April 25, 1978 Board of Directors Garden State National Bank 10 Forest Avenue Paramus, NJ Gentlemen: Having cast the only disapproving vote on a revised proposal for the consolidation of Garden State National Bank (GSNB) and The National State Bank (NSB), I feel obligated to set out, on the record, the reasons for my negative vote. At the special meeting the Board of Directors held on Thursday, April 20, 1978, we the directors were given a revised proposal for consolidation of the GSNB and NSB. Our consent was asked in the form of an affirmative note in favor of this re- vised plan basically on a "caryot and stick" approach. On the "carrot" approach, we first were given the firm assurance of our Chairman that the resultant com- mon stock, of which the GSNB shareholders would receive three shares for each share of GSNB common stock currently held, would have a market value roughly equivalent to the present NSB stock price of $11 per share which, times 3 shares, would be $33. Secondly, we were told by our Chairman, the proposed new common stock would carry a dividend of $.76 per share, which times the 3 received shares would equal a dividend of $2.28 compared with the current $1.25 received on each share of GSNB stock. On the "stick" side, our Chairman told us if our affirmative vote was not forthcoming that GSNB common stock would likely fall in market price to $20 or $22 per share. (If that is the Chairman's estimation for GSNB shares in a market not supported by WCI's supportive pur- chases (35,000 shs) over the last 5 years, then that is all that WCI should get.) If we failed to approve this plan then WCI, having exhausted all other avenues to find a pur- chaser for their stock, would then sell their holdings in GSNB willy-nilly to any party who came along. In his words, confirmed by Mr. Sarnoff, the stock would, in all likelihood, be sold to undesirable parties whose sole motive in acquiring it would be for the purposes of raid- ing the asset and capital base of the GSNB. In addition, the Chairman threatened that in the case of a sale by WCI, he would resign his role in Management and leave GSNB with a management team which while he created it, he now expresses a strong lack of confidence in its ability.Board of Directors April 25, 1978 Page 2 In face of these emotional reasons given to enlist our sup- port, you may wonder why I cast the sole vote of disapproval. My reasons basically were as follow: 1.) We as directors of a national bank, who have responsibilities first to depositors and then to all classes of stockholders, both majority and minority, were being asked to vote on a consolidation involving over $1.2 billion in deposits and a stockholders’ equity base in excess of $84 million belonging to the stockholders of both banks. Our vote on this consolidation was solicited without a scrap of paper providing proform asset and liability statements, or any detail as to projected capital structure and future earn- ings. I agree with our Chairman that the proposed plan of consoli- dation is very beneficial from the viewpoint of GSNB's major stock- holder, WCI, but T was having difficulty answering the question: what about our depositors and the other stockholders. 2.) I was expected to reach a quick decision on this proposed consolidation and found that any attempt to defer a decision until more information was made available or, for more careful consi eration, was most annoying to the Chairman and dismissed out-of- hand. As a director of GSNB whose legal and moral responsibility is to the depositors and stockholders (both classes) of this in~ stitution, I have, at considerable time and effort,using the annual reports of both institutions, statements issued to the press, and xumors (which proved correct) of the consolidation terms, constructed the following analysis in order to understand the nuances of this proposed transaction. The effect on stockholders’ equity is set forth in the following table which illustrates that the cash pay- off to WCI and other GSNB shareholders uses all GSNB's equity capital and $8 million of NSB's equity capital. STOCKHOLDERS" EQUITY “~~ ($000) COMBINED GSNB NSB BANKS Equity Capital $44,968 $39,302 $84,270 Paid out to WCI (41,292) (41,292) Minority Shareholders (11,831) (1,831) $8,155) 539,302 $31,147 a.) Equity capital of both institutions has thus been impaired by $53,123,000. WCI receives $41,292,000 cash and $10,000,000 pfd; the minority shareholders receive $11,831,000 cash for a total of $53,123,000 cash. removed from the stockholders' equity of the combined banks.Board of Directors April 25, 1978 Page 3 The foregoing can be viewed in another light: PROPOSED EQUITY ALLOCATION OF NEW BANK 000 Equity Proposed Result Contributed: To be allocated to GSB Deficit: NA NJ base shares o/s: SHS o/s 8 Stkhdrs. By $ & — Equity _ GSNB $44,968 53.4 1,774 685-37.16 $11,574 ($33,394) NSB _39,302 46.6 3,000 000 62.84 19,573 (19,729) $8: 70 1008 a, 714 100s $31,147 (§53,123*) *Stockholders equity paid out: To WCI To Minority In the absence of proforma statements, I have set forth a summary, following through three steps in the consolidation. 1.) Combination of present bank debenture debt and equity. 2.) Equity after pay out to GSNB shareholders. 3.) Restatement of new bank (GSB NANJ) capital structure, debenture debt, preferred stock, and equity. CAPITAL STRUCTURE OF PROPOSED GSB NA NJ ($00 Before write up After write up Combined of BK Bldg. & of BK Bldg. & Banks 1* _ good will 2* __good will Subordinated Debt $ 6,250 $430,000 $36,250 $ $36,250 Subtotal 6,250 +30,000 "36,250 36,250 6% Pfd stock +10,000 10,000 10,000 Common Stock 29,087 + 4,335 33,422 33,422 Surplus 33,000 -32,853 147 + 9,853 10,000 Undivided Porfits _22,183 2,422 _+22,750 _10,328 Subtotal $84,270 $31,147 $432,603 $63,750 Total $90,520 $-23,123 $67,397 $+32,603 $100,000 *1) Stockholders equity has been reduced $53,123, debenture debt increased by $30,000 for a net stockholders equity reduction of $23,123.wh Board of Directors April 25, 1978 Page 4 *2) Stockholder equity is increased by "write up" of Bank Premises and creation of a "Good Will" item $32,603. It has taken GSNB years to build this substan— tial stockholders equity, to see it drained out seems wrong; to consent to it seems dereliction of duty. It has taken GSNB years to depreciate its banking house, to now "write up" this item to ob- scure the disipated equity seems like Chinese paperwork. To sponsor and consent to it flavors of conspiracy. To further use a fictional "Good Will” of over $20 million dollars to window dress the resultant banks balance sheet carries the same flavor. b.) With the substantial reduction in stockholders equity outlined previously comes a startling change in the ratio of stockholders equity to deposits. RATIO STOCKHOLDERS EQUITY TO DEPOSITS $001 oa RYAN GsB "NI BANK REVIEW 77" NA GSNB NSB COMBINED AVERAGE No_ — Listed Peer Banks (22)Banks* Stockholders Equity $44,968 $39,302 $84,270 $55,233 $97,097 $31,147 Total Deposits 650,004 640,433 1290,437 751,000 1314,000 1290,437 Ratig**® oy 1/14.4 1/16.3 1/15.3 1/14.14 1/13.53 1/41.43 Bibro An 6G co) ‘ Le 13 24 Market"as a % of Equity 80.4 67.3 *Bankshares of NJ Fidelity Union Heritage Bank Corp. Midlantic NJ National United Jersey **Ratio of Stockholders Equity to DepositsBoard of Directors Apri Page 1 25, 1978 5 The foregoing table must raise significant questions regarding the safety of depositors’ funds since their equity capital protection is reduced almost threefold. c.) The following table illustrates from another viewpoint the dilutive effect of the revised proposal on depositors. INVESTABLE DEPOSITS PER DOLLAR OF SHAREHOLDERS" EQUITY GSNB Prop NA 3.) Investable Deposits Deposits Shareholders' per Dollar of Share~ ($000) o/s Equity. holders’ Equity 468 $650,004 $44,948,000 $14.47 osed GSB NO $1,290,487 $31,174,000 $41.39 One share GSNB equals 3 NSB NA NI x3 $124.17 The foregoing table illustrates a startling increase in investable dollars of deposits per dollar of stockholders’ equity (leverage is increased by 858%) emphasizing the dilu- tion of depositors protection and the dissipation of stock- holders' equity. a.) In addition, the consolidated GSB NA NJ will have rather significant fixed charges that must be paid before any con- sideration of dividend, namely: ESTIMATED ANNUAL COST FIXED OBLIGATION Pre Tax After Tax I) Interest cost of debentures $2,776,000 $1,388,000 2) Dividends of preferred stock 1,200,000 600,000 3) Increased depreciation of bank premises 452,000 226,000 4) Reductions of good will 252,000 126,000 $4,680,000 $2,340,000 $0.98/share $0.49/share These fixed charges will have to be paid annually before dividends and before contribution to retained earnings. They will prolong the rebuilding of stockholders’ equity to the cur- rent level (before dissipation). The presence of the charges in the P/L of the new bank illustrate the increased burden placed on earnings of the combined institution to serve the interest, benefit and gain of a departing shareholder our Chairman assures the Board, but not in writing, that the shares of GSB NA NJ will sell at the same price as the current NSB shares at $11 per share. On this basis, we are told GSNB shareholders will be effectively receiving more in this revised plan than in the prior plan of consolidationBoard of Directors April 25, 1978 Page 6 MINORTTY GNSB_SHAREHOLDERS' BUYOUT Per Share Original Plan Revised Plan cash $50 $20 Stock-3 shares 33, Total $50 $53 NSB, however, currently sells at 80% of its book value. Assuming the market were generous enough to continue this valua~ tion after this dilution of equity capital, the proforma book value of new bank of $6.52 per share would indicate a probable market price of $5.21 per share: Per Share Original Plan Revised Plan cash $50 $20 Stock-3 shares 15.63 Total $50 $35.63 With WCI receiving a $50 price, $40 cash and $10 in a 68 preferred stock, this analysis would suggest: 4.) a.) ‘That WCI, merely another GSNB stockholder, has re- ceived far more preferential treatment than the GSNB minority stockholders. b.) When one adds to this the fact that WCI is upgrading a portion of their holding to a prefered position; one which, being a corporate owner of prefered dividend stock, gives preferential tax treatment (only 15% of div: dends received are taxable income) and that WCI enjoys a tax preference over the minority shareholders, being able to spread any capital gain realized on this transaction over a ten-year period, whereas the minority shareholders will face a fully and immediately taxable transaction; the disparity in treatment of the two shareholder groups must raise eyebrows. The Chairman is in a position of conflicting interests: a.) He is a member of the Board of Directors of WCT and sits on its Executive Committee. b.) He was at least the co-author of the August 15, 1977 plan which failed and is again co-author of the revised proposal.Board of Directors April 25, 1978 Page 7 c.) He argues strenuously for an unnecessary taxable Liquidation of stockholder equity in a WCI 63.4% con- trolled subsidiary. a.) He favors a proposal which provides better treatment to WCI, the majority holder, than to the minority holders. e.) WCI has disclosed in a recent proxy statement, the existence of a contract to purchase the GSNB holdings of the Chairman's estate, in the event of his death. £.) He, as Chairman of the Board of GSNB and its chief executive officer, is a fervent supportor of the revised proposal which favors WCI's position and rebuffs efforts to obtain time to study the revised plan or seek alter- natives. The crux of the problem presented at the special meeting of the Board, April 20th, is not really GSNB’s problem, it is the problem of a single shareholder, the majority shareholder of GSNB. WCI, a public corporation which filed on May 20, 1971, (almost seven years ago) in accordance with the terms of the Bank Holding Company act of 1956, as amended with the Federal Reserve Board an “irrevocable declaration to cease being a bank holding company by December 31, 1980." If any other shareholder were under a compulsion to dispose of his stock, for whatever reason, there certainly would not have been this type of a meeting nor the in- tensified campaign to alleviate distress. A campaign which ex- tends its scope to devise the proposed consolidation as a vehicle for total liquidation of stockholders’ equity in GSNB for the major benefit of its majority stockholder. IN SHORT, THIS MAg- ORITY SHAREHOLDER'S PROBLEM IS THIS SHAREHOLDER'S PROBLEM AND NOT THE PROBLEM OF THE DEPOSITORS, MINORITY SHAREHOLDERS, OR GSNB ITSELF. 1.) The fact that WCI is the majority holder of GSNB shares makes them no different than any other shareholder of a limited market stock - if you have to sell - SELL. WCI does not lack alternatives, they lack the fortitude to take them - Some alternatives follow: a.) Distribute their GSNB shares to their stockholders. 1) One share of Class "A" for a certain number of WCI shares. 2) One share of Class shares. " for a certain number of WCIBoard of Directors April 25, 1978 Page 8 b.) Have an underwritten publié offering of GSNB shares. Class "A" at one price, Class "B" at another price. c.) They could ask GSNB shareholders for permission to convert their class "B" shares to class "A" - for either of the above purposes. If GSNB shareholders agreed (not an unlikely event in my view) one of the prime objections they have heard from potential buyers would be removed. a.) They could offer rights to purchase their GSNB hold- ings to their WCI shareholders. Class "A" at one price, Class "B" at another price. Bank consolidations have often been put together to salvage a problem bank and protect depositors; but never to my knowledge has a consolidation been voted for the purpose of using stock- holder's equity to liquidate the equity investment of sharcholders. The proposal presented goes beyond liquidation of equity, it favors a majority group of shareholders over the minority group. The payment of $20.00 per share to the minority seemed a bit of bait - providing cash with which to pay the taxes inherent in the transaction. With alternatives available to WCI for the solution to their problem, I fail to see why we, directors of GSNB, must feel pres- sure to approve a course of action which, while generously assist~ ing WCI, has the following apparent consequences for all others: 1.) The GSNB depositors are stripped of all their equity capital protection, plus some of NSB's equity capital. 2.) The minority GSNB shareholders are forced to accept a signi- ficant dilution of their equity, built up over many years. 3.) ‘he minority GSNB shareholders are forced unnecessarily into a fully taxable transaction. 4.) ‘The minority GSNB shareholders are forced to accept onerous continuing fixed charges to carry the debt and preferred stock burdens used to bail out WCI. 5.) ‘The NSB Board is being "sold" a deal which dilutes their depositor equity protection and stockholder equity.Board of Directors April 25, 1978 Page 9 6.) The patchwork quilt financing and accounting scheme pro- ferred by WCI and our Chairman to facilitate this proposal and make it "palatable" to regulatory authorities, account~ ants, analysists, and investors is a "comforter" of debt, preferred stock and Chinese bookkeeping. It is my intention to oppose the proposed consolidation and having reached that decision, I hereby tender my resignation as a member of the Board of Directors of Garden State National Bank effective upon receipt of an acknowledgement of receipt of this letter. Ti Ly, William A. Conway/ for