring a valuation allowance of
$126,000 and $234,000, respectively. Average impaired loans totaled
$598,000 and $1,178,000 for the years ended December 31, 1997 and 1996,
respectively.
At December 31, 1997 and 1996, loans to directors and officers amount to
$27,360 and $0, respectively.
An analysis of the allowance for loan losses for the years ended December
31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 3,126,480 4,746,438 5,072,998
Provision charged to operations 475,000 725,000 1,005,000
Recoveries 50,000 -- 40,000
Loans charged off, net (590,511) (2,344,958) (1,371,560)
----------- ----------- -----------
Balance at end of year $ 3,060,969 3,126,480 4,746,438
=========== =========== ===========
F-25
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
A summary of accrued interest and dividends receivable at December 31,
1997 and 1996 is as follows:
1997 1996
---- ----
Loans, net of allowance for uncollected interest
of $168,878 in 1997 and $282,012 in 1996 $ 472,052 450,092
Mortgage-backed securities 360,736 280,510
Investment securities and other interest earning
assets 1,261,272 735,833
---------- ----------
$2,094,060 1,466,435
========== ==========
(6) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at December 31, 1997 and 1996 is as follows:
1997 1996
---- ----
Land $ 259,774 71,876
Building and improvements 3,538,023 3,396,498
Furnishings and equipment 1,250,795 1,039,709
---------- ----------
5,048,592 4,508,083
Less accumulated depreciation 2,029,989 1,808,970
---------- ----------
$3,018,603 2,699,113
========== ==========
F-26
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) DEPOSITS
A summary of deposit balances as of December 31, 1997 and 1996 is as
follows:
1997 1996
------------------------------------ --------------------------------------------
Stated Stated
Rate Amount % Rate Amount %
---- ------ - ---- ------ -
NOW accounts 2.75% $ 15,854,837 7.29 2.75% $11,527,716 5.65
Money Market
deposit accounts 3.00 19,271,440 8.87 3.00 20,881,101 10.23
Savings accounts 3.00 48,948,453 22.51 3.00 45,067,070 22.07
Club accounts 3.00 395,447 .18 3.00 359,391 .18
------------ ------ ------------
84,470,177 38.85 77,835,278 38.13
------------ ------ ------------
Certificates of
deposit 3.00-3.99 116,196 .05 3.00-3.99 120,100 .06
4.00-4.99 1,904,443 .88 4.00-4.99 13,644,461 6.68
5.00-5.99 123,669,404 56.88 5.00-5.99 100,601,573 49.28
6.00-6.99 6,808,323 3.13 6.00-6.99 11,458,700 5.61
7.00-7.99 95,966 .04 7.00-7.99 108,939 .05
8.00 and over -- -- 8.00 and over 76,504 .04
------------ ------ ------------
132,594,332 60.98 126,010,277 61.72
------------ ------------
Accrued interest
payable 361,589 .17 308,658 .15
------------ ------------
$217,426,098 100.00 $204,154,213 100.00
============ ============
F-27
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The aggregate amount of certificates of deposit in denominations of
$100,000 or more total $6,487,596 and $5,466,708 at December 31, 1997 and
1996, respectively. The deposits of the Company are insured up to $100,000
by the Savings Association Insurance Fund (SAIF), which is administered by
the Federal Deposit Insurance Corporation (FDIC) and is backed by the full
faith and credit of the U.S. Government.
At December 31, 1997 and 1996, certificates of deposit have scheduled
maturities as follows:
1997 1996
---- ----
One year or less $104,718,835 100,044,318
One year to three years 26,810,653 22,730,597
Three years or more 1,064,844 3,235,362
------------ ------------
$132,594,332 126,010,277
============ ============
Interest expense on deposits for the years ended December 31, 1997, 1996
and 1995 consists of the following:
1997 1996 1995
---- ---- ----
Certificates of deposit $7,104,813 6,934,578 6,248,910
Savings and club amounts 1,433,467 1,407,325 1,358,688
NOW and money market amounts 831,740 830,517 861,119
---------- ---------- ----------
$9,370,020 9,172,420 8,468,717
========== ========== ==========
F-28
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) BORROWINGS
The following is a summary of borrowings at December 31, 1997:
Contractual maturity - 1998 $31,344,000
===========
Weighted average interest rate at the end of the
period 6.01%
====
Weighted average interest rate during the period 6.05%
====
Average amount outstanding during the period $17,552,873
===========
Maximum amount outstanding at any month end
during the period $31,334,000
===========
Securities collateralizing the borrowings include agencies and
mortgage-backed securities, which have an amortized cost of $30,867,143
and a fair value of $31,497,260 at December 31, 1997. The securities
underlying the borrowings are under the Bank's control.
(9) INCOME TAXES
Under tax law that existed prior to 1996, if certain conditions were met,
thrift institutions, in determining taxable income, were allowed a special
bad debt deduction based on a percentage of taxable income before such
deduction. The Company used the experience method in preparing the federal
income tax return for 1995. Legislation was enacted in August 1996 which
repealed the percentage of taxable income method. As a result, the Company
may no longer use the percentage of taxable income reserve method. A small
thrift (one with $500 million or less in assets) is allowed to use either
the specific charge-off method or the "bank" experience method of Section
585 of the Internal Revenue Code (the Code) to compute its bad debt
deduction.
Upon repeal of previous regulation, the Company is generally required to
recapture into income the portion of its bad debt reserve (other than
supplemental reserves) that exceeds its base year (December 31, 1987)
reserves. The recapture amount generally will be taken into income ratably
(on a straight-line basis) over a six-year period. If the Company meets
the residential loan requirement for a tax year beginning in 1996 or 1997,
the recapture of the reserves will be suspended for such tax year. Thus,
the recapture can potentially be deferred for up to two years. The
residential loan requirement is met if the principal amount of housing
loans made by the Company during the year at issue (1996 or 1997) is at
least as much as the average principal amount of loans made during the six
most recent
F-29
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
years prior to 1996. Refinancing and home equity loans are excluded. The
Company is not required to recapture any amounts into income.
Retained earnings at December 31, 1997 includes approximately $5.4 million
for which no provision for income tax has been made. This amount
represents the base year reserves. Events that would result in taxation of
these reserves include failure to qualify as a bank for tax purposes,
distributions in complete or partial liquidation, stock redemptions and
excess distributions to shareholders. At December 31, 1997, the Bank has
an unrecognized tax liability of $1,950,000 million with respect to this
reserve. The Bank does not anticipate any such recognition in the
foreseeable future.
F-30
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Income tax expense for the years ended December 31, 1997, 1996 and 1995
consists of the following:
1997 1996 1995
---- ---- ----
Current tax expense (benefit):
Federal $ 848,903 16,013 (186,517)
State 104,609 (7,844) (17,068)
---------- ---------- ----------
953,512 8,169 (203,585)
---------- ---------- ----------
1997 1996 1995
---- ---- ----
Deferred tax expense:
Federal $ 105,442 392,526 424,574
State 384 45,006 38,621
---------- ---------- ----------
105,826 437,532 463,195
---------- ---------- ----------
$1,059,338 445,701 259,610
========== ========== ==========
A reconciliation between the effective income tax expense and the expected
expense computed using the applicable statutory federal income tax rate of
34% is as follows:
1997 1996 1995
---- ---- ----
Computed "expected" federal income tax expense $1,079,992 408,611 244,131
Increase (decrease) in taxes resulting from:
New Jersey savings institution tax, net
of federal income tax effect 69,296 24,527 14,225
Other items, net (89,950) 12,563 1,254
---------- ------- -------
Effective income tax expense $1,059,338 445,701 259,610
========== ======= =======
F-31
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax assets:
Federal net operating loss carryover $ -- 101,361
Management recognition plan 69,735 --
Dividend income 2,105 1,813
Allowance for losses on loans and real estate owned 1,103,865 1,168,495
Accrued pension 8,485 9,033
Charitable contribution -- 4,069
Deferred loan fees 46,968 79,526
Accrued interest receivable 24,934 5,045
Unrealized loss on securities available for sale 226,074 346,310
----------- -----------
Total gross deferred tax assets 1,482,166 1,715,652
Less valuation allowance (177,555) (293,277)
----------- -----------
Net deferred tax assets 1,304,611 1,422,375
----------- -----------
Deferred tax liabilities:
Prepaid FDIC premium 25,071 25,115
Discount accretion on securities 3,297 1,645
Premises and equipment - differences in depreciation 89,260 98,292
----------- -----------
Total gross deferred tax liabilities 117,628 125,052
----------- -----------
Net deferred tax asset $ 1,186,983 1,297,323
=========== ===========
A deferred tax benefit of $48,519 and $53,033 has been recorded directly
through equity at December 31, 1997 and 1996, respectively. Such deferred
tax benefits relate to the unrealized depreciation on debt and
mortgage-backed securities available for sale. The deferred tax benefit
related to the unrealized depreciation on marketable equity securities
available for sale has been offset by the deferred tax valuation allowance
due to uncertainties of generating capital gains to absorb such loss
deductions.
Management believes, based upon current facts, that it is more likely than
not that there will be sufficient taxable income in future years to
realize the net deferred tax asset. However, there can be no assurance
about the levels of future earnings.
F-32
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) BENEFIT PLANS
PENSION PLAN
The Company has a qualified, noncontributory defined benefit pension plan
(the Plan) covering all eligible employees. Retirement benefits are based
upon a formula utilizing years of service and average monthly
compensation. It is the Company's policy to fund the Plan for the maximum
amount that can be deducted for federal income tax purposes, subject to
the minimum funding requirements of the Employee Retirement Income
Security Act of 1974 (ERISA).
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated financial statements as
determined by the plan actuaries as of September 30, 1997 and 1996:
1997 1996
---- ----
Actuarial present value of benefit obligation
including vested benefits of $921,280 and
$768,873 at September 30, 1997 and 1996,
respectively $ 921,280 844,985
=========== ===========
Projected benefit obligation (1,343,209) (1,212,683)
Plan assets at fair value (primarily insurance
contracts and time deposits with banks) 971,137 879,452
----------- -----------
Projected benefit obligation
in excess of plan assets (372,072) (333,231)
Unrecognized net loss 130,437 107,469
Unrecognized net transition obligation 139,246 149,958
Unrecognized prior service cost (17,314) (18,468)
----------- -----------
Accrued pension cost $ (119,703) (94,272)
=========== ===========
F-33
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Net periodic pension cost includes the following components for the years
ended September 30, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Service cost $ 131,103 125,202 117,080
Interest cost 90,363 75,874 68,307
Return on plan assets (43,937) (43,104) (37,995)
Net amortization and deferral (15,153) (3,224) (2,092)
--------- --------- ---------
Net periodic pension
cost $ 162,376 154,748 145,300
========= ========= =========
The discount rate and rate of increase in future compensation levels used
in computing the net periodic pension cost were 7.5% and 4.5%,
respectively, for 1997, 1996 and 1995. The expected long-term rate of
return on assets was 7.5% in 1997, 1996 and 1995.
ESOP
In connection with the conversion from a mutual to a capital stock form,
the Company established the ESOP for the benefit of the employees of the
Company. The ESOP purchased 253,920 shares, or 8% of the total stock sold
in the subscription, for $2,539,200 financed by a loan from the Company.
The ESOP was effective upon completion of the conversion. Full-time
employees of the Company or the Bank who have been credited with at least
1,000 hours of service during a 12-month period and who have attained the
age of 21 are eligible to participate in the ESOP. At December 31, 1997,
15,781 ESOP shares have been allocated. There were no ESOP shares
allocated in 1996. The loan to the ESOP will be repaid principally from
the Company's contributions to the ESOP over a period of ten years
beginning on December 31, 1997. The loan will be collateralized by the
uncommitted common stock purchased by the ESOP. As the debt is repaid,
shares are released from collateral and allocated to qualified employees
based on the proportion of debt service paid in the year.
STOCK OPTION PLANS
The Company maintains stock option plans for the benefit of directors,
officers and other key employees.
The Incentive Stock Option Plan provides for 222,180 common shares which
may be granted to key employees of the Company. The options are subject to
a five-year vesting
F-34
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
schedule with 20% of the options vesting each year. The Incentive Stock
Option Plan authorizes the grant of options that may be either options
that qualify as incentive stock options as defined in Section 422 of the
Code, as amended, or options that do not qualify. In 1997, the Company
granted 181,200 options to key employees at an exercise price of $13.975.
F-35
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Stock Option Plan for Outside Directors provides for 95,220 common
shares which may be granted to members of the Board of Directors, who are
not employees of the Company. The options are intended to become
exercisable in five equal annual installments commencing one year from the
date of grant. In 1997, the Company granted 79,350 options at an exercise
price of $13.975.
Changes in the number of shares outstanding under the plans and the
weighted average exercise price of those shares are as follows:
1997
---------------------
Weighted
Number average
of exercise
shares price
------ -----
Outstanding at beginning of year -- $ --
Granted 260,550 13.975
Exercised -- --
------- -------
Outstanding at end of year 260,550 $13.975
======= =======
For options that were granted in 1997, the exercise price of the options
equaled the market value of the stock at grant date.
The following table summarizes information about the stock options
outstanding at December 31, 1997:
Weighted
average Weighted
Number of remaining average
shares out- contractual exercise
standing life in years price
-------- ------------- -----
$ 260,550 10.0 $ 13.975
========== ==== ========
There are no options exercisable at December 31, 1997.
F-36
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Bank applies APB 25 in accounting for the plans. Consistent with SFAS
123, if compensation cost for the plans were included as compensation
expense, the Company's net income and earnings per share for 1997 would
have been reduced to the pro forma amounts indicated below:
Net income:
As reported $ 2,117,110
Pro forma 1,880,137
=========
Basic earnings per share:
As reported $.80
Pro forma .71
===
Diluted earnings per share:
As reported $.80
Pro forma .71
===
The fair value of stock options granted by the Bank was estimated through
the use of the Black-Scholes option-pricing model that takes into account
the following factors as of the grant date: the exercise price and
expected life of the option, the market price of the underlying stock at
the grant date and its expected volatility, and the risk-free interest
rate for the expected term of the option. In deriving the fair value of
the stock options, the stock price at the grant date is reduced by the
value of dividends to be paid during the life of the option. The following
assumptions were used for grants in 1997: dividend yield of 1.07%, an
expected volatility of 21% and the risk free interest rate of 5.71% for
1997. The effects of applying SFAS 123 on the pro forma net income may not
be representative of the effect on pro forma net income for future years.
RRP
The RRP was adopted in 1997 as a method of providing executive officers an
incentive designed to encourage such persons to promote the growth and
profitability of the Company and to remain employed with the Company. The
RRP is a nonqualified plan under ERISA. The shares awarded vest in five
equal annual installments commencing one year from the date of grant. The
RRP authorizes the granting of plan share awards of up to 88,872 shares of
common stock. The Company granted 73,980 shares to key employees in 1997.
F-37
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Recognition and Retention Plan for Outside Directors (Directors' RRP)
was adopted as a method of providing outside directors an incentive
designed to encourage such persons to promote the growth and profitability
of the Company. The Directors' RRP is a non-qualified plan under ERISA.
The shares are to vest in five equal annual installments commencing one
year from the date of grant. The Directors' RRP authorizes the granting of
plan share awards of up to 38,088 shares of common stock. The Company
granted 31,740 shares to outside directors under the plan.
(11) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
COMMITMENTS
The Company is party to financial instruments and commitments with
off-balance-sheet credit risk in the normal course of business. These
financial instruments and commitments include unused home equity lines of
credit, commitments to extend credit, and commitments to purchase
securities. These commitments and instruments involve, to varying degrees,
elements of risk in excess of the amounts recognized in the consolidated
financial statements.
The Company's maximum exposure to credit losses in the event of
nonperformance by the other party to these financial instruments and
commitments is represented by the contractual amount. The Company uses the
same credit policies in granting commitments and conditional obligations
as it does for financial instruments recorded in the consolidated
statements of financial condition.
At December 31, 1997, financial instruments and commitments whose
contractual amounts represent off-balance-sheet credit risk are comprised
of unused home equity lines of credit, primarily floating-rate, totaling
$5.3 million.
At December 31, 1997, the Company has commitments to purchase loans
totaling $3.2 million and commitments to originate loans of $1.0 million.
CONTINGENCIES
In the normal course of business, there are various outstanding legal
proceedings, claims, commitments and contingent liabilities such as
commitments to extend credit which are not included in the accompanying
consolidated financial statements. In the opinion of management, the
financial position, results of operations or liquidity of the Company will
not be materially affected by the outcome of such legal proceedings and
claims or by such commitments and contingent liabilities.
F-38
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
CONCENTRATIONS OF CREDIT RISK
A substantial portion of the Company's loans are one- to four-family
residential first mortgage loans secured by real estate located in New
Jersey. Accordingly, the collectibility of a substantial portion of the
Company's loan portfolio is susceptible to changes in real estate market
conditions.
(12) RECAPITALIZATION OF SAIF
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF and spread the obligations
for payment of Financing Corporation (FICO) bonds across all SAIF and Bank
Insurance Fund (BIF) members. The FDIC special assessment being levied
amounts to 65.7 basis points on SAIF assessable deposits held as of March
31, 1995. The special assessment was recognized in the third quarter and
was tax deductible. The Bank took a charge of $1.3 million, before
tax-effect, as a result of the FDIC special assessment. This legislation
eliminated the substantial disparity between the amount that BIF and SAIF
member institutions had been paying for deposit insurance premiums.
Beginning on January 1, 1997, BIF members paid a portion of the FICO
payment equal to 1.3 basis points on BIF-insured deposits compared to 6.4
basis points on SAIF-insured deposits, and will pay a pro rata share of
the FICO payment on the earlier of January 1, 2000 or the date upon which
the last savings association ceases to exist. The legislation also
requires BIF and SAIF to be merged by January 1, 1999, provided that
subsequent legislation is adopted to eliminate the savings association
charter and no savings associations remain as of that time.
The FDIC lowered SAIF assessments to a range comparable to that of BIF
members, although SAIF members must also make the FICO payments described
above. Management cannot predict the level of FDIC insurance assessments
on an ongoing basis or whether the BIF and SAIF will eventually be merged.
F-39
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) REGULATORY MATTERS
Office of Thrift Supervision (OTS) regulations require savings
institutions to maintain minimum levels of regulatory capital. Under the
regulations in effect at December 31, 1997, the Bank was required to
maintain a minimum ratio of tangible capital to total adjusted assets of
1.5%; a minimum ratio of Tier 1 (core) capital to total adjusted assets of
3.0%; and a minimum ratio of total (core and supplementary) capital to
risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Generally, an institution is considered
well-capitalized if it has a Tier 1 (core) capital ratio of at least 5.0%;
a Tier 1 risk-based capital ratio of at least 6.0%; and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings, and other factors.
Management believes that, as of December 31, 1997, the Bank meets all
capital adequacy requirements to which it is subject. Further, the most
recent OTS notification categorized the Bank as a well-capitalized
institution under the prompt corrective action guidelines. There have been
no conditions or events since that notification that management believes
have changed the Bank's capital classification.
The following is a summary of the Bank's actual capital amounts and ratios
as of December 31, 1997 and 1996, compared to the minimum capital adequacy
requirements and the requirements for classification as a well-capitalized
institution (dollars in thousands).
F-40
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
To be well
Capitalized
For capital Under prompt
Adequacy Correction
Actual Purposes Action
------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Tangible capital $30,860 10.6% 4,371 1.5% 4,371 1.5%
Core capital 30,860 10.6 8,742 3.0 14,571 5.0
Tier 1 risk-based capital 30,860 24.9 4,949 4.0 7,423 6.0
Risk-based capital 32,417 26.2 9,897 8.0 12,371 10.0
======= ==== ===== === ====== ====
As of December 31, 1996:
Tangible capital $28,151 9.7% 3,712 1.5% 3,712 1.5%
Core capital 28,151 9.7 7,425 3.0 12,374 5.0
Tier 1 risk-based capital 28,151 22.8 4,194 4.0 6,291 6.0
Risk-based capital 29,477 28.1 8,388 8.0 10,845 10.0
======= ==== ===== === ====== ====
OTS regulations impose limitations upon all capital distributions by
savings institutions, like the Bank, such as cash dividends and payments
to repurchase or otherwise acquire shares. Because of the Bank's
regulatory capital requirements approximately $12,200,000 of its retained
earnings is unavailable for distribution to the Company.
F-41
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) STOCK REPURCHASE PROGRAM
The Company has approved three stock repurchases aggregating 14% of
outstanding shares. As of December 31, 1997, 436,425 shares (including the
shares purchased for the RRP) have been repurchased under this program.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires the Company to
disclose in the notes to consolidated financial statements the fair value
of financial assets and liabilities for which it is practicable to
estimate fair value. Fair value estimates, methods and assumptions are set
forth below for the Company's financial instruments.
CASH AND CASH EQUIVALENTS
For cash and due from banks and interest-bearing deposits, the carrying
amount approximates fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The fair value of investment securities and mortgage-backed securities is
estimated based on bid quotations received from securities dealers.
FEDERAL HOME LOAN BANK OF NEW YORK STOCK
The fair value for FHLB-NY stock is its carrying value, since this is the
amount for which it could be redeemed. There is no active market for this
stock and the Company is required to maintain a minimum balance based upon
the unpaid principal of home mortgage loans.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential
mortgage, home equity and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms and into
performing and nonperforming categories.
Fair value of performing loans was estimated using the quoted market
prices for similar loans, adjusted for differences in loan
characteristics, if applicable.
Fair value for significant nonperforming loans is based on recent external
appraisals of collateral securing such loans.
F-42
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings, and NOW and money market accounts, is
equal to the amount payable on demand. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits
of similar remaining maturities.
ADVANCES
The fair value for advances from the FHLB-NY are caclulated by discounting
estimated future cash flows using current rates for similar remaining
maturities.
COMMITMENTS TO EXTEND CREDIT
Fair values of commitments to extend credit are based on fees currently
charged to enter into similar agreements. Fair market value approximates
the contract amount.
The estimated fair values of the company's financial instruments as of
December 31, 1997 and 1996 are presented in the following tables.
1997 1996
-------------------------- -------------------------
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents $ 3,199,133 3,199,133 7,730,770 7,730,770
Investment securities held to maturity 46,903,262 47,252,311 33,135,851 33,180,975
Mortgage-backed securities held to 52,457,620 53,008,777 51,768,925 51,946,901
maturity
Investment securities available for 41,090,336 41,090,336 19,596,895 15,596,895
sale
Mortgage-backed securities available 10,444,559 10,444,559 2,824,044 2,824,044
for sale
Loans 127,817,620 132,755,000 123,824,912 128,364,000
Federal Home Loan Bank of New York 1,627,100 1,627,100 1,487,200 1,487,200
stock
Financial liabilities:
Deposits 217,426,098 217,595,686 204,154,213 204,334,381
Advances from Federal Home Loan 31,334,000 31,334,000 -- --
Bank of New York ========== ========== =========== ============
F-43
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include deferred tax assets and premises and equipment. In addition, the
tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in the estimates.
(16) PARENT COMPANY ONLY
At December 31, 1997, the Company, which was formed in November 1995, has
two subsidiaries: the Bank and South Bergen Financial Services, Inc. The
earnings of the subsidiaries are recognized by the Company using the
equity method of accounting. Accordingly, subsidiaries' dividends paid
reduce the Company's investment in the subsidiaries. The following
information should be read in conjunction with other notes to the
consolidated financial statements. Condensed financial statements of the
Company at
F-44
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996 and for the year ended December 31, 1997 and
for the period March 29, 1996 (conversion date) to December 31, 1996 are
presented below:
STATEMENTS OF FINANCIAL CONDITION
ASSETS 1997 1996
---- ----
Cash $ 6,664,492 10,954,225
ESOP loan receivable from subsidiary 2,381,381 2,539,200
Investment in subsidiaries 31,035,213 28,056,681
Other assets 16,032 --
------------ ------------
Total assets $ 40,097,118 41,550,106
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 827,426 315,523
Stockholders' equity 39,269,692 41,234,583
------------ ------------
Total liabilities and stock-
holders' equity $ 40,097,118 41,550,106
============ ============
STATEMENTS OF INCOME
1997 1996
---- ----
Interest income - ESOP loan receivable
from subsidiary $ 190,510 152,352
Expenses - miscellaneous (366,920) (47,154)
------------ ------------
(Loss) income before
equity in undistributed earnings of
subsidiaries (176,410) 105,198
Undistributed earnings of subsidiaries 2,293,520 444,802
------------ ------------
Net income $ 2,117,110 550,000
============ ============
F-45
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
STATEMENTS OF CASH FLOWS
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 2,117,110 550,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of
subsidiaries (2,293,520) (444,802)
Increase in other assets (16,032) --
Increase in other liabilities 511,903 315,523
------------ ------------
Net cash provided by operating
Activities 319,461 420,721
------------ ------------
Cash flows from investing activities:
Decrease (increase) in investment in
Subsidiary 140,277 (12,923,571)
Decrease (increase) in ESOP loan
receivable from subsidiary 157,819 (2,539,200)
------------ ------------
Net cash provided by (used
in) investing activities 298,096 (15,462,771)
------------ ------------
Cash flows from financing activities:
Net proceeds from stock offering -- 28,081,638
Cash dividends paid (459,739) (190,882)
Purchase of shares by RRP (1,745,700) --
Purchase of treasury stock (2,701,851) (1,894,481)
------------ ------------
Net cash (used in) provided
by investing activities (4,907,290) 25,996,275
------------ ------------
Net (decrease) increase in
cash (4,289,733) 10,954,225
Cash at beginning of period 10,954,225 --
------------ ------------
Cash at end of period $ 6,664,492 10,954,225
============ ============
F-46
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses,
gains and losses) in a full set of general purpose financial statements.
SFAS 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 does not require a specific format for the
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital the
equity section of a statement of financial position. SFAS 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required. Management has not yet determined the impact of the adoption
on its reporting of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). This statement established
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established
standards for related disclosures about products and services, geographic
areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. The adoption of
SFAS 131 is not expected to change the Company's reporting requirements.
F-47
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data for the years ended
December 31, 1997 and 1996 (dollars in thousands).
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Year ended December 31, 1997:
Interest income $4,422 4,883 5,102 5,095
Interest expense 2,213 2,549 2,812 2,857
------ ------ ------ ------
Net interest income
before provision
for loan losses 2,209 2,334 2,290 2,238
Provision for loan losses 175 125 100 75
------ ------ ------ ------
Net interest income
after provision
for loan losses 2,034 2,209 2,190 2,163
Non-interest income (loss) 67 57 80 85
Non-interest expense 1,308 1,393 1,489 1,518
------ ------ ------ ------
Net income before
taxes 793 873 781 730
Federal and state income tax
expense 289 303 291 177
------ ------ ------ ------
Net income $ 504 570 490 553
====== ====== ====== ======
Basic earnings per share .18 .19 .19 .22
====== ====== ====== ======
Basic weighted average shares 2,761 2,644 2,550 2,501
====== ====== ====== ======
Diluted earnings per share .18 .19 .19 .21
====== ====== ====== ======
Diluted weighted average shares 2,761 2,645 2,606 2,571
====== ====== ====== ======
F-48
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
Year ended December 31, 1996:
Interest income $3,999 4,356 4,388 4,495
Interest expense 2,359 2,346 2,247 2,220
------ ------ ------ ------
Net interest income
before provision
for loan losses 1,640 2,010 2,141 2,275
Provision for loan losses 125 150 325 125
------ ------ ------ ------
Net interest income
after provision
for loan losses 1,515 1,860 1,816 2,150
Non-interest income 49 56 39 57
Non-interest expense 1,241 1,145 2,487 1,467
------ ------ ------ ------
Net income (loss) before
tax expense (benefit) 323 771 (632) 740
Federal and state income tax
expense (benefit) 117 277 (226) 278
------ ------ ------ ------
Net income (loss) $ 206 494 (406) 462
====== ====== ====== ======
Basic earnings per share -- .16 (.13) .16
====== ====== ====== ======
Basic weighted average shares -- 3,174 3,174 2,825
====== ====== ====== ======
Diluted earnings per share -- .16 (.13) .16
====== ====== ====== ======
Diluted weighted average shares -- 3,174 3,174 2,825
====== ====== ====== ======
F-49
1ST BERGEN BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Consent of Independent Accountants
The Board of Directors
1st Bergen Bancorp
We consent to the use of our report dated February 2, 1998 relating to the
consolidated statements of financial condition of 1st Bergen Bancorp as of
December 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, included herein, and to the reference to our
firm under the heading "Experts" in the Proxy Statement of 1st Bergen Bancorp.
KPMG LLP
Short Hills, New Jersey
December 30, 1998
F-50
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
KEARNY FEDERAL SAVINGS BANK
1ST BERGEN BANCORP AND
SOUTH BERGEN SAVINGS BANK
AGREEMENT AND PLAN OF REORGANIZATION
TABLE OF CONTENTS
Page
----
Recitals............................................................... 1
ARTICLE 1
TERMS OF THE REORGANIZATION
1.1 The Reorganization..................................................... 2
(a) Bancorp Merger.................................................. 2
(b) Bank Merger..................................................... 2
(c) Merger of Bancorp into Kearny................................... 2
(d) Effect on Outstanding Shares.................................... 2
(e) Resulting Company................................................3
1.2 Adoption and Execution and Delivery of Documents providing
for the Reorganization................................................. 3
1.3 Effective Time and Closing of the Reorganization....................... 3
1.4 Modification of Structure.............................................. 3
1.5 Charter, Bylaws, Directors, Officers and Name of the
Resulting Company.......................................................3
(a) Charter......................................................... 3
(b) Bylaws.......................................................... 4
(c) Directors and Officers.......................................... 4
(d) Advisory Board.................................................. 4
(e) Name............................................................ 4
1.6 Availability of Information............................................ 4
1.7 Bancorp Stock Options.................................................. 4
1.8 Employment Agreements.................................................. 4
1.9 Employees.............................................................. 4
1.10 Management Stock Bonus Plan.............................................5
1.11 ESOP and Directors Retirement Plan......................................5
1.12 Mechanics of Payment of Consideration.................................. 5
(a) Surrender of Certificates....................................... 5
(b) Stock Transfer Books .......................................... 6
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF KEARNY FEDERAL SAVINGS BANK
2.1 Organization and Corporate Authority................................... 6
2.2 Authorization, Execution and Delivery; Reorganization Agreement
Not in Breach ......................................................... 7
2.3 No Legal Bar........................................................... 7
2.4 Government Approvals................................................... 7
2.5 Kearny Financial Statements .......................................... 8
2.6 Litigation............................................................. 8
ARTICLE 2
REPRESENTATION AND WARRANTIES OF KEARNY FEDERAL SAVINGS BANK
2.7 Compliance with Laws................................................... 8
2.8 Material Contract Defaults............................................. 8
2.9 Disclosure............................................................. 9
2.10 Delays................................................................. 9
2.11 Corporate Approval..................................................... 9
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BANCORP AND STOCK BANK
3.1 Organization and Qualification of Bancorp and Subsidiaries............. 9
3.2 Authorization, Execution and Delivery; Reorganization Agreement
Not in Breach.......................................................... 9
3.3 No Legal Bar...........................................................10
3.4 Government and Other Approvals.........................................10
3.5 Licenses, Franchises and Permits.......................................10
3.6 Charter Documents......................................................11
3.7 Bancorp Financial Statements...........................................11
3.8 Absence of Certain Changes.............................................11
3.9 Deposits...............................................................12
3.10 Properties.............................................................12
3.11 Condition of Fixed Assets and Equipment................................13
3.12 Tax Matters............................................................13
3.13 Litigation.............................................................13
3.14 Environmental Materials................................................14
3.15 Insurance..............................................................14
3.16 Books and Records......................................................14
3.17 Capitalization of Bancorp..............................................15
3.18 Sole Agreement.........................................................15
3.19 Disclosure.............................................................15
3.20 Absence of Undisclosed Liabilities.....................................16
3.21 Allowance for Possible Loan or REO Losses..............................16
3.22 Loan Portfolio.........................................................16
(a) Enforceability..................................................17
(b) No Modifications................................................17
(c) Owner...........................................................17
(d) Collateral Documents............................................17
(e) Litigation......................................................17
(f) Participation...................................................17
3.23 Compliance with Laws...................................................17
3.24 Employee Benefit Plans.................................................18
3.25 Material Contracts.....................................................19
3.26 Material Contract Defaults.............................................19
3.27 Reports................................................................19
3.28 Exchange Act and Nasdaq Small Cap Market...............................19
ii
3.29 Statements True and Correct............................................20
3.30 Investment Securities..................................................20
3.31 Certain Regulatory Matters.............................................20
3.32 Corporate Approval.....................................................20
3.33 Broker's and Finder's Fees.............................................21
3.34 Year 2000 Readiness....................................................21
3.35 Liquidation Account....................................................21
3.36 Derivatives Contracts..................................................21
ARTICLE 4
COVENANTS OF KEARNY
4.1 Regulatory and Other Approvals.........................................21
4.2 Preparation of Regulatory Applications.................................22
4.3 Employee Benefits......................................................22
4.4 Notification...........................................................23
4.5 Tax Representations....................................................23
4.6 Directors and Officers Indemnification and Insurance Coverage..........23
4.7 Conduct of Kearny Prior to the Effective Time..........................24
ARTICLE 5
COVENANTS OF BANCORP AND STOCK BANK
5.1 Preparation of Registration Statement and Applications For
Required Consent.......................................................24
5.2 Conduct of Business -- Affirmative Covenants...........................25
5.3 Conduct of Business -- Negative Covenants..............................27
5.4 Conduct of Business -- Certain Actions.................................29
5.5 New Jersey Environmental Notice........................................30
5.6 Voting Agreement.......................................................30
5.7 Liquidation Account Computations.......................................30
ARTICLE 6
CONDITIONS TO CLOSING
6.1 Conditions to the Obligations of Bancorp...............................30
(a) Performance.....................................................30
(b) Representations and Warranties..................................30
(c) Documents.......................................................30
(d) Opinion of Kearny's Counsel.....................................31
(e) Fairness Opinion................................................31
6.2 Conditions to the Obligations of Kearny................................32
(a) Performance.....................................................32
(b) Representations and Warranties..................................32
(c) Documents.......................................................32
(d) Inspections Permitted...........................................32
(e) No Material Adverse Change......................................33
(f) Opinion of Bancorp's Counsel....................................33
iii
(g) Other Business Combinations, Etc................................33
(h) Regulatory Approvals............................................33
(i) Bancorp Stockholder Approval....................................33
6.3 Conditions to Obligations of All Parties...............................34
(a) No Pending or Threatened Claims.................................34
(b) Governmental Approvals and Acquiescence Obtained................34
(c) Approval of Stockholders........................................34
(d) Effectiveness of Registration Statement.........................34
ARTICLE 7
TERMINATION
7.1 Termination............................................................34
7.2 Effect of Termination..................................................35
ARTICLE 8
GENERAL PROVISIONS
8.1 Notices................................................................35
8.2 Governing Law..........................................................36
8.3 Counterparts...........................................................36
8.4 Publicity..............................................................36
8.5 Entire Agreement.......................................................37
8.6 Severability...........................................................37
8.7 Modifications, Amendments and Waivers..................................37
8.8 Interpretation.........................................................37
8.9 Payment of Expenses....................................................38
8.10 Attorneys' Fees........................................................38
8.11 No Survival of Representations and Warranties..........................38
8.12 No Waiver..............................................................38
8.13 Remedies Cumulative....................................................38
8.14 Confidentiality........................................................38
iv
ATTACHMENTS
Exhibit 5.6 Voting Agreement
Exhibit G - Stock Option Agreement
v
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Reorganization
Agreement"), dated as of October 14, 1998, is entered into by and among Kearny
Federal Savings Bank ("Kearny" or the "Surviving Corporation"), a mutual savings
bank incorporated and existing under the laws of the United States whose
executive offices are located at 614 Kearny Avenue, Kearny, New Jersey 07032;
1st Bergen Bancorp ("Bancorp"), a corporation organized and existing under the
laws of the State of New Jersey, which is a registered savings and loan holding
company and whose principal offices are located at 250 Valley Boulevard,
Wood-Ridge, New Jersey 07075; and South Bergen Savings Bank ("Stock Bank"), a
federal savings bank, chartered and existing under the laws of the United
States, whose main office is located at 250 Valley Boulevard, Wood-Ridge, New
Jersey 07075 and which is a wholly owned subsidiary of Bancorp.
Kearny, Bancorp and Stock Bank are sometimes referred to herein as the
"Parties."
RECITALS
A. Bancorp is the beneficial owner and holder of record of 1,000 shares of
no par value per share common stock, of Stock Bank, which constitute all of the
shares of common stock of Stock Bank issued and outstanding (the "Stock Bank
Common Stock").
B. The Boards of Directors of Bancorp and Stock Bank deem it desirable and
in the best interests of Bancorp and Stock Bank and the shareholders of Bancorp
(the "Bancorp Shareholders") that Stock Bank be merged with and into Kearny
(which would survive the merger as the Surviving Corporation, as defined herein)
on the terms and subject to the conditions set forth in this Reorganization
Agreement and in the manner provided in this Reorganization Agreement and the
Plans of Merger attached hereto.
C. The Board of Directors of Kearny deems it desirable and in the best
interests of Kearny that Stock Bank be merged with and into Kearny on the terms
and subject to the conditions set forth in this Reorganization Agreement and in
the manner provided in this Reorganization Agreement and the Plans of Merger.
D. The Parties desire for Kearny to acquire Bancorp pursuant to the
transactions set forth in this Reorganization Agreement on or after the
Effective Time.
E. Pursuant to this Reorganization Agreement, each share of Bancorp Common
Stock outstanding at the Effective Time will be converted into cash in the
amount of $24.00 (the "Cash Merger Consideration"). Holders of options to
purchase Bancorp Common Stock will be entitled to receive cash in an amount
equal to the difference between the Cash Merger Consideration and the exercise
price.
F. It is agreed that the number of shares of Bancorp Common Stock
(including 105,720 shares issued under any restricted or management stock bonus
plan) outstanding is 2,585,243. In addition, there are currently outstanding
options to purchase 264,050 shares of Bancorp Common Stock at $13.975 per share.
G. Concurrently with the execution and delivery of this Reorganization
Agreement, and as
a condition and inducement to Kearny's willingness to enter into this
Reorganization Agreement, Kearny and the Bancorp have entered into a Stock
Option Agreement (the "Option Agreement") pursuant to which Bancorp has granted
to Kearny an option to purchase shares of Bancorp's common stock, no par value
per share, upon the terms and conditions therein contained.
NOW THEREFORE, in consideration of the foregoing premises and the mutual
representations, warranties, covenants and agreements herein contained and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Parties agree as follows:
AGREEMENT
ARTICLE 1
TERMS OF THE REORGANIZATION
1.1 The Reorganization. Subject to the terms and conditions of this
Reorganization Agreement, and in accordance with the provisions of the laws of
the State of New Jersey, and the rules and regulations of the Office of Thrift
Supervision ("OTS"), the Parties hereby agree that the following corporate
transactions (collectively referred to herein as the "Reorganization") shall
occur substantially concurrently as set forth below in accordance with
applicable laws and regulations and the provisions of this Reorganization:
(a) Bancorp Merger. Pursuant to this Reorganization Agreement and an
agreement and plan of merger, among Kearny, Bancorp and a to-be-formed New
Jersey corporation ("Merger Sub") which is to be wholly owned by Kearny, Merger
Sub shall be merged with and into Bancorp pursuant to the provisions of the New
Jersey Business Corporation Act ("NJBCA") (the "Bancorp Merger") and, in
connection therewith, each share of common stock, no par value per share, of
Bancorp ("Bancorp Common Stock") outstanding immediately prior to the effective
time of the Bancorp Merger shall be canceled in exchange for the right to
receive the Cash Merger Consideration specified in this Reorganization Agreement
and an agreement and plan of merger, with the result that Bancorp will become a
wholly owned subsidiary of Kearny.
(b) Bank Merger. Pursuant to this Reorganization Agreement and an
agreement and plan of merger, between Stock Bank and Kearny, Stock Bank shall
merge with and into Kearny (the "Bank Merger") simultaneously with or
immediately following consummation of the transactions referred to in Section
1.1(a) hereof, with the result that Kearny will acquire all of the assets and
liabilities of Stock Bank and Stock Bank shall cease to exist.
(c) Merger of Bancorp into Kearny. Simultaneously with or immediately
following consummation of the transactions referred to in Sections 1.1(a) and
(b) hereof, Bancorp shall merge with and into Kearny with the result that Kearny
shall acquire all of the assets and liabilities of Bancorp and Bancorp shall
cease to exist.
(d) Effect on Outstanding Shares. By virtue of the Bancorp Merger,
automatically and
-2-
without any action on the part of the holder thereof, each share of Bancorp
Common Stock issued and outstanding at the Effective Time (other than (i) shares
held directly or indirectly by Kearny; (ii) shares held as treasury stock of
Bancorp and (iii) unallocated shares held in Bancorp's Management Stock Bonus
Plan (the "MSBP")) shall become and be converted into the right to receive
$24.00 in cash without interest (the "Cash Merger Consideration"). At the
Effective Time, each share of Bancorp Common Stock held directly or indirectly
by Kearny (if any), and shares held as treasury stock of Bancorp and unallocated
shares held in Bancorp's MSBP, shall be canceled and retired and cease to exist,
and no exchange or payment shall be made with respect thereto. Simultaneously,
as of the Effective Time, each share of Merger Sub shall be converted into
shares of Bancorp.
(e) Resulting Company. Upon the consummation of the Reorganization, the
separate existence of Bancorp and Stock Bank shall cease, and Kearny shall
continue as the surviving institution in the Bank Merger. The plan of merger for
the Bank Merger, the Bancorp Merger and the merger of Bancorp into Kearny are
collectively referred to herein as the "Plans of Merger."
1.2 Adoption and Execution and Delivery of Documents providing for
the Reorganization. Promptly following the formation of the Merger Sub referred
to in Section 1.1(a) hereof, Bancorp shall execute and deliver an Agreement of
Merger and Kearny and Merger Sub shall execute and deliver such Agreement of
Merger, as applicable. Promptly upon consummation of the transactions
contemplated by Section 1.1(a) hereof, Kearny and Stock Bank shall execute and
deliver an Agreement of Merger and Bancorp shall adopt such agreement in its
capacity as the sole stockholder of Stock Bank and Bancorp shall approve the
agreement in its capacity as the owner of more than two-thirds of the
outstanding shares of Stock Bank. Promptly upon consummation of the transactions
contemplated in Sections 1.1(a) and (b) hereof, Kearny shall adopt the Agreement
of Merger in its capacity as sole stockholder of Bancorp.
1.3 Effective Time and Closing of the Reorganization. The term
"Effective Time" shall mean the date and time that the Bancorp Merger and Bank
Merger become effective in accordance with applicable laws and regulations.
Kearny will file all applications or notices that are necessary to consummate
the Reorganization with state and Federal regulatory agencies within sixty (60)
days, or as soon thereafter as practicable after the date of this Reorganization
Agreement. Except to the extent otherwise contemplated hereby, a closing of the
Reorganization ("Closing") shall take place at the executive offices of Kearny
within thirty (30) days after the satisfaction or waiver of all conditions
and/or obligations (other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing) contained in Articles
VI, VII and VIII of this Reorganization Agreement, or at such other place, at
such other time or on such date as the Parties may mutually agree upon ("Closing
Date"). At the Closing, there shall be delivered the opinions, certificates and
other documents and instruments required to be delivered under this
Reorganization Agreement.
1.4 Modification of Structure. Notwithstanding any provision of this
Reorganization to the contrary, Kearny may elect, subject to the filing of all
necessary applications and the receipt of all required regulatory approvals, to
modify the structure of the transactions contemplated hereby so long as (i)
there are no material adverse federal income tax consequences to the
stockholders of Bancorp as a result of such modification, (ii) the consideration
to be paid to holders
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of Bancorp Common Stock under this Reorganization is not thereby changed in
kind, or reduced in amount solely because of such modification, and (iii) such
modification will not be likely to materially delay or jeopardize receipt of any
required regulatory approvals or stockholder approval required hereunder.
1.5 Charter, Bylaws, Directors, Officers and Name of the Resulting
Company.
(a) Charter. At and after the Effective Time, the Charter of
Kearny, as in effect immediately prior to the Effective Time, shall continue to
be the Charter of Kearny as the Resulting Company, unless and until amended
thereafter as provided by law and the terms of such Charter.
(b) Bylaws. At and after the Effective Time, the Bylaws of
Kearny, as in effect immediately prior to the Effective Time, shall continue to
be the Bylaws of Kearny as the Resulting Company, unless and until amended or
repealed as provided by law, the Charter of Kearny and such Bylaws.
(c) Directors and Officers. The directors of Kearny in office
immediately prior to the Effective Time of the Bank Merger shall continue to be
the directors and officers of the Resulting Company, to hold office as provided
in the Charter and Bylaws of the Resulting Company, unless and until their
successors shall have been elected or appointed and shall have been qualified or
until they shall have been removed in the manner provided in said Charter and
Bylaws.
(d) Advisory Board. The Resulting Company shall appoint James
W. Mason, Richard R. Masch, Bernard Leung, Robert C. Miller and Kathleen Fisher
to an Advisory Board of Kearny for a period of at least two years. Each member
of the Advisory Board will receive annual board fees of not less than 75% of the
annual retainer in effect as of June 30, 1998 for the members of the Board of
Directors of Bancorp.
(e) Name. The name of the Resulting Company following the
Reorganization shall continue to be: Kearny Federal Savings Bank.
1.6 Availability of Information. Promptly after the execution by the
Parties of this Reorganization Agreement, Bancorp shall provide to Kearny, its
officers, employees, agents, and representatives access, on reasonable notice
and during customary business hours, to the books, records, properties and
facilities of Bancorp and Stock Bank and shall use its best efforts to cause its
officers, employees, agents and representatives to cooperate with any reasonable
request for information.
1.7 Bancorp Stock Options. As of the date of this Reorganization
Agreement, there are 264,050 validly issued, outstanding and currently
exercisable options to purchase shares of Bancorp Common Stock (the "Bancorp
Stock Options"), and no other options, rights, warrants, scrip or similar rights
to purchase shares of Bancorp Common Stock are issued and outstanding. At the
Effective Time, all issued and outstanding Bancorp Stock Options will be
converted to cash in accordance with the terms of this Reorganization Agreement.
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1.8 Employment Agreements and Retention of Officers. It is
acknowledged that Bancorp and Bergen Bank currently have outstanding, three
separate employment agreements with William M. Brickman, Albert E. Gossweiler
and Robert C. Maison ("Employment Agreements"). Prior to the closing of the
transaction, Kearny will offer to enter into employment agreements with William
M. Brickman and Albert E. Gossweiler ("Kearny Employment Agreements") in a form
similar to that detailed at Schedule 1.8, whereby such employees will relinquish
all rights under the Employment Agreements in exchange for the rights under the
Kearny Employment Agreements. Prior to the closing of the transaction, Kearny
will offer to enter into a consulting agreement with Robert C. Maison ("Kearny
Consulting Agreement") in a form similar to that detailed at Schedule 1.8,
whereby such employee will relinquish all rights under his Employment Agreement
with Bancorp and Bergen Bank in exchange for the rights under the Kearny
Consulting Agreement. Further, at the Closing, the Resulting Company intends to
hire Erika Sacher in a position that allows her to maximize contributions to
Kearny and at such employee's salary in effect on the Closing Date. Upon
resignation, subsequent to Closing Date, of employment from Kearny by Vice
President Robert O'Neil, Kearny will use its best efforts to provide continued
health insurance benefits to Mr. O'Neil, with the premiums to be paid by Mr.
O'Neil.
1.9 Employees. Kearny will attempt to retain qualified employees of
Bancorp subject to the needs of its business. Any employee who involuntarily is
terminated without cause after the Effective Time will be provided a severance
payment, to be mutually agreed upon by the Parties. The Parties will mutually
develop a "success" bonus plan, which will pay a cash bonus to certain key
employees who are not covered by an employment agreement for remaining employed
at Stock Bank from the signing of this Reorganization Agreement through three
months after the Closing.
1.10 Management Stock Bonus Plan. All shares currently allocated to
employees or directors under any restricted stock plan or Management Stock Bonus
Plan ("MSBP") will be outstanding and exchanged for the Cash Merger
Consideration. Kearny acknowledges that Bancorp has outstanding 105,720 MSBP
shares allocated and vested as of the Closing Date.
1.11 Employee Stock Ownership Plan (the "ESOP") and Directors
Retirement Plan. Upon the Effective Time, the ESOP will exchange all shares held
by the ESOP Trust to Kearny for the Cash Merger Consideration, pay off any
remaining loan, distribute the proceeds to the employees of Stock Bank in
accordance with the terms of the ESOP and terminate the Plan. Stock Bank agrees
to stop accruing benefits under its Directors' Retirement Plan (the "Retirement
Plan") during the 1998 calendar year and, prior to the Effective Time, make a
lump sum distribution to each non-officer director participating in the
Retirement Plan in an amount approximately equal to the present value of the
payments expected to be made under the Retirement Plan. The total expense of
terminating this Retirement Plan, which is disclosed in Bancorp Schedule 1.11,
will not exceed $317,000.
1.12 Mechanics of Payment of Consideration.
(a) (i) Surrender of Certificates. Within five business days
after the Effective Time, the Exchange Agent shall deliver to each holder of
Bancorp Common Stock on Record Date (the "Bancorp Record Holders") who have not
previously submitted properly completed Election
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Forms, accompanied by all certificates (or other appropriate documentation) in
respect of all shares of Bancorp Common Stock held of record by such Bancorp
Record Holders, such materials and information deemed necessary by the Exchange
Agent to advise the Bancorp Record Holders of the procedures required for proper
surrender of their certificates evidencing and representing shares of the
Bancorp Common Stock in order for the Bancorp Record Holders to receive the Cash
Merger Consideration to which they are entitled as provided herein. Such
materials shall include, without limitation, a letter of transmittal, an
instruction sheet, and a return mailing envelope addressed to the Exchange Agent
(collectively the "Shareholder Materials"). All Shareholder Materials shall be
sent by United States mail to the Bancorp Record Holders at the addresses set
forth on a certified shareholder list to be delivered by Bancorp to Kearny at
the Closing (the "Shareholder List"). Kearny shall also make appropriate
provisions with the Exchange Agent to enable Bancorp Record Holders to obtain
the Shareholder Materials from, and to deliver the certificates formerly
representing shares of Bancorp Common Stock to, the Exchange Agent in person,
commencing on or not later than the second business day following the Closing
Date. Upon receipt of the appropriate Shareholder Materials, together with the
certificates formerly evidencing and representing all of the shares of Bancorp
Common Stock which were validly held of record by such holder, the Exchange
Agent shall take prompt action to process such certificates formerly evidencing
and representing shares of Bancorp Common Stock received by it (including the
prompt return of any defective submissions with instructions as to those actions
which may be necessary to remedy any defects) and to mail to the former Bancorp
Record Holders in exchange for the certificate(s) surrendered by them, the Cash
Merger Consideration to be issued or paid for each such Bancorp Record Holder's
shares pursuant to the terms hereof. After the Effective Time and until properly
surrendered to the Exchange Agent, each outstanding certificate or certificates
which formerly evidenced and represented the shares of Bancorp Common Stock of a
Bancorp Record Holder, subject to the provisions of this Section, shall be
deemed for all corporate purposes to represent and evidence only the right to
receive the Cash Merger Consideration into which such Bancorp Record Holder's
shares of Bancorp Common Stock were converted and aggregated at the Effective
Time. Unless and until the outstanding certificate or certificates, which
immediately prior to the Effective Time evidenced and represented the Bancorp
Record Holder's Bancorp Common Stock shall have been properly surrendered as
provided above, the Cash Merger Consideration issued or payable to the Bancorp
Record Holder(s) of the canceled shares as of any time after the Effective Time
shall not be paid to the Bancorp Record Holder(s) of such certificate(s) until
such certificates shall have been surrendered in the manner required. Each
Bancorp Record Holder will be responsible for all federal, state and local taxes
which may be incurred by him on account of his receipt of the Cash Merger
Consideration to be paid in the Merger. The Bancorp Record Holder(s) of any
certificate(s) which shall have been lost or destroyed may nevertheless, subject
to the provisions of this Article, receive the Cash Merger Consideration to
which each such Bancorp Record Holder is entitled, provided that each such
Bancorp Record Holder shall deliver to Kearny and to the Exchange Agent: (i) a
sworn statement certifying such loss or destruction and specifying the
circumstances thereof and (ii) a lost instrument bond in form satisfactory to
Kearny and the Exchange Agent which has been duly executed by a corporate surety
satisfactory to Kearny and the Exchange Agent, indemnifying the Resulting
Company, Kearny, the Exchange Agent (and their respective successors) to their
satisfaction against any loss or expense which any of them may incur as a result
of such lost or destroyed certificates being thereafter presented. Any costs or
expenses which may arise from such replacement procedure, including the premium
on the lost instrument bond, shall be paid by the Bancorp Record Holder.
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(ii) All exercisable stock options as detailed at Schedule
1.12, shall be converted to a right to receive cash equal to the difference
between the Cash Merger Consideration and the Option Exercise Price.
(b) Stock Transfer Books. At the Effective Time, the stock transfer
books of Bancorp shall be closed and no transfer of shares of Bancorp Common
Stock shall be made thereafter.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF KEARNY FEDERAL SAVINGS BANK
Except as otherwise disclosed in one or more schedules (collectively
the "Kearny Schedules") dated as of the date hereof and delivered concurrently
with this Reorganization Agreement, both as of the date hereof and as of the
Effective Time, Kearny represents and warrants to Bancorp and Stock Bank as
follows:
2.1 Organization and Corporate Authority. Kearny is a corporation
duly organized, validly existing and in good standing under the laws of the
United States, and Kearny (i) has all requisite corporate power and authority to
own, operate and lease its material properties and carry on its businesses as
currently being conducted; (ii) is in good standing and is duly qualified to do
business in each jurisdiction where the character of its properties owned or
held under lease or the nature of its business is such that failure to be so
qualified would have a material adverse effect on Kearny; and (iii) has in
effect all federal, state, local and foreign governmental authorizations,
permits and licenses necessary for them to own or lease their properties and
assets and to carry on their businesses as they are currently being conducted.
The Charter and Bylaws of Kearny is in full force and effect.
2.2 Authorization, Execution and Delivery; Reorganization Agreement
Not in Breach.
(a) Kearny has all requisite corporate power and authority to
execute and deliver this Reorganization Agreement and the Plans of Merger and to
consummate the transactions contemplated hereby. The execution and delivery of
this Reorganization Agreement and the Plans of Merger and the consummation of
the proposed transactions have been duly authorized by at least a two-thirds
majority of the entire Board of Directors of Kearny and no other corporate
proceedings on the part of Kearny is necessary to authorize the execution and
delivery of this Reorganization Agreement and the Plans of Merger and the
consummation of the transactions contemplated hereby and thereby. This
Reorganization Agreement and all other agreements and instruments herein
contemplated to be executed by Kearny have been (or upon execution will have
been) duly executed and delivered by Kearny and constitute (or upon execution
will constitute) legal, valid and enforceable obligations of Kearny, subject, as
to enforceability, to applicable bankruptcy, insolvency, receivership,
conservatorship, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and to the application of equitable
principles and judicial discretion.
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(b) The execution and delivery of this Reorganization
Agreement and the Plans of Merger, the consummation of the transactions
contemplated hereby and thereby and the fulfillment of the terms hereof and
thereof will not result in a material violation or breach of any of the terms or
provisions of, or constitute a material default under (or an event which, with
the passage of time or the giving of notice or both, would constitute such a
material default under), or conflict with, or permit the acceleration of any
material obligation under, any material mortgage, lease, covenant, agreement,
indenture or other instrument to which Kearny is a party or by which it or its
property or any of its assets are bound, the Charter and Bylaws of Kearny, or
any material judgment, decree, order, regulatory letter of understanding or
award of any court, governmental body or arbitrator by which Kearny is bound; or
any material permit, concession, grant, franchise, license, law, statute,
ordinance, rule or regulation applicable to Kearny or its properties, or result
in the creation of any material lien, claim, security interest, encumbrance,
charge, restriction or right of any third party of any kind whatsoever upon the
property or assets of Kearny, except that the Government Approvals, as defined
below, shall be required in order for Kearny to consummate the Bank Merger.
2.3 No Legal Bar. Kearny is not a party to, subject to or bound by
any material agreement, judgment, order, regulatory letter of understanding,
writ, prohibition, injunction or decree of any court or other governmental
authority or body of competent jurisdiction or any law which would prevent the
execution of this Reorganization Agreement or the Plans of Merger by Kearny, the
delivery thereof to Bancorp and Stock Bank or the consummation of the
transactions contemplated hereby and thereby and no action or proceeding is
pending against Kearny in which the validity of this Reorganization Agreement,
any of the transactions contemplated hereby or any action which has been taken
by any of the Parties in connection herewith or in connection with any of the
transactions contemplated hereby, is at issue.
2.4 Government Approvals. No consent, approval, order or
authorization of, or registration, declaration or filing with, any federal,
state or local governmental authority is required to be made or obtained by
Kearny in connection with the execution and delivery of this Reorganization
Agreement or the consummation of the transactions contemplated hereby by Kearny
except for the prior approval of the Office of Thrift Supervision ("OTS") under
the Home Owners' Loan Act of 1933, as amended and recodified ("HOLA"), the
Federal Deposit Insurance Corporation ("FDIC") and any other government
approvals that may be necessary (the "Government Approvals"). Kearny is not
aware of any facts, circumstances or reasons why such Government Approvals
should not be forthcoming or which would prevent or hinder such approvals from
being obtained.
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2.5 Kearny Financial Statements. Kearny has delivered or will
deliver to Bancorp copies of the statements of financial condition of Kearny as
of June 30 for the fiscal years 1997 and 1998, and the related statements of
operations, changes in equity and cash flows for the fiscal years 1996 through
1998, inclusive, in each case accompanied by the audit report of Radics & Co.,
LLC. The statements of financial condition of Kearny referred to herein
(including the related notes, where applicable) fairly present the financial
condition of Kearny as of the respective dates set forth therein, and the
related statements of operations, changes in equity and cash flows (including
the related notes, where applicable) fairly present the results of the
operations, changes in equity and cash flows of Kearny for the respective
periods or as of the respective dates set forth therein, in each case in
conformity with generally accepted accounting principles ("GAAP") consistently
applied.
2.6 Litigation. Except as set forth in Schedule 2.6 hereto, there is
no action, suit or proceeding pending against Kearny, or to the best knowledge
of Kearny, threatened against or affecting Kearny, or any of its assets, before
any court or arbitrator or any governmental body, agency or official that would,
if decided against Kearny, have a material adverse impact on the business,
properties, assets, liabilities or condition (financial or other) of Kearny and
that are not reflected in the Kearny Financial Statements.
2.7 Compliance with Laws.
(a) Kearny is in compliance with all laws, rules, regulations,
reporting and licensing requirements, and orders applicable to its business or
employees conducting its business (including, but not limited to, those relating
to consumer disclosure and currency transaction reporting) the breach or
violation of which would reasonably be expected to have a material adverse
effect on the financial condition or operations of Kearny, or which would
reasonably be expected to subject Kearny or any of its directors or officers to
civil money penalties; and
(b) Kearny is not a party to any cease and desist order,
written agreement or memorandum of understanding with, or a party to any
commitment letter or similar undertaking to, or is subject to any order to
directive by, or is a recipient of any extraordinary supervisory letter from, or
has adopted any board resolutions at the request of, federal or state
governmental authorities (the "Regulatory Authorities") charged with the
supervision or regulation of the operations of any of them not has it been
advised by any such government authority that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, directive, written agreement, memorandum or understanding,
extraordinary supervisory letter, commitment letter, board resolutions or
similar undertaking.
2.8 Material Contract Defaults. Kearny is not in default in any
respect under any material contract, agreement, commitment, arrangement, lease,
insurance policy, or other instrument to which it is a party or by which its
respective assets, business, or operations may be bound or affected or under
which it or its respective assets, business, or operations receives benefits,
and which default would reasonably be expected to have either individually or in
the aggregate a material adverse effect on Kearny and there has not occurred any
event that, with the lapse of time or the giving of notice or both, would
constitute such a default.
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2.9 Disclosure. The information concerning, and the representations
or warranties made by Kearny, as set forth in this Reorganization Agreement, or
in any document, statement, certificate or other writing furnished or to be
furnished by Kearny to Bancorp and Stock Bank pursuant hereto, do not and will
not contain any untrue statement of a material fact or omit and will not omit to
state a material fact required to be stated herein or therein which is necessary
to make the statements and facts contained herein or therein, in light of the
circumstances under which they were or are made, not false or misleading.
2.10 Delays. Kearny is not aware of any matter that could cause a
delay in receiving the approval required by this Reorganization.
2.11 Corporate Approval. At a duly constituted meeting of the Board
of Directors of Kearny directors constituting at least two-thirds of the
Directors granted their prior approval to the Reorganization Agreement and the
transactions contemplated thereby.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BANCORP AND STOCK BANK
Except as otherwise disclosed in one or more schedules (the "Bancorp
Schedule(s)") dated as of the date hereof and delivered concurrently with this
Reorganization Agreement, both as of the date hereof and as of the Effective
Time, each of Bancorp and Stock Bank represents and warrants to Kearny as
follows:
3.1 Organization and Qualification of Bancorp and Subsidiaries.
Bancorp is a corporation duly organized, validly existing and in good standing
under the laws of the State of New Jersey and (i) has all requisite corporate
power and authority to own, operate and lease its properties and to carry on its
business as it is currently being conducted; (ii) is in good standing and is
duly qualified to do business in each jurisdiction where the character of its
properties owned or held under lease or the nature of its business is such that
a failure to be so qualified would have a material adverse effect on Bancorp and
Stock Bank taken as a whole; and (iii) is registered as a savings and loan
holding company with the OTS. Schedule 3.1 of the Bancorp Schedules contains a
list of all of Bancorp's direct and indirect subsidiaries (the "Bancorp
Subsidiaries"). Stock Bank is a federally chartered stock savings bank, duly
organized, validly existing and in good standing under the laws of the United
States and engages only in activities (and holds properties only of the types)
permitted by the rules and regulations promulgated by the OTS and the FDIC for
insured depository institutions. Stock Bank's deposit accounts are insured by
the Savings Association Insurance Fund (the "SAIF") as administered by the FDIC
to the fullest extent permitted under applicable law.
3.2 Authorization, Execution and Delivery; Reorganization
Agreement Not in Breach.
(a) Bancorp and Stock Bank have all requisite corporate power
and authority to execute and deliver this Reorganization Agreement and the Plans
of Merger and to consummate the transactions contemplated hereby. The execution
and delivery of this Reorganization
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Agreement and the Plans of Merger and the consummation of the proposed
transactions have been duly authorized by at least a majority of the entire
Boards of Directors of both Bancorp and Stock Bank and no other corporate
proceedings on the part of Bancorp and Stock Bank are necessary to authorize the
execution and delivery of this Reorganization Agreement and the Plans of Merger
and the consummation of the transactions contemplated hereby and thereby. This
Reorganization Agreement and all other agreements and instruments herein
contemplated to be executed by Bancorp and Stock Bank have been (or upon
execution will have been) duly executed and delivered by Bancorp and Stock Bank
and constitute (or upon execution will constitute) legal, valid and enforceable
obligations of Bancorp and Stock Bank, subject, as to enforceability, to
applicable bankruptcy, insolvency, receivership, conservatorship,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and to the application of equitable principles and
judicial discretion.
(b) The execution and delivery of this Reorganization
Agreement and the Plans of Merger, the consummation of the transactions
contemplated hereby and thereby, and the fulfillment of the terms hereof and
thereof will not result in a material violation or breach of any of the terms or
provisions of, or constitute a material default under (or an event which, with
the passage of time or the giving of notice, or both, would constitute such a
default under), or conflict with, or permit the acceleration of, any material
obligation under, any material mortgage, lease, covenant, agreement, indenture
or other instrument to which Bancorp or any Bancorp Subsidiary is a party or by
which Bancorp or any Bancorp Subsidiary is bound, the Certificate of
Incorporation and Bylaws of Bancorp or the Charter and Bylaws of Stock Bank; or
any material judgment, decree, order, regulatory letter of understanding or
award of any court, governmental body, authority or arbitrator by which Bancorp
or any Bancorp Subsidiary is bound, or any material permit, concession, grant,
franchise, license, law, statute, ordinance, rule or regulation applicable to
Bancorp or any Bancorp Subsidiary or the properties of any of them; or result in
the creation of any material lien, claim, security interest, encumbrance,
charge, restriction or right of any third party of any kind whatsoever upon the
properties or assets of Bancorp or any Bancorp Subsidiary, except the Government
approvals shall be required for Bancorp and Stock Bank to consummate the Bancorp
Merger and Bank Merger.
3.3 No Legal Bar. Neither Bancorp nor Stock Bank is a party to, or
subject to or bound by, any material agreement, judgment, order, letter of
understanding, writ, prohibition, injunction or decree of any court or other
governmental authority or body of competent jurisdiction, or any law which would
prevent the execution of this Reorganization Agreement or the Plans of Merger by
Bancorp or Stock Bank, the delivery thereof to Kearny or the consummation of the
transactions contemplated hereby and thereby, and no action or proceeding is
pending against Bancorp or Stock Bank in which the validity of this
Reorganization Agreement, any of the transactions contemplated hereby or any
action which has been taken by any of the Parties in connection herewith, or, in
connection with any of the transactions contemplated hereby, is at issue.
3.4 Government and Other Approvals. Except for the Government
Approvals described in Section 2.4, no consent, approval, order or authorization
of, or registration, declaration or filing with, any federal, state or local
governmental authority is required to be made or obtained by Bancorp or Stock
Bank in connection with the execution and delivery of this Reorganization
Agreement or the consummation of the transactions contemplated by this
Reorganization Agreement nor is any consent or approval required from any
landlord, licensor or other non-governmental party
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which has granted rights to Bancorp or Stock Bank in order to avoid forfeiture
or impairment of such rights. Neither Bancorp nor Stock Bank is aware of any
facts, circumstances or reasons why such Government Approvals should not be
forthcoming or which would prevent or hinder such approvals from being obtained.
3.5 Licenses, Franchises and Permits. Bancorp and all Bancorp
Subsidiaries hold all licenses, franchises, permits and authorizations necessary
for the lawful conduct of their respective businesses. Except as disclosed in
Schedule 3.5, the benefits of all of such licenses, franchises, permits and
authorizations are in full force and effect and may continue to be enjoyed by
Bancorp and Stock Bank subsequent to the Closing of the transactions
contemplated herein without any consent or approval. Neither Bancorp nor any
Bancorp Subsidiary has received notice of any proceeding for the suspension or
revocation of any such license, franchise, permit, or authorization and no such
proceeding is pending or, to the best knowledge of Bancorp and the Bancorp
Subsidiaries, has been threatened by any governmental authority.
3.6 Charter Documents. Included in Schedule 3.6 hereto are true and
correct copies of the Certificate of Incorporation and Bylaws of Bancorp and
Charter and Bylaws of Stock Bank.
3.7 Bancorp Financial Statements. Bancorp has delivered or will
deliver to Kearny copies of the consolidated statements of financial condition
of Bancorp as of December 31, for the fiscal years 1996 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the fiscal years 1995 through 1997, inclusive, as incorporated by
reference in Bancorp's Annual Report to Stockholders in each case accompanied by
the audit report of KPMG Peat Marwick LLP, independent public accountants with
respect to Bancorp (the "Audited Financial Statements"), and the unaudited
consolidated statements of financial condition of Bancorp as of June 30, 1998
and the related unaudited consolidated statements of income, changes in
stockholders' equity and cash flows for the six month periods then ended as
reported in Bancorp's quarterly report to shareholders. The consolidated
statements of financial condition of Bancorp referred to herein (including the
related notes, where applicable) fairly present the consolidated financial
condition of Bancorp as of the respective dates set forth therein, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows (including the related notes, where applicable) fairly present the
results of the consolidated operations, changes in stockholders' equity and cash
flows (including the related notes, where applicable) fairly present the results
of the consolidated operations, changes in stockholders' equity and cash flows
of Bancorp for the respective periods or as of the respective dates set forth
therein, in each case in conformity with generally accepted accounting
principles ("GAAP") consistently applied, it being understood that Bancorp's
interim financial statements are not audited, not prepared with related notes
and are subject to normal year-end adjustments.
3.8 Absence of Certain Changes. Except as disclosed in Schedule 3.8
or as provided for or contemplated in this Reorganization Agreement, since June
30, 1998 (the "Balance Sheet Date") there has not been:
(a) any material transaction by Bancorp or Stock Bank not in
the ordinary
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course of business and in conformity with past practice;
(b) any material adverse change in the business, property,
assets (including loan portfolios), liabilities (whether absolute, accrued,
contingent or otherwise), operations, liquidity, income, condition or net worth
of Bancorp and Stock Bank taken as a whole;
(c) any damage, destruction or loss, whether or not covered by
insurance, which has had or may have a material adverse effect on any of the
properties or business prospects of Bancorp and Stock Bank taken as a whole or
their future use and operation by Bancorp and Stock Bank taken as a whole;
(d) any acquisition or disposition by Bancorp or Stock Bank of
any property or asset of Bancorp or Stock Bank, whether real or personal, having
a fair market value, singularly or in the aggregate, in an amount greater than
Twenty-Five Thousand Dollars ($25,000) other than acquisitions or dispositions
made in the ordinary course of business;
(e) any mortgage, pledge or subjection to lien, charge or
encumbrance of any kind on any of the respective properties or assets of Bancorp
or Stock Bank, except to secure extensions of credit in the ordinary course of
business and in conformity with past practice (pledges of and liens on assets to
secure Federal Home Loan Bank advances being deemed both in the ordinary course
of business and consistent with past practice);
(f) any amendment, modification or termination of any contract
or agreement in excess of $25,000, relating to Bancorp or Stock Bank, to which
Bancorp or Stock Bank is a party which would have a material adverse effect upon
the financial condition or operations of Bancorp or Stock Bank taken as a whole;
(g) any increase in, or commitment to increase, the
compensation payable or to become payable to any officer, director, employee or
agent of Bancorp or Stock Bank, or any bonus payment or similar arrangement made
to or with any of such officers, directors, employees or agents, other than
routine increases to non-officer employees made in the ordinary course of
business and consistent with past practice not exceeding the lesser of five
percent (5%) per annum or $5,000 for any of them individually;
(h) any incurring of, assumption of, or taking of, by Bancorp
or Stock Bank, any property subject to, any liability in excess of $25,000,
except for liabilities incurred or assumed or property taken subsequent to the
Balance Sheet Date in the ordinary course of business and in conformity with
past practice; or
(i) any material alteration in the manner of keeping the
books, accounts or Records of Bancorp or Stock Bank, or in the accounting
policies or practices therein reflected, except as required by GAAP and
requirements of Regulatory Authorities.
3.9 Deposits. Except as set forth in Schedule 3.9, none of the Stock
Bank deposits (consisting of certificate of deposit, savings accounts, NOW
accounts and checking account), is a
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brokered deposit.
3.10 Properties. Except as described in Schedule 3.10 hereto or
adequately reserved against in the Audited Financial Statements of Bancorp or
disposed of since the Balance Sheet Date, Bancorp and each Bancorp Subsidiary
has good and, as to real property, marketable title free and clear of all
material liens, encumbrances, charges, defaults, or equities of whatever
character to all of the material properties and assets, reflected in the Audited
Financial Statements of Bancorp as being owned by Bancorp or any Bancorp
Subsidiary as of the dates thereof. All buildings, and all fixtures, equipment,
and other property and assets that are material to the business of Bancorp and
the Bancorp Subsidiaries on a consolidated basis, held under leases or subleases
by Bancorp or any Bancorp Subsidiary, are held under valid instruments
enforceable in accordance with their respective terms (except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
or other laws affecting the enforcement of creditors' rights generally, or by
equitable principles).
3.11 Condition of Fixed Assets and Equipment. Except as disclosed in
Schedule 3.11 hereto, each item of Bancorp's or Stock Bank's fixed assets and
equipment having a net book value in excess of Twenty-Five Thousand Dollars
($25,000) included in the Fixed Assets is in good operating condition and
repair, normal wear and tear excepted.
3.12 Tax Matters. Except as described in Schedule 3.12 hereto:
(a) All federal, state and local tax returns required to be
filed by or on behalf of Bancorp and Stock Bank have been timely filed or
requests for extensions have been timely filed, granted and have not expired for
periods ended on or before the date of this Reorganization Agreement, and all
returns filed are, and the information contained therein is, complete and
accurate. All tax obligations reflected in such returns have been paid. As of
the date of this Reorganization Agreement, there is no audit examination,
deficiency, or refund litigation or matter in controversy with respect to any
taxes that might reasonably be expected to result in a determination materially
adverse to Bancorp and Stock Bank taken as a whole except as fully reserved for
in the Audited Financial Statements of Bancorp. All taxes, interest, additions,
and penalties due with respect to completed and settled examinations or
concluded litigation have been paid;
(b) Neither Bancorp nor Stock Bank has executed an extension
or waiver of any statute of limitations on the assessment or collection of any
tax due that is currently in effect;
(c) Adequate provision for any federal, state or local taxes
due or to become due for Bancorp and Stock Bank for all periods through and
including December 31, 1997, has been made and is reflected on the December 31,
1997 financial statements included in the Audited Financial Statements of
Bancorp, and have been and will continue to be made with respect to periods
ending after December 31, 1997;
(d) Deferred taxes of Bancorp and Stock Bank have been and
will be provided for in accordance with GAAP; and
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(e) To the best knowledge of Bancorp and Stock Bank, neither
the Internal Revenue Service (the "IRS") nor any state, local or other taxing
authority is now asserting or threatening to assert against Bancorp or Stock
Bank any deficiency or claim for additional taxes, or interest thereon or
penalties in connection therewith. All material income, payroll, withholding,
property, excise, sales, use, franchise and transfer taxes, and all other taxes,
charges, fees, levies or other assessments, imposed upon Bancorp by the United
States or by any state, municipality, subdivision or instrumentality of the
United States or by any other taxing authority, including all interest,
penalties or additions attributable thereto, which are due and payable by
Bancorp or Stock Bank, either have been paid in full or have been properly
accrued and reflected in the Audited Financial Statements of Bancorp.
3.13 Litigation. Except as set forth in Schedule 3.13 hereto, there
is no action, suit or proceeding pending against Bancorp or Stock Bank, or to
the best knowledge of Bancorp or Stock Bank, threatened against or affecting
Bancorp, Stock Bank or any of their assets, before any court or arbitrator or
any governmental body, agency or official that may, if decided against Bancorp
or Stock Bank, have a material adverse effect on the business, properties,
assets, liabilities, or condition (financial or other) of Bancorp and Stock Bank
taken as a whole and that are not reflected in the Audited Financial Statements
of Bancorp.
3.14 Environmental Materials. Except as set forth in Schedule 3.14
to the knowledge of Bancorp and Stock Bank, the real property owned by Bancorp
associated with its two offices as well as other real property held as an asset
and real property held as real estate owned ("Real Properties") are in material
compliance with all Environmental Laws, as hereinafter defined, and there are no
conditions existing currently which would subject Bancorp to damages, penalties,
injunctive relief or cleanup costs under any Environmental Laws or assertions
thereof, or which require cleanup, removal, remedial action or other response
pursuant to Environmental Laws by Bancorp. Copies of all environmental studies,
reports, notices and the like known to exist with regard to the Real Properties
is contained at Schedule 3.14. Bancorp is not a party to any litigation or
administrative proceeding, nor has Bancorp (either in its own capacity or as
trustee or fiduciary), materially violated Environmental Laws nor, to its
knowledge and except as set forth in Schedule 3.14, is Bancorp (either in its
own capacity or as trustee or fiduciary) required to clean up, remove or take
remedial or other responsive action due to the disposal, depositing, discharge,
leaking or other release of any hazardous substances or materials. To the
knowledge of Bancorp, none of the Real Properties are, nor is Bancorp, subject
to any judgment, decree, order or citation related to or arising out of any
Environmental Laws. To the knowledge of Bancorp, no material permits, licenses
or approvals are required under Environmental Laws relative to the Real
Properties; and, except as disclosed in Schedule 3.14, Bancorp has not stored,
deposited, treated, recycled, used or disposed of any materials (including,
without limitation, asbestos) on, under or at the Real Properties (or tanks or
other facilities thereon containing such materials), which materials if known to
be present on the Real Properties or present in soils or ground water, would
require cleanup, removal or some other remedial action under the Environmental
Laws. The term "Environmental Laws" shall mean all federal, state and local
laws, including statutes, regulations, ordinances, codes, rules and other
governmental restrictions, standards and requirements relating to the discharge
of air pollutants, water pollutants or process waste water or substances, as now
or at any time hereafter in effect, including, but not limited to, the Federal
Solid Waste Disposal Act, the Federal Hazardous Materials Transportation Act,
the Federal Clean Air Act, the Federal
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Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, the
Federal Comprehensive Environmental Responsibility Cleanup and Liability Act of
1980, as amended ("CERCLA"), regulations of the Environmental Protection Agency,
regulations of the Nuclear Regulatory Agency, regulations of the Occupational
Safety and Health Administration, and any so-called "Superfund" or "Superlien"
Laws.
3.15 Insurance. Schedule 3.15 of the Bancorp Disclosure Schedules
contains a true and complete list of all policies of liability, theft, fidelity,
property damage and other forms of insurance held by Bancorp or any Bancorp
Subsidiary (specifying the insurer, amount of coverage, annual premium, type of
insurance, policy number and any pending material claims thereunder). The
policies listed in such Schedule 3.15 are outstanding and duly in force and all
premiums with respect to such policies are currently paid. Except as set forth
in such Schedule 3.15, neither Bancorp nor any Bancorp Subsidiary has, during
the past three fiscal years, been denied or had revoked or rescinded any policy
of insurance. Bancorp and Stock Bank and all of Bancorp's and Stock Bank's
Realty and other material properties are insured against fire, casualty, theft,
loss, and such other events against which it is customary to insure, all such
insurance policies being in amounts that are adequate and are consistent with
past practices and experience.
3.16 Books and Records. The minute books of Bancorp and Stock Bank
contain, in all material respects, complete and accurate records of and fairly
reflect all actions taken at all meetings and accurately reflect all other
corporate action of the shareholders and the boards of directors and each
committee thereof. The books and records of Bancorp and Stock Bank fairly and
accurately reflect the transactions to which Bancorp and Stock Bank is or has
been a party or by which their properties are subject or bound, and such books
and records have been properly kept and maintained.
3.17 Capitalization of Bancorp. The authorized capital stock of
Bancorp consists of 6,000,000 shares of Common Stock, no par value, 2,000,000
shares of preferred stock, no par value, the "Bancorp Preferred Stock" and no
other class of equity security. As of the date of this Reorganization Agreement,
2,585,243 shares of Bancorp Common Stock were issued and outstanding and no
shares of Bancorp Preferred Stock were issued and outstanding. All of the
outstanding Bancorp Common Stock is validly issued, fully-paid and nonassessable
and has not been issued in violation of any preemptive rights of any Bancorp
Shareholder. Except as described in Section 1.7 of this Reorganization Agreement
as of the date hereof, there are no outstanding securities or other obligations
which are convertible into Bancorp Common Stock or into any other equity or debt
security of Bancorp, and there are no outstanding options, warrants, rights,
scrip, rights to subscribe to, calls or other commitments of any nature which
would entitle the holder, upon exercise thereof, to be issued Bancorp Common
Stock or any other equity or debt security of Bancorp. None of the stock options
will be exercised between the signing of this Reorganization Agreement and the
Effective Time. Accordingly, immediately prior to the Effective Time, there will
be not more than 2,585,243 shares of Bancorp Common Stock issued and outstanding
and 264,050 options outstanding. Bancorp owns and is the beneficial record
holder of, and has good and freely transferable title to, all of the _________
shares of Stock Bank Common Stock issued and outstanding, and recorded on the
books and Records of Stock Bank as being held in its name, free and clear of all
liens, charges or encumbrances, and such stock is not subject to any voting
trusts, agreements or similar arrangements or other claims which
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could affect the ability of Bancorp to freely vote such stock in support of the
transactions contemplated herein.
3.18 Sole Agreement. With the exception of this Reorganization
Agreement, neither Bancorp, nor Stock Bank, nor any Subsidiary of either has
been or is a party to: any letter of intent or agreement to merge, to
consolidate, to sell or purchase assets (other than in the normal course of its
business) or to any other agreement which contemplates the involvement of
Bancorp or Stock Bank or any Subsidiary of either (or any of their assets) in
any business combination of any kind; or any agreement obligating Bancorp or
Stock Bank to issue or sell or authorize the sale or transfer of Bancorp Common
Stock or the capital stock of Stock Bank. There are no (nor will there be at the
Effective Time any) shares of capital stock or other equity securities of
Bancorp outstanding, except for shares of Bancorp Common Stock presently issued
and outstanding (or issuable upon the exercise of outstanding stock options),
and there are no (nor will there be at the Effective Time any) outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into or
exchangeable for, shares of the capital stock of Bancorp or Stock Bank, or
contracts, commitments, understandings, or arrangements by which Bancorp or
Stock Bank is or may be bound to issue additional shares of their capital stock
or options, warrants, or rights to purchase or acquire any additional shares of
their capital stock. There are no (nor will there be at the Effective Time any)
contracts, commitments, understandings, or arrangements by which Bancorp or
Stock Bank is or may be bound to transfer or issue to any third party any shares
of the capital stock of Stock Bank, and there are no (nor will there be at the
Effective Time any) contracts, agreements, understandings or commitments
relating to the right of Bancorp to vote or to dispose of any such shares.
3.19 Disclosure. The information concerning, and representations and
warranties made by, Bancorp or Stock Bank set forth in this Reorganization
Agreement, or in the Schedule of Bancorp hereto, or in any document, statement,
certificate or other writing furnished or to be furnished by Bancorp or Stock
Bank to Kearny, pursuant hereto, do not and will not contain any untrue
statement of a material fact or omit and will not omit to state a material fact
required to be stated herein or therein which is necessary to make the
statements and facts contained herein or therein, in light of the circumstances
in which they were or are made, not false or misleading. Without limiting the
foregoing, at the time the merger proxy statement of Bancorp to be filed with
the SEC is mailed to Bancorp Record Holders and at all times subsequent to such
mailing, up to and including the Effective Time, such merger proxy statement
(including any amendments and supplements thereto), with respect to all
information relating to Bancorp, Stock Bank and this Reorganization Agreement as
it relates to Bancorp, (i) will comply in all material respects with the
applicable provisions of the Securities Laws and (ii) will not contain any
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact or omit to state
any material fact necessary in order to make the statements made therein not
false or misleading, or required to be stated therein or necessary to correct
any statement made in an earlier communication with respect to such matters
which have become false or misleading. Copies of all documents heretofore or
hereafter delivered or made available to Kearny by Bancorp or Stock Bank
pursuant hereto were or will be complete and accurate copies of such documents.
3.20 Absence of Undisclosed Liabilities. Except as described in
Schedule 3.20
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hereto, to their knowledge neither Bancorp nor Stock Bank has any obligation or
liability that is material to the financial condition or operations of Bancorp
or Stock Bank, or that, when combined with all similar obligations or
liabilities, would be material to the financial condition or operations of
Bancorp or Stock Bank (i) except as disclosed in the Audited Financial
Statements of Bancorp delivered to Kearny prior to the date of this
Reorganization Agreement, (ii) except obligations or liabilities incurred in the
ordinary course of its business consistent with past practices or (iii) except
as contemplated under this Reorganization Agreement. Since June 30, 1998,
neither Bancorp nor Stock Bank has incurred or paid any obligation or liability
which would be material to the financial condition or operations of Bancorp or
Stock Bank, except for obligations paid in connection with transactions made by
it in the ordinary course of its business consistent with past practices, laws
and regulations applicable to Bancorp or Stock Bank.
3.21 Allowance for Possible Loan or REO Losses. The allowance for
possible loan losses shown on the Audited Financial Statements of Bancorp is in
the opinion of management of Bancorp adequate in all material respects to
provide for anticipated losses inherent in loans outstanding. Except as
disclosed in Schedule 3.21 hereto, as of the date thereof, neither Bancorp nor
Stock Bank has any loan which has been criticized, designated or classified by
management of Bancorp, or by regulatory examiners representing any Regulatory
Authority or by Bancorp's independent auditors as "Special Mention,"
"Substandard," "Doubtful", "Loss" or as a "Potential Problem Loan."
The allowance for possible losses in real estate owned, if
any, shown on the Audited Financial Statements of Bancorp in the opinion of
management is or will be adequate in all respects to provide for anticipated
losses inherent in REO owned or held by Bancorp or Stock Bank and the net book
value of real estate owned on the Balance Sheet of the Audited Financial
Statements of Bancorp is the fair value of the real estate owned in accordance
with Statement of Position 92-3.
3.22 Loan Portfolio. To the best knowledge of Bancorp or Stock Bank,
with respect to each mortgage loan owned by Bancorp or Stock Bank in whole or in
part (each, a "Mortgage Loan"):
(a) Enforceability. The mortgage note and the related mortgage
are each legal, valid and binding obligations of the maker or obligor thereof,
enforceable against such maker or obligor in accordance with their terms.
(b) No Modification. Neither Bancorp nor Stock Bank nor any
prior holder of a Mortgage Loan has modified the related documents in any
material respect or satisfied, canceled or subordinated such mortgage or
mortgage note except as otherwise disclosed by documents in the applicable
mortgage file.
(c) Owner. Bancorp or Stock Bank is the sole holder of legal
and beneficial title to each Mortgage Loan (or Stock Bank's applicable
participation interest), as applicable and there has not been any assignment or
pledge of any Mortgage Loan (other than as security for Federal Home Loan Bank
advances as detailed at Schedule 3.22(c)).
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(d) Collateral Documents. The mortgage note, mortgage and any
other collateral documents, copies of which are included in the Mortgage Loan
files, are true and correct copies of the documents they purport to be and have
not been superseded, amended, modified, canceled or otherwise changed except as
otherwise disclosed by documents in the applicable mortgage file.
(e) Litigation. There is no litigation or proceeding pending
or threatened, relating to the mortgaged property which would have a material
adverse effect upon the related Mortgage Loan.
(f) Participation. With respect to each Mortgage Loan held in
the form of a participation, the participation documentation is legal, valid,
binding and enforceable and the interest in such Mortgage Loan of Bancorp or
Stock Bank created by such participation would not be a part of the insolvency
estate of the Mortgage Loan originator or other third party upon the insolvency
thereof.
3.23 Compliance with Laws.
(a) Bancorp and Stock Bank are in compliance with all laws,
rules, regulations, reporting and licensing requirements, and orders applicable
to its business or employees conducting its business (including, but not limited
to, those relating to consumer disclosure and currency transaction reporting)
the breach or violation of which would or could reasonably be expected to have a
material adverse effect on the financial condition or operations of Bancorp and
Stock Bank taken as a whole, or which would or could reasonably be expected to
subject Bancorp or Stock Bank or any of its directors or officers to civil money
penalties; and
(b) Neither Bancorp or Stock Bank has received notification or
communication from any agency or department of federal, state, or local
government or any of the Regulatory Authorities, or the staff thereof (i)
asserting that Bancorp or Stock Bank is not in compliance with any of the
statutes, rules, regulations, or ordinances which such governmental authority or
Regulatory Authority enforces, and which, as a result of such noncompliance,
would or could reasonably be expected to have a material adverse effect on
Bancorp and Stock Bank taken as a whole, (ii) threatening to revoke any license,
franchise, permit, or governmental authorization which is material to the
financial condition or operations of Bancorp and Stock Bank, taken as a whole,
or (iii) requiring Bancorp to enter into a cease and desist order, consent,
agreement or memorandum of understanding.
3.24 Employee Benefit Plans.
(a) Schedule 3.24 to the Bancorp Disclosure Schedule lists (i) each
pension, profit sharing, stock bonus, thrift, savings, employee stock ownership
or other plan, program or arrangement, which constitutes an "employee pension
benefit plan" within the meaning of Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), which is maintained by
Bancorp and/or Stock Bank or to which Bancorp and/or Stock Bank contribute for
the benefit of any current or former employee, officer, director, consultant or
agent; (ii) each plan, program or arrangement for the provision of medical,
surgical, or hospital care or benefits, benefits in the event of sickness,
accident,
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disability, death, unemployment, severance, vacation, apprenticeship, day care,
scholarship, prepaid legal services or other benefits which constitute an
"employee welfare benefit plan" within the meaning of Section 3(1) of ERISA,
which is maintained by Bancorp and/or Stock Bank or to which Bancorp and/or
Stock Bank contribute for the benefit of any current or former employee,
officer, director, consultant or agent; and (iii) every other retirement or
deferred compensation plan, bonus or incentive compensation plan or arrangement,
stock option plan, stock purchase plan, severance or vacation pay arrangement,
or other fringe benefit plan, program or arrangement through which Bancorp
and/or Stock Bank provide benefits for or on behalf of any current or former
employee, officer, director, consultant or agent.
(b) All of the plans, programs and arrangements described in Schedule 3.24
(hereinafter referred to as the "Bancorp Benefit Plans") that are subject to
ERISA are in material compliance with all applicable requirements of ERISA and
all other applicable federal and state laws, including the reporting and
disclosure requirements of Part I of Title I of ERISA. Each of the Bancorp
Benefit Plans that is intended to be a pension, profit sharing, stock bonus,
thrift, savings or employee stock ownership plan that is qualified under Section
401(a) of the Code satisfies the applicable requirements of such provision and
to the best of Bancorp's knowledge there exist no circumstances that would
adversely affect the qualified status of any such plan under that section,
except with respect to any required retroactive amendment for which the remedial
amendment period has not yet expired. Except as set forth in Schedule 3.24,
there is no pending or, to the best knowledge of Bancorp, threatened litigation,
governmental proceeding or investigation against or relating to any Bancorp
Benefit Plan and there is no reasonable basis for any material proceedings,
claims, actions or proceedings against any such Bancorp Benefit Plan. No Bancorp
Benefit Plan (or Bancorp Benefit Plan fiduciary, in his capacity as such) has
engaged in a non-exempt "Prohibited Transaction" (as defined in Section 406 of
ERISA and Section 4975(c) of the Code) since the date on which said sections
became applicable to such plan. There have been no acts or omissions by Bancorp
that have given rise to any fines, penalties, taxes or related charges under
Sections 502(c), 502(i) or 4071 of ERISA or Chapter 43 of the Code, or that may
give rise to any material fines, penalties, taxes or related damages under such
laws for which Bancorp may be liable. All group health plans of Bancorp,
including any plans of current and former Affiliates of Bancorp that must be
taken into account under Section 4980B of the Code or Section 601 of ERISA or
the requirements of any similar state law regarding insurance continuation, have
been operated in material compliance with the group health plan continuation
coverage requirements of Section 4980B of the Code and Section 601 of ERISA to
the extent such requirements are applicable. All payments due from any Bancorp
Benefit Plan (or from Bancorp with respect to any Bancorp Benefit Plan) have
been made, and all amounts properly accrued to date as liabilities of Bancorp
that have not yet been paid have been properly recorded on the books of Bancorp.
Schedule 3.24(b) contains a copy of the IRS Form 5500 filed with respect to the
Bancorp Benefit Plans for the last 3 plan years and a copy of such IRS letter of
determinations received with respect to such plans.
(c) Except as disclosed at Schedule 3.24(c), no payments to be made by
Stock Bank or Bancorp to any employee, officer or director shall result in an
"excess parachute payment" as defined at Section 280G of the Code or exceed the
deductibility limits provided at Section 162(m) of the Code.
(d) Schedule 3.24(d) contains a list of the maximum vacation accrual to be
paid at Closing
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by Bancorp, subject to reductions based upon time taken up to Closing. No
additional compensation shall be paid for any unused sick leave pay.
3.25 Material Contracts. Except as described in Schedule 3.25
hereto, neither Bancorp nor Stock Bank, nor any of their respective assets,
businesses, or operations, is as of the date of this Reorganization Agreement a
party to, or bound or affected by, or receives benefits under, any contract or
agreement or amendment thereto that require annual payments of over $25,000 per
year.
3.26 Material Contract Defaults. Neither Bancorp nor Stock Bank is
in default in any respect under any material contract, agreement, commitment,
arrangement, lease, insurance policy, or other instrument to which it is a party
or by which its respective assets, business, or operations may be bound or
affected or under which it or its respective assets, business, or operations
receives benefits, and which default would reasonably be expected to have either
individually or in the aggregate a material adverse effect on Bancorp and Stock
Bank taken as a whole, and there has not occurred any event that, with the lapse
of time or the giving of notice or both, would constitute such a default.
3.27 Reports. Since March 29, 1996, Bancorp and Stock Bank have
filed all reports and statements, together with any amendments required to be
made with respect thereto, that it was required to file with (i) the OTS; (ii)
the SEC, including, but not limited to, Annual Reports on Form 10-KSB, Quarterly
Reports on Form 10-QSB, Current Reports on Form 8-K and proxy statements; and
(iii) any other applicable federal or state securities or banking authorities
(except, in the case of federal or state securities authorities, filings that
are not material). As of their respective dates, each of such reports and
documents, including the financial statements, exhibits, and schedules thereto,
complied in all material respects with all of the requirements of their
respective forms and all of the statutes, rules, and regulations enforced or
promulgated by the Regulatory Authority with which they were filed. All such
reports were true and complete in all material respects and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.28 Exchange Act and Nasdaq Market
(a) The Bancorp Common Stock is registered with the SEC
pursuant to the Securities and Exchange Act of 1934, as amended ("Exchange Act")
and Bancorp has filed with the SEC all material forms and reports required by
law to be filed by Bancorp with the SEC, which forms and reports, taken as a
whole, are true and correct in all material respects, and do not misstate a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
(b) The outstanding shares of Bancorp Common Stock are listed
for trading on the Nasdaq National Market System (under the symbol "FBER")
pursuant to the listing rules of the Nasdaq and Bancorp has filed with the
Nasdaq all material forms and reports required by law to be filed by Bancorp,
which forms and reports, taken as a whole, are true and correct in all
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material respects, and do not misstate a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading.
3.29 Statements True and Correct. None of the information prepared
by, or on behalf of, Bancorp or any Bancorp Subsidiary regarding Bancorp, Stock
Bank or any other Bancorp Subsidiary included or to be included in the Merger
Proxy Statement to be mailed to Bancorp's Shareholders in connection with the
Bancorp Shareholders' Meeting, and any other documents to be filed with the SEC,
or any other Regulatory Authority in connection with the transactions
contemplated herein, will, at the respective times such documents are filed,
and, with respect to the Merger Proxy Statement, when first mailed to the of
Bancorp Shareholders, be false or misleading with respect to any material fact,
or omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or, in
the case of the Merger Proxy Statement or any amendment thereof or supplement
thereto, at the time of the Bancorp Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for the Bancorp Shareholders' Meeting. All
documents which Bancorp or any Bancorp Subsidiary is responsible for filing with
the SEC or any other Regulatory Authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable law, including applicable provisions of the Securities
Laws and the rules and regulations promulgated thereunder.
3.30 Investment Securities. Section 1 of Schedule 3.30 sets forth
the book and market value as of June 30, 1998 of the investment securities,
mortgage-backed securities and securities held for sale of Bancorp and Stock
Bank as of such date. Section 2 of Schedule 3.30 sets forth an investment
securities report which includes (to the extent known or reasonably obtainable)
security descriptions, CUSIP or Agency Pool numbers, current pool face values,
book values, coupon rates, market values and book yields in each case as of June
30, 1998.
3.31 Certain Regulatory Matters.
(a) Stock Bank is a qualified thrift lender under Section
10(m) of HOLA and is a member of the Federal Home Loan Bank of New York.
(b) Stock Bank has not paid any dividends to Bancorp or any
affiliate thereof that (i) caused the regulatory capital of Stock Bank to be
less than the amount then required by applicable law or (ii) exceeded any other
limitation on the payment of dividends imposed by law, agreement or regulatory
policy. Other than as reflected on Schedule 3.31 and as required by applicable
law, there are no restrictions on the payment of dividends by Bancorp or Stock
Bank.
(c) Bancorp and Stock Bank have adopted policies and
procedures designed to promote overall compliance with the Bank Secrecy Act (31
U.S.C. Section 5301), the Truth-in-Lending Act (15 U.S.C. Section 1601 et seq.),
the Expedited Funds Availability Act (12 U.S.C. Section 4001) and the
regulations adopted under each such act and have materially complied with the
reporting requirements under the Bank Secrecy Act and the regulations
thereunder.
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3.32 Corporate Approval.
(a) The affirmative vote of a majority of the votes cast by
shareholders of Bancorp entitled to vote at a meeting is required to adopt this
Reorganization Agreement and approve the Merger and the other transactions
contemplated hereby. No other vote of the stockholders of Bancorp is required by
law, the Certificate of Incorporation or Bylaws of Bancorp or otherwise to adopt
this Reorganization Agreement and approve the Reorganization and the other
transactions contemplated hereby.
(b) At a duly constituted meeting of the Board of Directors of
Bancorp, directors constituting at least a majority of the Directors granted
their prior approval to the Reorganization and, accordingly, the provisions of
Article VIII of Bancorp's Certificate of Incorporation do not and will not apply
to this Reorganization Agreement or the consummation of any of the transactions
contemplated hereby or thereby.
(c) The provisions of the New Jersey Shareholders' Protection
Act of the NJBCA will not apply to this Reorganization Agreement, the Merger or
the transactions contemplated hereby and thereby.
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3.33 Broker's and Finder's Fees. Except for payments to FinPro, Inc.
as detailed in Schedule 3.33, which has been engaged by Bancorp as its financial
advisor (pursuant to an agreement, a copy of which has been separately provided
to Kearny), neither Bancorp nor any of its subsidiaries has any liability to any
broker, finder, or similar agent, nor have any of them agreed to pay any
broker's fee, finder's fee or commission, with respect hereto or to the
transactions contemplated hereby.
3.34 Year 2000 Readiness. Bancorp and each of the Bancorp
Subsidiaries have taken all reasonable steps necessary to address the computer
software, accounting and record keeping issues raised in order for the data
processing systems used in the business conducted by Bancorp and the Bancorp
Subsidiaries to be substantially Year 2000 compliant on or before the end of
1999 and, except as set forth in Schedule 3.34, does not expect the future cost
of addressing such issues to be material. Neither Bancorp nor any Bancorp
Subsidiary has received a rating of less than satisfactory from any bank
regulatory agency with respect to Year 2000 compliance.
3.35 Liquidation Account. The Stock Bank has maintained sufficient
records to make the necessary computations of the balance of the liquidation
account and the subaccounts thereunder.
3.36 Derivatives Contracts. None of Bancorp or Bancorp Subsidiaries
is a party to or has agreed to enter into an exchange-traded or over-the-counter
swap, forward, future, option, cap, floor or collar financial contract or any
other contract not included on the balance sheet which is a derivative contract
(including various combinations thereof) (each a "Derivatives Contract") or owns
securities that are referred to as "structured notes" except for those
Derivatives Contracts and structured notes previously disclosed in Schedule
3.36, including a list, as applicable, of any Bancorp or Bancorp Subsidiary
assets pledged as security for each such Derivatives Contract.
ARTICLE 4
COVENANTS OF KEARNY
4.1 Regulatory and Other Approvals. Within a reasonable time after
execution of this Reorganization Agreement, Kearny shall file any and all
applications with the appropriate government Regulatory Authorities in order to
obtain the Government Approvals and shall take such other actions as may be
reasonably required to consummate the transactions contemplated in this
Reorganization Agreement and the Plans of Merger with reasonable promptness.
Kearny shall pay all fees and expenses arising in connection with such
applications for regulatory approval. Kearny agrees to use its best efforts to
provide the appropriate Regulatory Authorities with the information required by
such authorities in connection with Kearny's applications for regulatory
approval and to use its best efforts to obtain such regulatory approvals, and
any other approvals and consents as may be required for the Closing, as promptly
as practicable; provided, however, that nothing in this Section shall be
construed to obligate Kearny to take any action to meet any condition required
to obtain prior regulatory approval if Kearny shall, deem such condition to be
unreasonable or to constitute a significant impediment upon its ability to carry
on its business or acquisition programs. Kearny shall
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provide Bancorp the opportunity to review and comment on all required
applications within a reasonable period prior to the filing thereof and provide
Bancorp with copies of all written communications with Regulatory Authorities
regarding the transactions provided for herein and related applications and
proceedings. Subject to the terms and conditions of this Reorganization
Agreement, Kearny agrees to use all reasonable efforts and to take, or to cause
to be taken, all actions, and to do, or to cause to be done, all things
necessary, proper, or advisable under applicable laws and regulations to
consummate and make effective, with reasonable promptness after the date of this
Reorganization Agreement, the transactions contemplated by this Reorganization
Agreement, including, without limitation, using reasonable efforts to lift or
rescind any injunction or restraining or other order adversely affecting the
ability of the Parties to consummate the transaction contemplated by this
Reorganization Agreement. Subject to the provisions of this Section, Kearny
shall use, and shall cause each of its Subsidiaries to use, its best efforts to
obtain consents of all third parties and Regulatory Authorities necessary or
desirable for the consummation of each of the transactions contemplated by this
Reorganization Agreement.
4.2 Preparation of Regulatory Applications. Kearny will use its best
efforts to prepare and file (a) with the FDIC, an application for approval of
the Mergers, if applicable and, (b) with the OTS, an application for approval of
the Plans of Mergers. Kearny, reasonably in advance of making such filings, will
provide Bancorp and its counsel a reasonable opportunity to comment on such
filings and regulatory applications; and Kearny will provide Bancorp and its
counsel with copies of all such filings and applications at the time filed if
such filings and applications are made at any time before the Effective Time.
Kearny covenants and agrees that all information furnished by Kearny for
inclusion in the Bancorp Merger Proxy Statement will comply in all material
respects with the provisions of applicable law, including the Exchange Act and
the rules and regulations of the SEC, and will not contain any untrue statement
of a material fact and will not omit to state any material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading, Kearny will
furnish to FinPro, investment bankers advising Bancorp, such information as they
may reasonably request for purposes of the opinion referred to in Section 7.1.
4.3 Employee Benefits. Following the consummation of the
transactions contemplated herein, Kearny shall not be obligated to make further
contributions to any of the Employee Plans or Benefit Arrangements of Bancorp or
Stock Bank and all employees of Bancorp and Stock Bank immediately prior to the
Effective Time who shall continue as employees of Kearny as the Resulting
Company will be afforded the opportunity to participate in any employee benefit
plans maintained by Kearny, including but not limited to any "employee benefit
plan," as that term is defined in ERISA, on an equal basis with employees of
Kearny with comparable positions, compensation, and tenure, subject to the
provisions of this Section. Service with Bancorp or with any Bancorp Subsidiary
prior to the Effective Time by such former Bancorp employees will be deemed
service with Kearny for purposes of determining eligibility for participation
and for crediting of service for vesting purposes in such employee benefit plans
of Kearny; provided, however, that in no event shall any former Bancorp employee
be entitled to or be given credit for past service with such former Bancorp for
purposes of the participation, accrual, calculation, vesting or determination of
benefit amounts under any pension plan maintained by Kearny. The employees of
Bancorp will be treated as new employees for purposes of participation, vesting
and benefits determination value in Kearny's
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qualified pension plans. On or before the Effective Time, Bancorp shall take all
steps necessary to cause the 401(k) plan maintained by Bancorp to be terminated,
subject to applicable limitations under the Internal Revenue Code of 1986, as
amended (the "Code"). Bancorp shall take all steps necessary to cause the
defined benefit plan maintained by Bancorp to be terminated on or prior to
December 31, 1998, (provided, however, if Bancorp stockholders shall not have
approved the Merger by December 30, 1998, then the defined benefit plan shall be
terminated as of such later date as is mutually agreed by the parties on, or
before, the Effective Time and in accordance with applicable law and
regulations) and distributions made thereafter in accordance with the provisions
of the defined benefit plan and the Code. Bancorp will terminate its ESOP as set
forth in Section 1.11 of this Reorganization Agreement.
4.4 Notification. Kearny shall notify Bancorp promptly after
becoming aware of the occurrence of, or the impending or threatened occurrence
of, any event that would constitute a breach on its part of any obligation under
this Reorganization Agreement or the occurrence of any event that would cause
any representation or warranty made by it herein to be false or misleading, or
if it becomes a party or is threatened with becoming a party to any legal or
equitable proceeding or governmental investigation or upon the occurrence of any
event that would result in a change in the circumstances described in the
representations and warranties contained herein. At all times up to and
including, and as of, the Closing, Kearny shall inform Bancorp in writing of any
and all facts necessary to amend or supplement the representations and
warranties made herein and the Kearny Schedules attached hereto as necessary so
that the information contained herein and therein will accurately reflect the
current status of Kearny; provided, however, that any such updates to the Kearny
Schedules shall be required prior to the Closing only with respect to matters
which represent material changes to the Kearny Schedules and the information
contained therein.
4.5 Tax Representations. Kearny has not taken, agreed to take, or
will take any action or has any knowledge of any fact or circumstance that would
prevent the transactions contemplated hereby, including the Bank Merger and
Bancorp Merger, from qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
4.6 Directors and Officers Indemnification and Insurance Coverage.
(a) From and after the Effective Time through the sixth
anniversary thereof, Kearny agrees to indemnify, defend and hold harmless each
present and former director and officer of Bancorp and Stock Bank as of the
Closing Date (the "Indemnified Parties") against losses, claims, damages, costs,
expenses (including reasonable attorneys' fees and expenses), liabilities,
judgments or amounts paid in settlement (with the approval of Kearny, which
approval shall not be unreasonably withheld) or in connection with any claim,
action, suit, proceeding or investigation arising out of matters existing or
occurring at or prior to the Effective Time (a "Claim") in which an Indemnified
Party is, or is threatened to be made, a party or a witness based in whole or in
part on, or arising in whole or in part out of, the fact that such person is or
was a director or officer, regardless of whether such Claim is asserted or
claimed prior to, at or after the Effective Time, to the fullest extent to which
directors and officers are entitled under Bancorp's Certificate of Incorporation
(as to Stock Bank its Charter) and Bylaws, or other applicable law as in effect
on the date hereof (and Kearny shall pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
extent permissible under law and Stock Bank's Charter and Bylaws as in effect on
the date
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hereof, and as permitted to a federal savings bank under federal law and as to
Bancorp, as permitted under New Jersey law and under Bancorp's Certificate of
Incorporation and Bylaws; provided that the person to whom expenses are advanced
provides an undertaking to repay such expenses if it is determined that such
person is not entitled to indemnification). All rights to indemnification in
respect of a Claim asserted or made within the period described in the preceding
sentence shall continue until the final disposition of such Claim.
Notwithstanding the foregoing, an officer or director of Bancorp and Stock Bank
may not be indemnified by Kearny if such indemnification is prohibited by
applicable law.
(b) Any Indemnified Party wishing to claim indemnification
under this Section, upon learning of any Claim, shall promptly notify Kearny,
but the failure to so notify shall not relieve Kearny of any liability it may
have to such Indemnified Party except to the extent that such failure materially
prejudices Kearny. In the event of any Claim, (1) Kearny shall have the right to
assume the defense thereof (with counsel reasonably satisfactory to the
Indemnified Party) and shall not be liable to such Indemnified Parties for any
legal expenses of other counsel or any other expenses subsequently incurred by
such Indemnified Parties in connection with the defense thereof, except that, if
Kearny elects not to assume such defense or counsel for the Indemnified Parties
advises that there are issues which raise conflicts of interest between Kearny
and the Indemnified Parties, the Indemnified Parties may retain counsel
satisfactory to them, and Kearny shall pay all reasonable fees and expenses for
the Indemnified Parties promptly as statements therefor are received, provided
further that Kearny shall in all cases be obligated pursuant to this paragraph
to pay for only one firm of counsel for each Indemnified Party, (2) the
Indemnified Parties will cooperate in the defense of any such Claim and (3)
Kearny shall not be liable for any settlement effected without its prior written
consent (which consent shall not be unreasonably withheld).
(c) For a period of three (3) year after the Effective Time,
Kearny will use its best efforts to provide to the persons who served as
directors or officers of Bancorp or Stock Bank on or before the Effective Time
insurance against liabilities and claims (and related expenses) made against
them resulting from their service as such prior to the Effective Time
substantially similar in all material respects to the insurance coverage
provided to them in such capacities at the date hereof. In lieu of the
foregoing, Bancorp may renew any existing insurance or purchase any "discovery
period" insurance provided for thereunder at Kearny's request and expense.
4.7 Conduct of Kearny Prior to the Effective Time. Except as
expressly provided in this Reorganization, as agreed to by Bancorp or as
required by applicable law, rules or regulations, during the period from the
date of this Reorganization Agreement to the Effective Time, Kearny shall (i)
take no action which would adversely affect or delay the ability of Bancorp or
Kearny to obtain any necessary approvals, consents or waivers of any
governmental authority required for the transactions contemplated hereby or to
perform its covenants and agreements on a timely basis under this Reorganization
Agreement and, (ii) take no action that could reasonably be expected to have a
material adverse effect on Kearny.
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ARTICLE 5
COVENANTS OF BANCORP AND STOCK BANK
5.1 Preparation of Merger Proxy Statement and Applications for
Required Consents. Bancorp will use its best efforts to prepare and file a
merger proxy statement with the SEC under the Exchange Act that will be used by
Bancorp to solicit shareholders for approval of the Reorganization Agreement
(the "Merger Proxy Statement"). In connection therewith, Bancorp will furnish
all financial or other information, including using best efforts to obtain
customary consents, certificates, opinions of counsel and other items concerning
Bancorp for the filing or preparation for filing under the Exchange Act. Bancorp
covenants and agrees that all information furnished for inclusion in the Merger
Proxy Statement, all applications to appropriate regulatory agencies for
approval of the Reorganization Agreement, and all information furnished by
Bancorp to Kearny pursuant to this Reorganization Agreement, will comply in all
material respects with the provisions of applicable law, and will not contain
any untrue statement of a material fact and will not omit to state any material
fact required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading. Bancorp will provide Kearny and its counsel in advance a reasonable
opportunity to comment on the Merger Proxy Statement before filing the Merger
Proxy Statement with the SEC; and Bancorp will provide Kearny and its counsel
with copies of filings made with the SEC at the time filed. Bancorp will furnish
to FinPro such information as FinPro may reasonably request for purposes of the
opinion referred to in Section 6.1(e).
5.2 Conduct of Business -- Affirmative Covenants. Unless the prior
written consent of Kearny shall have been obtained:
(a) Bancorp and Stock Bank shall:
(i) Operate its business only in the usual, regular, and
ordinary course;
(ii) Preserve intact its business organizations and
assets and to maintain its rights and franchises;
(iii) Take no action, unless otherwise required by law,
rules or regulation, that would reasonably be considered to (A) adversely affect
the ability of any of them or Kearny to obtain any necessary approvals of
Regulatory Authorities required to consummate the transactions contemplated by
this Reorganization Agreement, or (B) adversely affect the ability of such Party
to perform its covenants and agreements under this Reorganization Agreement;
(iv) Except as they may terminate in accordance with
their terms, keep in full force and effect, and not default in any of their
obligations under, all material contracts;
(v) Keep in full force and effect insurance coverage
with responsible insurance carriers which is reasonably adequate in coverage and
amount for companies the size of Bancorp and for the businesses and properties
owned by each and in which each is engaged, to the extent that such insurance is
reasonably available;
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(vi) Use its best efforts to retain Stock Bank's present
customer base and to facilitate the retention of such customers by Stock Bank
and its branches after the Effective Time; and
(vii) Maintain, renew, keep in full force and effect,
and preserve its business organization and material rights and franchises,
permits and licenses, and to use its best efforts to maintain positive relations
with its present employees so that such employees will continue to perform
effectively and will be available to Bancorp, Stock Bank or Kearny at and after
the Effective Time, and to use its best efforts to maintain its existing, or
substantially equivalent, credit arrangements with banks and other financial
institutions and to assure the continuance of Stock Bank's customer
relationships.
(b) Bancorp and Stock Bank agree to use their best efforts to
assist Kearny in obtaining the Government Approvals necessary to complete the
transactions contemplated hereby and do not know of any reason that such
Government Approvals can not be obtained, and Bancorp and Stock Bank shall
provide to Kearny or to the appropriate governmental authorities all information
reasonably required to be submitted in connection with obtaining such approvals.
(c) Bancorp and Stock Bank, at their own cost and expense,
shall use their best efforts to secure all necessary consents and all consents
and releases, if any, required of Bancorp, Stock Bank or third parties and shall
comply with all applicable laws, regulations and rulings in connection with this
Reorganization Agreement and the consummation of the transactions contemplated
hereby.
(d) At all times to and including, and as of, the Closing,
Bancorp and Stock Bank shall inform Kearny of any and all facts necessary to
amend or supplement the representations and warranties made herein and the
Bancorp Schedules attached hereto as necessary so that the information contained
herein and therein will accurately reflect the current status of Bancorp and
Stock Bank; provided, however, that any such updates to the Bancorp Schedules
shall be required prior to the Closing only with respect to matters which
represent material changes to the Bancorp Schedules and the information
contained therein.
(e) Subject to the terms and conditions of this Reorganization
Agreement, Bancorp and Stock Bank agree to use all reasonable efforts and to
take, or to cause to be taken, all actions, and to do, or to cause to be done,
all things necessary, proper, or advisable under applicable laws and regulations
to consummate and make effective, with reasonable promptness after the date of
this Reorganization Agreement, the transactions contemplated by this
Reorganization Agreement, including, without limitation, using reasonable
efforts to lift or rescind any injunction or restraining or other order
adversely affecting the ability of the Parties to consummate the transaction
contemplated by this Reorganization Agreement. Bancorp shall use, and shall
cause each of its Subsidiaries to use, its best efforts to obtain consents of
all third parties and Regulatory Authorities necessary or desirable for the
consummation of each of the transactions contemplated by this Reorganization
Agreement.
(f) Bancorp shall notify Kearny promptly after becoming aware
of the occurrence of, or the impending or threatened occurrence of, any event
that would constitute a breach
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on its part of any obligation under this Reorganization or the occurrence of any
event that would cause any representation or warranty made by it herein to be
false or misleading, or if it becomes a party or is threatened with becoming a
party to any legal or equitable proceeding or governmental investigation or upon
the occurrence of any event that would result in a change in the circumstances
described in the representations and warranties contained herein.
(g) On the business day immediately prior to the Effective
Time or on such other day after the satisfaction of all conditions precedent to
the Reorganization as Kearny may require Bancorp shall, at the request of
Kearny, take all legally permissible action necessary to convert to the
accounting policies and practices of Kearny, such actions to include, without
limitation, at Kearny's option, adjustments to loan loss reserves, reserves for
federal income taxes, accounting for post-retirement medical benefits, and
accruals for severance and related costs and accrued vacation and disability
leave. Bancorp's and Stock Bank's representations, warranties and covenants
contained in this Reorganization Agreement shall not be deemed to be untrue or
breached in any respect for any purpose as a consequence of any modifications or
changes undertaken solely on account of this Section.
5.3 Conduct of Business -- Negative Covenants. From the date of this
Reorganization Agreement until the earlier of the Effective Time or the
termination of this Reorganization Agreement, Bancorp and Stock Bank covenant
and agree that they will neither do, nor agree or commit to do, nor permit any
Bancorp Subsidiary to do or commit or agree to do, any of the following without
requesting Kearny's approval and receiving the prior written consent of the
President of Kearny, which consent will not be unreasonably withheld:
(a) Except as expressly contemplated by this Reorganization
Agreement or the Plans of Merger, amend their Certificate of Incorporation,
Charter or Bylaws; or
(b) Impose on any share of capital stock held by it or by any
of its Subsidiaries of any lien, charge, or encumbrance, or permit any such
lien, charge, or encumbrance to exist; or
(c) Except as provided in accordance with the Stock Option
Agreement between the Parties contained herein at Appendix I: (i) Repurchase,
redeem, or otherwise acquire or exchange, directly or indirectly, any shares of
its capital stock or other equity securities or any securities or instruments
convertible into any shares of its capital stock, or any rights or options to
acquire any shares of its capital stock or other equity securities except as
expressly permitted by this Reorganization Agreement or the Plans of Merger; or
(ii) split or otherwise subdivide its capital stock; or (iii) recapitalize in
any way; or (iv) declare a stock dividend on the Bancorp Common Stock; or (v)
pay or declare a cash dividend or make or declare any other type of distribution
on the Bancorp Common Stock except for any cash dividend already declared prior
to this Reorganization Agreement or regular quarterly cash dividends payable in
the same amount and during the same time periods as past quarterly dividends; or
(d) Except as expressly permitted by this Reorganization
Agreement, acquire direct or indirect control over any corporation, association,
firm, organization or other entity,
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other than in connection with (i) mergers, acquisitions, or other transactions
approved in writing by Kearny, (ii) internal reorganizations or consolidations
involving existing Subsidiaries, (iii) acquisitions of control in its fiduciary
capacity, or (iv) the creation of new subsidiaries organized to conduct or
continue activities otherwise permitted by this Reorganization Agreement;
(e) Except as expressly permitted by this Reorganization
Agreement or the Plans of Merger, to (i) issue, sell, agree to sell, or
otherwise dispose of or otherwise permit to become outstanding any additional
shares of Bancorp Common Stock (not including shares issuable upon the exercise
of validly issued and Bancorp Stock Options outstanding as of the date of this
Reorganization Agreement), or any other capital stock of Bancorp or of any
Bancorp Subsidiary, or any stock appreciation rights, or any option, warrant,
conversion, call, scrip, or other right to acquire any such stock, or any
security convertible into any such stock, unless any such shares of such stock
are directly sold or otherwise directly transferred to Bancorp or any Bancorp
Subsidiary, (ii) sell, agree to sell, or otherwise dispose of any substantial
part of the assets or earning power of Bancorp or of any Bancorp Subsidiary;
(iii) sell, agree to sell, or otherwise dispose of any asset of Bancorp or any
Bancorp Subsidiary other than in the ordinary course of business for reasonable
and adequate consideration or (iv) buy, agree to buy or otherwise acquire a
substantial part of the assets or earning power of any other Person or entity;
(f) Incur, or permit any Bancorp Subsidiary to incur, any
additional debt obligation or other obligation for borrowed money other than (i)
in replacement of existing short-term debt with other short-term debt of an
equal or lesser amount, (ii) financing of banking related activities, or (iii)
indebtedness of Bancorp or any Bancorp Subsidiary to Stock Bank or another
Bancorp Subsidiary in excess of an aggregate of $50,000 (for Bancorp and its
Subsidiaries on a consolidated basis) except in the ordinary course of the
business of Bancorp or such Bancorp Subsidiary (and such ordinary course of
business shall include, but shall not be limited to, creation of deposit
liabilities, entry into repurchase agreements or reverse repurchase agreements,
purchases or sales of federal funds, and sales of certificates of deposit);
(g) Grant any increase in compensation or benefits to any
officer or director or grant any increase in compensation or benefits to any of
its non-officer employees in excess of the lesser of five percent (5%) per annum
or $5,000 for any of them individually upon not less than three (3) business
days notice to Kearny, except in accordance with past practices or as required
by law; pay any bonus except in accordance with past practices or any plan or
arrangement disclosed in Bancorp Schedule 5.3(g); enter into any employment or
severance agreements with any of its officers or employees; grant any material
increase in fees or other increases in new compensation or other benefits to any
director of Bancorp or of any Bancorp Subsidiary; or effect any change in
retirement benefits for any class of its employees or officers, unless such
change is required by applicable law;
(h) Amend any existing employment contract between it and any
person to increase the compensation or benefits payable thereunder; or enter
into any new employment contract with any person that Bancorp or Stock Bank do
not have the unconditional right to terminate without liability (other than
liability for services already rendered), at any time on or after the Effective
Time;
(i) Except as disclosed in Bancorp Schedule 5.3(i), adopt any
new
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employee benefit plan or terminate or make any material change in or to any
existing employee benefit plan other than any change that is required by law or
that, in the opinion of counsel, is necessary or advisable to maintain the
tax-qualified status of any such plan;
(j) Enter into any new service contracts, purchase or sale
agreements or lease agreements in excess of $25,000 that are material to Bancorp
or any Bancorp Subsidiary;
(k) Make any capital expenditure exceeding $25,000;
(l) Knowingly take any action that is intended or may
reasonably be expected to result in any of its representations and warranties
set forth in this Reorganization Agreement being or becoming untrue in any
material respect, or in any of the conditions to the Merger set forth in Article
7 not being satisfied, or in violation of any provision of this Reorganization
Agreement, except, in every case, as may be required by applicable law;
(m) Change its methods of accounting in effect at June 30,
1998, except as required by changes in generally accepted accounting principles
as concurred in, in writing, by Bancorp's independent auditors (a copy of which
shall be provided to Kearny) or regulatory accounting principles;
(n) Except as required by applicable law, knowingly take or
cause to be taken any action that could reasonably be expected to jeopardize or
delay the receipt of any of the required regulatory approvals or which would
reasonably be expected to result in any such required regulatory approval
containing a condition that is determined by Kearny to be unduly burdensome;
(o) Fail to use its best efforts to keep in full force and
effect its insurance and bonds in such amounts as are reasonable to cover such
risks customary in relation to the character and location of its properties and
the nature of its business and in any event at least equal in scope and amount
of coverage of insurance and bonds now carried;
(p) Fail to notify Kearny promptly of its receipt of any
letter, notice or other communication, whether written or oral, from any
governmental entity advising Bancorp that it is contemplating issuing,
requiring, or requesting any agreement, memorandum of understanding, or similar
undertaking, order or directive;
(q) Fail promptly to notify Kearny of (i) the commencement or
threat of any audit, action, or proceeding involving any material amount of
taxes against either Bancorp or (ii) the receipt by Bancorp or any Bancorp
Subsidiary of any deficiency or audit notices or reports in respect of any
material deficiencies asserted by any federal, state, local or other tax
authorities;
(r) Fail to maintain and keep its properties in good repair
and condition, except for depreciation due to ordinary wear and tear;
(s) Engage in any off-balance sheet hedge transactions.
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5.4 Conduct of Business -- Certain Actions.
Except to the extent necessary to consummate the transactions
specifically contemplated by this Reorganization Agreement, Bancorp and Stock
Bank shall not, and shall use their respective best efforts to ensure that their
respective directors, officers, employees, and advisors do not, directly or
indirectly, institute, solicit, or knowingly encourage (including by way of
furnishing any information not legally required to be furnished) any inquiry,
discussion, or proposal, or participate in any discussions or negotiations with,
or provide any confidential or non-public information to, any corporation,
partnership, person or other entity or group (other than to Kearny) concerning
any "Acquisition Proposal" (as defined below), except for actions reasonably
considered by the Board of Directors of Bancorp, based upon the advice of
outside legal counsel, to be required in order to fulfill its fiduciary
obligations. Bancorp shall notify Kearny immediately if any Acquisition Proposal
has been or should hereafter be received by Bancorp or Stock Bank, such notice
to contain, at a minimum, the identity of such persons, and, subject to
disclosure being consistent with the fiduciary obligations of Bancorp's Board of
Directors, a copy of any written inquiry, the terms of any proposal or inquiry,
any information requested or discussions sought to be initiated, and the status
of any reports, negotiations or expressions of interest. For purposes of this
Section, "Acquisition Proposal" means any tender offer, agreement, understanding
or other proposal of any nature pursuant to which any corporation, partnership,
person or other entity or group, other than Kearny, would directly or indirectly
(i) acquire or participate in a merger, share exchange, consolidation or any
other business combination involving Bancorp or Stock Bank; (ii) acquire the
right to vote ten percent (10%) or more of the Bancorp Common Stock or Stock
Bank Common Stock; (iii) acquire a significant portion of the assets or earning
power of Bancorp or of Stock Bank; or (iv) acquire in excess of ten percent
(10%) of the outstanding Bancorp Common Stock or Stock Bank common stock.
5.5 New Jersey Environmental Notice. Bancorp shall, within thirty
(30) days following the date hereof, apply for non-applicability determinations
from the New Jersey Department of Environmental Protection with respect to the
New Jersey Industrial Site Responsibility Act for all real property owned by
Bancorp or any Bancorp Subsidiary.
5.6 Voting Agreement. Each of Bancorp's directors have entered into
a Voting Agreement, a Form of which is attached as Exhibit 5.6 hereto.
5.7 Liquidation Account Computations. Bancorp shall (a) furnish to
Kearny a computation of the Liquidation Account within forty-five (45) days
following the date hereof and (b) recompute the Liquidation Account as of
January 1, 1999 and shall furnish such recomputation to Bancorp prior to
Closing.
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ARTICLE 6
CONDITIONS TO CLOSING
6.1 Conditions to the Obligations of Bancorp. Unless waived in
writing by Bancorp, the obligation of Bancorp to consummate the transaction
contemplated by this Reorganization Agreement is subject to the satisfaction at
or prior to the Closing Date of the following conditions:
(a) Performance. Each of the material acts and undertakings of
Kearny to be performed at or prior to the Closing Date pursuant to this
Reorganization Agreement shall have been duly performed in all material
respects;
(b) Representations and Warranties. The representations and
warranties of Kearny contained in this Reorganization Agreement shall be true
and correct, in all material respects, on and as of the Closing Date with the
same effect as though made on and as of the Effective Time;
(c) Documents. In addition to the other deliveries of Kearny
described elsewhere in this Reorganization Agreement, Bancorp shall have
received the following documents and instruments:
(i) a certificate signed by the Secretary or an
assistant secretary of Kearny dated as of the Closing Date certifying that:
(A) Kearny's Boards of Directors has duly adopted
resolutions (copies of which shall be attached to such certificate) approving
the substantive terms of this Reorganization Agreement (including the Plans of
Merger and Option Agreement) and authorizing the consummation of the
transactions contemplated by this Reorganization Agreement and certifying that
such resolutions have not been amended or modified and remain in full force and
effect;
(B) the persons executing this Reorganization
Agreement on behalf of Kearny are officers of Kearny, holding the offices so
specified with full power and authority to execute this Reorganization Agreement
and any and all other documents in connection with the Merger, and that the
signature of such person set forth on such certificate is his genuine signature;
(C) the organization documents of Kearny attached
to such certificate remain in full force and effect; and
(ii) a certificate signed by duly authorized officers of
Kearny stating that the conditions set forth in Sections 6.1(a), 6.1(b) and
6.1(c) of this Reorganization Agreement have been satisfied;
(d) Opinion of Kearny's Counsel. Bancorp shall have been
furnished with an opinion of counsel to Kearny, dated as of the Closing Date,
addressed to Bancorp, substantially to
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the effect that:
(i) Kearny is incorporated and validly existing as a
corporation in good standing under the laws of the United States and is validly
existing and in good standing as a Federal mutual savings bank chartered by the
OTS.
(ii) Kearny has full corporate power and authority to
enter into the Reorganization Agreement, the Reorganization Agreement has been
duly and validly authorized by all necessary corporate action by Kearny and has
been duly and validly executed and delivered by and on behalf of Kearny and no
approval, authorization, order consent, registration, filing, qualification,
license or permit of or with any court, regulatory, administrative or other
governmental body is required under any federal or New Jersey statute or
regulation for the execution and delivery of the Reorganization Agreement by
Kearny or the consummation of the transactions contemplated by the
Reorganization Agreement, except such as have been obtained and are in full
force and effect;
(iii) Neither the execution and delivery by Kearny of
this Reorganization Agreement nor any of the documents to be executed and
delivered by Kearny in connection herewith violates or conflicts with Kearny's
Charter or Bylaws.
Such opinion may (i) expressly rely upon certificates furnished by appropriate
officers of Kearny or appropriate government officials; (ii) in the case of
matters of law governed by the laws of the states in which they are not
licensed, reasonably rely upon the opinions of legal counsel duly licensed in
such states and may be limited, in any event, to Federal Law and the State of
New Jersey; and (iii) incorporate, be guided by, and be interpreted in
accordance with, the Legal Opinion Accord of the ABA Section of Business Law
(1991); and
(e) Fairness Opinion. Bancorp shall have received a "fairness
opinion" letter from its independent financial adviser, FinPro, dated the date
hereof to the effect that, in the opinion of such adviser the Cash Merger
Consideration to be received by the Bancorp Record Holders is fair to the
Bancorp Record Holders from a financial point of view.
6.2 Conditions to the Obligations of Kearny. Unless waived in
writing by Kearny, the obligation of Kearny to consummate the transactions
contemplated by this Reorganization Agreement is subject to the satisfaction at
or prior to the Closing Date of the following conditions:
(a) Performance. Each of the material acts and undertakings of
Bancorp and Stock Bank to be performed at or before the Closing Date pursuant to
this Reorganization Agreement shall have been duly performed;
(b) Representations and Warranties. The representations and
warranties of Bancorp and Stock Bank contained in Article 3 of this
Reorganization Agreement shall be true and correct, in all material respects, on
and as of the Closing Date with the same effect as though made on and as of the
Closing Date;
(c) Documents. In addition to the documents described
elsewhere in this
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Reorganization Agreement, Kearny shall have received the following documents and
instruments:
(i) a certificate signed by the Secretary or an
assistant secretary of Bancorp and Stock Bank dated as of the Closing Date
certifying that:
(A) Bancorp's and Stock Bank's respective Boards
of Directors and shareholders have duly adopted resolutions (copies of which
shall be attached to such certificate) approving the substantive terms of this
Reorganization Agreement (including the Plans of Merger) and authorizing the
consummation of the transactions contemplated by this Reorganization Agreement
and certifying that such resolutions have not been amended or modified and
remain in full force and effect;
(B) each person executing this Reorganization
Agreement on behalf of Bancorp and Stock Bank is an officer of Bancorp or Stock
Bank, as the case may be, holding the office or offices specified therein, with
full power and authority to execute this Reorganization Agreement and any and
all other documents in connection with the Reorganization, and that the
signature of each person set forth on such certificate is his or her genuine
signature;
(C) the charter documents of Bancorp and Stock
Bank attached to such certificate remain in full force and effect; and
(ii) a certificate signed by the respective President
and Chief Financial Officer of each of Bancorp and Stock Bank stating that the
conditions set forth in Sections 6.2(a), 6.2(b) and 6.2(e) this Reorganization
Agreement have been satisfied.
(d) Inspections Permitted. Between the date of this
Reorganization Agreement and the Closing Date, Bancorp and Stock Bank shall have
afforded Kearny and its authorized agents and representatives reasonable access
during normal business hours to the properties, operations, books, records,
contracts, documents, loan files and other information of or relating to Bancorp
and Stock Bank. Kearny will provide Bancorp and Stock Bank at least 24 hours
notice of any inspection and conduct any inspection in a reasonable manner that
will not interfere with business operations. Bancorp and Stock Bank shall have
caused all Bancorp or Stock Bank personnel to provide reasonable assistance to
Kearny in its investigation of matters relating to Bancorp and Stock Bank.
(e) No Material Adverse Change. No material adverse change in
the business, property, assets (including loan portfolios), liabilities (whether
absolute, contingent or otherwise), operations, liquidity, income, or financial
condition of Bancorp and Stock Bank taken as a whole shall have occurred since
the date of this Reorganization Agreement.
(f) Opinion of Bancorp's Counsel. Kearny shall have been
furnished with an opinion of legal counsel to Bancorp and Stock Bank, dated the
Closing Date, addressed to Kearny, substantially to the effect that:
(i) Bancorp is a corporation validly existing and in
good standing
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under the laws of the State of New Jersey;
(ii) Stock Bank is a Federal stock savings bank, validly
existing, and in good standing under the laws of the United States;
(iii) Bancorp and Stock Bank have full corporate power
and authority to enter into the Reorganization Agreement; the Reorganization
Agreement has been duly and validly authorized by all necessary corporate action
by Bancorp and Stock Bank and has been duly and validly executed and delivered
by and on behalf of Bancorp and Stock Bank; and no approval, authorization,
order, consent, registration, filing, qualification, license or permit of or
with any court, regulatory, administrative or other governmental body is
required under any federal or New Jersey statute or regulation for the execution
and delivery of the Reorganization Agreement by Bancorp and Stock Bank or the
consummation of the transactions contemplated by the Reorganization Agreement,
except such as have been obtained and are in full force and effect; and
Such opinion may (i) expressly rely upon certificates furnished by appropriate
officers of Bancorp or Stock Bank or appropriate government officials; (ii) in
the case of matters of law governed by the laws of the states in which they are
not licensed, reasonably rely upon the opinions of legal counsel duly licensed
in such states and may be limited, in any event, to federal law and the NJBCA
and (iii) incorporate, be guided by, and be interpreted in accordance with, the
Legal Opinion Accord of the ABA Section of Business Law (1991);
(g) Other Business Combinations, Etc. Neither Bancorp nor
Stock Bank shall have entered into any agreement, letter of intent,
understanding or other arrangement pursuant to which Bancorp or Stock Bank would
merge, consolidate with; effect a business combination with, sell any
substantial part of Bancorp's or Stock Bank's assets to, or; acquire a
significant part of the shares or assets of, any other Person or entity
(financial or otherwise); adopt any "poison pill" or other type of anti-takeover
arrangement, any shareholder rights provision, any "golden parachute" or similar
program which would have the effect of materially decreasing the value of
Bancorp or Stock Bank or the benefits of acquiring the Bancorp Common Stock;
(h) Regulatory Approvals. Except for the filing of the
Certificate of Merger with the OTS, all Regulatory Approvals for the
transactions contemplated by this Reorganization Agreement shall have been
obtained without the imposition of any conditions not typically imposed in
similar transactions which Kearny determines in its sole judgment to be
materially burdensome upon the conduct of the business of Kearny or which would
so adversely impact the economic and business benefits of the Merger to Kearny
as to render it inadvisable to proceed with the Merger; such approvals shall be
in effect and no proceedings shall have been instituted or threatened with
respect thereto; all applicable waiting periods with respect to such approvals
shall have expired; and all conditions and requirements prescribed by law or
otherwise imposed in connection with the Regulatory Approvals shall have been
satisfied. Bancorp shall also have obtained non-applicability determinations
from the New Jersey Department of Environmental Protection with respect to the
New Jersey Industrial Site Responsibility Act for all real property owned by
Bancorp or any Bancorp Subsidiary on the date hereof.
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(i) Bancorp Stockholder Approval. Bancorp shall have furnished
Kearny with a certified copy of resolutions duly adopted by the holders of a
vote of the outstanding shares of Bancorp Common Stock entitled to vote thereon
approving this Reorganization Agreement, the Plans of Merger, and the
transactions contemplated hereby; such resolutions shall be in full force and
effect and shall not have been modified, rescinded or annulled; and
(j) As of the Effective Time, Bancorp's stockholders equity on
a consolidated basis shall not be less than the stockholders equity as of June
30, 1998, less adjustments detailed at Schedule 6.2(j) as of the date hereof.
(k) Kearny shall have received an opinion of tax counsel that
the Reorganization shall not result in any taxable income, or gain or loss for
federal tax purposes to Kearny, Bancorp or Stock Bank.
6.3 Conditions to Obligations of All Parties. The obligations of
each party to effect the transactions contemplated hereby shall be subject to
the fulfillment, at or prior to the Closing, of the following conditions:
(a) No Pending or Threatened Claims. No claim, action, suit,
investigation or other proceeding shall be pending or threatened before any
court or governmental agency which presents a substantial risk of the restraint
or prohibition of the transactions contemplated by this Reorganization Agreement
or the obtaining of material damages or other relief in connection therewith;
(b) Governmental Approvals and Acquiescence Obtained. The
Parties hereto shall have received all applicable Governmental Approvals for the
consummation of the transactions contemplated herein and all waiting periods
incidental to such approvals or notices given shall have expired; and
(c) Approval of Stockholders. Approval of this Reorganization
Agreement and the transactions contemplated hereby by the stockholders of
Bancorp, as required by applicable law, the rules of the National Market System
or applicable provisions of Bancorp's Certificate of Incorporation and Bylaws.
(d) Effectiveness of Merger Proxy Statement. No stop order
preventing the use of the Merger Proxy Statement has been issued and no
proceedings for that purpose have been instituted or are pending or contemplated
by the SEC or any state securities or other regulatory authority.
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ARTICLE 7
TERMINATION
7.1 Termination. This Reorganization Agreement and the Plans of
Merger may be terminated at any time prior to the Closing, as follows:
(a)(a) By mutual consent in writing of the Parties;
(b) By Kearny or Bancorp in the event the Closing shall not
have occurred by May 31, 1999 (the "Target Date"), unless the failure of the
Closing to occur shall be due to the failure of the Party seeking to terminate
this Reorganization Agreement to perform its obligations hereunder in a timely
manner;
(c) By either Kearny or Bancorp upon written notice to the
other Party, upon (i) denial of any Governmental Approval necessary for the
consummation of the Merger (or should such approval be conditioned upon a
substantial deviation from the transactions contemplated); provided, however,
that either Kearny or Bancorp may, upon written notice to the other, extend the
term of this Reorganization Agreement for only one or more sixty (60) day
periods to prosecute diligently and overturn such denial, provided that such
denial has been appealed within twenty (20) business days of the receipt thereof
or (ii) upon the failure to obtain the approval of the Bancorp shareholders;
(d) By Kearny or Bancorp in the event that there shall have
been a material breach of any obligation or covenant of the other Party
hereunder and such breach shall not have been remedied within sixty (60) days
after receipt by the breaching Party of written notice from the other Party
specifying the nature of such breach and requesting that it be remedied;
(e) By Kearny should either Bancorp or Stock Bank enter into
any formal agreement, letter of understanding, memorandum or other similar
arrangement with any bank regulatory authority establishing a formal capital
plan requiring Bancorp or Stock Bank to raise additional capital or to sell a
substantial portion of its assets.
If a Party should elect to terminate this Reorganization Agreement pursuant to
subsections (b), (c), (d) or (e) of this Section 7.1, it shall give notice to
the other Party, in writing, of its election in the manner prescribed in Article
8 ("Notices") of this Reorganization Agreement.
7.2 Effect of Termination. In the event that this Reorganization
Agreement should be terminated pursuant to this Section, all further obligations
of the Parties under this Reorganization Agreement shall terminate without
further liability of any Party to another; provided, however, that a termination
under this Article shall not relieve any Party of any liability for breach of
this Reorganization Agreement or for any misstatement or misrepresentation made
hereunder prior to such termination, or be deemed to constitute a waiver of any
available remedy for any such breach, misstatement or misrepresentation.
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ARTICLE 8
GENERAL PROVISIONS
8.1 Notices. Any notice, request, demand and other communication
which either Party hereto may desire or may be required hereunder to give shall
be in writing and shall be deemed to be duly given if delivered personally or
mailed by certified or registered mail (postage prepaid, return receipt
requested), air courier or facsimile transmission, addressed or transmitted to
such other Party as follows:
If to Bancorp:
1st Bergen Bancorp
250 Valley Boulevard
Wood-Ridge, New Jersey 07075
Fax: (201) 507-8642
Attn: William M. Brickman, President
With a copy to:
McCarter & English
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102-4096
Fax: (201) 624-7070
Attn: Michael H. Horn
If to Kearny:
Kearny Federal Savings Bank
614 Kearny Avenue
Kearny, New Jersey 07032
Fax: (201) 955-1311
Attn: Matthew T. McClane, President
With a copy to:
Malizia, Spidi, Sloane & Fisch, P.C.
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Fax: (202) 434-4661
Attn: Samuel J. Malizia, Esq.
or to such other address as any Party hereto may hereafter designate to the
other Parties in writing. Notice shall be deemed to have been given on the date
reflected in the proof or evidence of delivery, or if none, on the date actually
received.
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8.2 Governing Law. This Reorganization Agreement shall be governed
by, and construed and enforced in accordance with, the internal laws, and not
the laws pertaining to choice or conflicts of laws, of the State of New Jersey,
unless and to the extent that federal law controls. Any dispute arising between
the Parties in connection with the transactions which are the subject of this
Reorganization Agreement shall be heard in a court of competent jurisdiction
located in New Jersey.
8.3 Counterparts. This Reorganization Agreement may be executed
simultaneously in one or more counterparts, each of which shall be deemed an
original, but all of which shall constitute but one and the same instrument.
8.4 Publicity. The Parties hereto will consult with each other with
regard to the terms and substance of any press releases, announcements or other
public statements with respect to the transactions contemplated hereby. To the
extent practicable, each Party shall provide the proposed text of any such press
release, announcement or public statement to the other Party prior to its
publication and shall permit such other Party a reasonable period to provide
comments thereon.
8.5 Entire Agreement. This Reorganization Agreement, together with
the Plans of Merger, Option Agreement, Schedules, Exhibits and certificates
required to be delivered hereunder and any amendments or addenda hereafter
executed and delivered in accordance with this Article constitute the entire
agreement of the Parties hereto pertaining to the transactions contemplated
hereby and supersede all prior written and oral (and all contemporaneous oral)
agreements and understandings of the Parties hereto concerning the subject
matter hereof. The Plans of Merger, Option Agreement, Bancorp Schedules, Kearny
Schedules, Exhibits and certificates attached hereto or furnished pursuant to
this Reorganization Agreement are hereby incorporated as integral parts of this
Reorganization Agreement. Except to the extent otherwise, provided herein, by
specific language and not by mere implication, this Reorganization Agreement is
not intended to confer upon any other person not a Party to this Reorganization
Agreement any rights or remedies hereunder.
8.6 Severability. If any portion or provision of this Reorganization
Agreement should be determined by a court of competent jurisdiction to be
invalid, illegal or unenforceable in any jurisdiction, such portion or provision
shall be ineffective as to that jurisdiction to the extent of such invalidity,
illegality or unenforceability, without affecting in any way the validity or
enforceability of the remaining portions or provisions hereof in such
jurisdiction or rendering that or any other portions or provisions of this
Reorganization Agreement invalid, illegal or unenforceable in any other
jurisdiction.
8.7 Modifications, Amendments and Waivers. At any time prior to the
Closing or termination of this Reorganization Agreement, the Parties may, solely
by written agreement executed by their duly authorized officers:
(a) extend the time for the performance of any of the
obligations or other acts of the other Party hereto;
(b) waive any inaccuracies in the representations and
warranties made by the other Party contained in this Reorganization Agreement or
in the Bancorp Schedules, Kearny
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Schedules or Exhibits hereto or any other document delivered pursuant to this
Reorganization Agreement;
(c) waive compliance with any of the covenants or agreements
of the other Party contained in this Reorganization Agreement to the extent
permitted by applicable law; and
(d) amend or add to any provision of this Reorganization
Agreement or the Plans of Merger; provided, however, that no provision of this
Reorganization Agreement may be amended or added to except by an agreement in
writing signed by the Parties hereto or their respective successors in interest
and expressly stating that it is an amendment to this Reorganization Agreement.
8.8 Interpretation. The headings contained in this Reorganization
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Reorganization Agreement.
8.9 Payment of Expenses. Except as set forth herein, Kearny and
Bancorp shall each pay its own fees and expenses (including, without limitation,
legal fees and expenses) incurred by it in connection with the transactions
contemplated hereunder.
8.10 Attorneys' Fees. If any Party hereto shall bring an action at
law or in equity to enforce its rights under this Reorganization Agreement
(including an action based upon a misrepresentation or the breach of any
warranty, covenant, agreement or obligation contained herein), the prevailing
Party in such action shall be entitled to recover from the other Party its
reasonable costs and expenses necessarily incurred in connection with such
action (including fees, disbursements and expenses of attorneys and costs of
investigation).
8.11 No Survival of Representations and Warranties. Except for the
agreements of the Parties in Sections 1.5(d), 1.8, 1.9, 4.3, 4.6 and 8.14, which
shall survive the Closing, none of the representations, warranties and
conditions of the Parties contained in this Reorganization Agreement or in any
instrument of transfer or other document delivered in connection with the
transactions contemplated by this Reorganization Agreement shall survive the
Closing or other termination of this Reorganization Agreement. The agreements of
the parties in Sections 1.5(d), 1.8, and 4.6 shall be enforceable directly by
each person benefitted or intended to be benefitted by such sections.
8.12 No Waiver. No failure, delay or omission of or by any Party in
exercising any right, power or remedy upon any breach or default of any other
Party shall impair any such rights, powers or remedies of the Party not in
breach or default, nor shall it be construed to be a waiver of any such right,
power or remedy, or an acquiescence in any similar breach or default; nor shall
any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any Party of any
provisions of this Reorganization Agreement must be in writing and must be
executed by the Parties to this Reorganization Agreement and shall be effective
only to the extent specifically set forth in such writing.
8.13 Remedies Cumulative. All remedies provided in this
Reorganization
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Agreement, by law or equity, shall be cumulative and not alternative.
8.14 Confidentiality. Any non-public or confidential information
disclosed by either Bancorp or Kearny to the other Parties pursuant to this
Reorganization Agreement or as a result of the discussions and negotiations
leading to this Reorganization Agreement, or otherwise disclosed, or to which
any other party has acquired or may acquire access, and indicated (either
expressly, in writing or orally, or by the context of the disclosure or access)
by the disclosing Party to be non-public or confidential, or which by the
content thereof reasonably appears to be non-public or confidential, shall be
kept strictly confidential and shall not be used in any manner by the recipient
except in connection with the transactions contemplated by this Reorganization
Agreement. To that end, the Parties hereto will each, to the maximum extent
practicable, restrict knowledge of and access to non-public or confidential
information of the other Party to its officers, directors, employees and
professional advisors who are directly involved in the transactions contemplated
hereby and reasonably need to know such information. Further to that end, all
non-public or confidential documents (including all copies thereof) obtained
hereunder by any Party shall be returned as soon as practicable after any
termination of this Reorganization Agreement.
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IN WITNESS WHEREOF, each of the Parties hereto has duly executed and
delivered this Reorganization Agreement or has caused this Reorganization
Agreement to be executed and delivered in its name and on its behalf by its
representative thereunto duly authorized, all as of the date first written
above.
1ST BERGEN BANCORP
By: /s/ William M. Brickman
--------------------------------
William M. Brickman
President and Chief Executive
Officer
ATTEST:
/s/ Robert Maison
- -----------------------------
Robert Maison, Secretary
SOUTH BERGEN SAVINGS BANK
By: /s/ William M. Brickman
--------------------------------
William M. Brickman
President
ATTEST:
/s/ Kimberly Manfredo
- -----------------------------
Kimberly Manfredo, Secretary
KEARNY FEDERAL SAVINGS BANK
By: /s/ Matthew T. McClane
--------------------------------
Matthew T. McClane
President and Chief Executive
Office
ATTEST:
/s/ Sharon Jones
- -----------------------------
Sharon Jones, Secretary
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ANNEX B
[FINPRO LETTERHEAD]
November 3, 1998
Board of Directors
1st Bergen Bancorp, Inc.
South Bergen Savings Bank
250 Valley Boulevard
Wood-Ridge, NJ 07075
Members of the Board:
1st Bergen Bancorp has requested our opinion, as an independent financial
analyst to the common shareholders of 1st Bergen Bancorp, Inc. ("1st Bergen")
and its wholly owned subsidiary South Bergen Bank, Wood-Ridge, New Jersey (the
"Bank"), as to the fairness, from a financial point of view to the common
shareholders of the 1st Bergen, as to the cash per share price proposed in the
Agreement and Plan of Reorganization pursuant to which 1st Bergen will be
acquired Kearny Federal Savings Bank ("Kearny"), a mutual organization.
Pursuant to the Agreement and Plan of Reorganization dated October 14, 1998, and
discussions with management, each share of 1st Bergen common stock issued and
outstanding immediately prior to the Effective Time shall be converted at the
Effective Time into the right to receive twenty-four dollars ($24.00) in cash.
This transaction will be accounted for under the purchase method of accounting.
As part of its banking analysis business, FinPro, Inc. ("FinPro") is continually
engaged in the valuation of bank, bank holding company and thrift securities in
connection with mergers and acquisitions nationwide. Prior to being retained for
this assignment, FinPro, Inc. had provided professional services and products to
1st Bergen. The revenues derived from such services and products are
insignificant when compared to the firm's total gross revenues.
In connection with this assignment, FinPro reviewed: (i) the Agreement and Plan
of Reorganization dated October 14, 1998; (ii) the most recent external
auditor's reports to the Boards of Directors of 1st Bergen; (iii) the June 30,
1998 Report of Condition and Income for each organization; (iv) the Rate
Sensitivity Analysis reports for 1st Bergen; (v) 1st Bergen's listing of
marketable securities showing rate, maturity, and market value as compared to
book value; (vi) 1st Bergen's internal loan classification list; (vii) a listing
of other real estate owned for 1st Bergen; (viii) the budget and long range
operating plan of 1st Bergen; (ix) the Minutes of the Board of Directors
meetings for 1st Bergen; (x) the most recent Board report for 1st Bergen; (xi)
the listing and description of significant real properties for 1st Bergen; and
(xii) the directors and officers liability and blanket bond insurance policies
for 1st Bergen. FinPro conducted limited due diligence on Kearny as part of team
that included a representative of McCarter & English, 1st Bergen's Legal
Counsel. The due diligence focused on the ability of Kearny to meet its
obligations as sent forth in the Agreement. FinPro conducted an on-site review
of each organization's historical performance and current financial condition
and performed a market area analysis.
We have also had discussions with the management of 1st Bergen and Kearny
regarding their respective financial results and have analyzed the most current
financial data available on 1st Bergen and Kearny. We
also considered such other information, financial studies, analyses and
investigations, and economic and market criteria which we deemed relevant. We
have met with the management of 1st Bergen and Kearny to discuss the foregoing
information with them.
We have considered certain financial data of 1st Bergen and have compared that
data with similar data for other savings institutions and their holding
companies which have recently merged or been acquired. Furthermore, we have
considered the financial terms of these business combinations involving said
savings institutions and their holding companies.
We have not independently verified any of the information reviewed by us and
have relied on its completeness and accuracy in all material respects. In
addition, we have not made an independent evaluation of the assets of 1st
Bergen.
In reaching our opinion, we took into consideration the financial benefits of
the proposed transaction to 1st Bergen's shareholders. Based on all factors that
we deem relevant and assuming the accuracy and completeness of the information
and data provided to us by 1st Bergen and Kearny, it is our opinion as of
November 3, 1998, that the proposed per share price is fair and equitable to all
1st Bergen's shareholders from a financial point of view.
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our opinion
as an exhibit to the proxy statement or prospectus related to the merger
transaction.
Respectfully submitted,
/s/ FinPro, Inc.
FinPro, Inc.
Liberty Corner, New Jersey