N.J. Thrift to Create Nonprofit To Soak Up Conversion Funds

A New Jersey thrift has found an ingenious way to use up extra capital from its conversion to stock ownership: form a tax-exempt foundation.

Ocean Federal Savings Bank of Brick Township is planning to donate as much as $12.5 million in stock from its conversion to a charitable community foundation.

The move could help Ocean address a common problem arising from conversions: ending up with more capital than can be deployed profitably.

At the same time, the deal could fortify the thrift's "outstanding" rating under the Community Reinvestment Act and blunt any criticism that the conversion benefits only insiders. Such charges have been leveled at a number of thrifts in recent years.

Ocean Financial Foundation would be incorporated as a nonstock Delaware corporation dedicated to helping with housing, scholarships, education, nonprofit medical facilities, and community groups in Ocean County.

About 8% of the common stock from the thrift's $157 million stock conversion would be donated to the foundation as funding. The foundation would get the actual cash from future stock dividends, loans collateralized by stock, and sales of the thrift's common stock by the foundation. The foundation would be limited, however, to selling no more than 5% of the stock in one year.

"What this plan does is forge a link between the community and the stock company, which preserves the community-based culture of the mutual institution," said Doug Faucette, partner with Muldoon Murphy & Faucette in Washington, counsel for the thrift.

Thrift officials refused to discuss the pending offering or the foundation because of securities laws.

The concept of the foundation is similar to subsidiaries set up for Community Reinvestment Act purposes by Quaker City Bancorp, Whittier, Calif., and Avondale Financial Corp., Chicago. Both institutions contributed a percentage of proceeds to the subsidiaries, said Richard Garabedian, attorney at the Washington law firm of Silver Freedman & Taff.

"This sounds like the next step consistent with that kind of community involvement, although I don't think it's ever been done before," Mr. Garabedian said. "From a social policy standpoint, it's got a lot of attractiveness."

Mr. Garabedian speculated that the thrift might also be trying to put as much stock as possible into friendly hands, creating a future barrier to hostile shareholders or potential acquirers' efforts to control the company.

In addition to the stock contribution for the foundation, as much as 8% of the stock would go to the thrift's employee stock option plan, while another 4% could go to an incentive-based management plan if approved by shareholders.

But setting up the foundation also hurts the thrift and shareholders in the short run, officials acknowledged in a filing with the Securities and Exchange Commission. If the foundation is approved by the thrift's depositors, their voting interests as shareholders would be diluted by about 8%.

And although the foundation would be tax-exempt and the contribution tax-deductible, establishing the organization could wipe out earnings for 1996, according to the filing.

If the stock contribution had been made last year, Ocean would have had to record it as an after-tax expense of $8.8 million. That would have meant a $900,000 loss for the year.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER