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As filed with the Securities and Exchange Commission on August 11, 1998
Registration No. 333-56729
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
WEST ESSEX BANCORP, INC.
WEST ESSEX BANK, F.S.B.
401(k) EMPLOYEE BENEFIT PLAN
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
UNITED STATES 6035 BEING APPLIED FOR
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
417 BLOOMFIELD AVENUE
CALDWELL, NEW JERSEY 07006
(973) 226-7911
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
LEOPOLD W. MONTANARO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WEST ESSEX BANK
417 BLOOMFIELD AVENUE
CALDWELL, NEW JERSEY 07006
(973) 226-7911
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
DOUGLAS P. FAUCETTE, ESQUIRE
LORI M. BERESFORD, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
----
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
----
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Title of each Class of Amount to Offering Price Aggregate Offering Registration
Securities to be Registered be Registered Per Unit Price (2) Fee
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Common Stock 2,482,585
$.01 par value(1) Shares $10.00 $24,825,850 (3)
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Participation 59,795 _______ (4)
Interests
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(1) Includes shares of Common Stock to be issued to the West Essex Bancorp
Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The registration fee of $7,324 was previously paid upon the initial filing
of the Form S-1.
(4) The securities of West Essex Bancorp, Inc. to be purchased by the West Essex
Bank 401(k) Savings Plan are included in the amount shown for Common Stock.
Accordingly, no separate fee is required for the participation interests. In
accordance with Rule 457(h) of the Securities Act, as amended, the
registration fee has been calculated on the basis of the number of shares of
Common Stock that may be purchased with the current assets of such Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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PROSPECTUS
WEST ESSEX BANCORP, INC.
2,071,955 (Anticipated Maximum) Shares of Common Stock
West Essex Bancorp, Inc. ("Bancorp") a federally chartered corporation, is
offering up to 2,071,955 shares of its common stock, par value $.01 per share
(the "Common Stock"), for a purchase price of $10.00 per share (the "Purchase
Price") in a minority stock offering in connection with the reorganization of
West Essex Bank, F.S.B. (the "Bank" or "West Essex") from a federally chartered
mutual savings bank to a federally chartered stock savings bank in the federal
mutual holding company form of organization (the "Reorganization"). As part of
the Reorganization, the Bank will become a wholly owned subsidiary of Bancorp
and Bancorp will issue a majority of its Common Stock to West Essex Bancorp,
M.H.C., a mutual holding company (the "Mutual Company"), and, pursuant to
Bancorp's Plan of Mutual Holding Company Reorganization and Stock Issuance (the
"Plan"), sell a minority of its Common Stock to the public as described herein.
Depending on changes in market and financial conditions, the number of shares
offered may be increased to 2,382,748 shares following commencement of the
Offering (as defined herein).
(continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 15.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY OTHER FEDERAL
AGENCY,
OR BY ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE, OTHER
AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND
OR ANY OTHER GOVERNMENT AGENCY NOR ARE THEY INSURED OR
GUARANTEED BY THE BANK.
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ESTIMATED UNDERWRITING
COMMISSIONS
PURCHASE AND OTHER FEES AND ESTIMATED
PRICE(1) EXPENSES(2) NET PROCEEDS
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<S> <C> <C> <C>
Minimum Per Share................ $ 10.00 $.06 $9.94
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Midpoint Per Share............... $ 10.00 $.05 $9.95
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Maximum Per Share................ $ 10.00 $.04 $9.96
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Total Minimum.................... $15,314,450 $767,000 $14,547,450
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Total Midpoint................... $18,017,000 $805,000 $17,212,000
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Total Maximum.................... $20,719,550 $842,000 $19,877,550
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Total Maximum, as adjusted(3).... $23,827,480 $884,000 $22,943,480
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</TABLE>
(1) The shares of Common Stock (including shares to be held by the Mutual
Company) will be issued at an aggregate purchase price equal to the
estimated pro forma market value of such stock based on an independent
appraisal (the "Independent Valuation") of Bancorp prepared by FinPro, Inc.
("FinPro"), an independent appraisal firm. FinPro determined that the
estimated pro forma market value of Bancorp, including the impact of the
Mutual Company and the establishment and funding of the charitable
foundation (as described herein), was $42.7 million as of June 12, 1998. The
shares of Common Stock being offered represent a minority interest in
Bancorp equal to 42.2% of the Independent Valuation. The aggregate purchase
price of the Common Stock to be offered in the Offering (as defined herein)
will range from $15,314,450 to $20,719,550, subject to adjustment up to
$23,827,480 million if there is an increase of up to 15% in the Independent
Valuation (the "Offering Range") taking into account the contribution to the
charitable foundation (as described herein). The Independent Valuation will
be updated at the time of completion of the Offering (as defined herein),
and the percentage of the outstanding shares to be offered in the Offering
(as defined herein) (the "Minority Ownership Interest") may increase or
decrease to reflect changes in market and financial conditions, the
estimated pro forma market value of Bancorp, or both. The Purchase Price
will remain fixed. In the event the Independent Valuation at the completion
of the Offering (as defined herein) increases, Bancorp may increase the
Offering (as defined herein) by up to 15% without giving prospective
purchasers the opportunity to change or withdraw their purchase orders. See
"The Reorganization and Stock Offering--Stock Pricing and Number of Shares
Issued." In the event the Independent Valuation decreases, the aggregate
purchase price necessary to purchase the Minority Ownership Interest will
also decrease. Any adjustment of shares within the Offering Range will have
a corresponding effect on the estimated net proceeds of the Offering and the
pro forma capitalization and per share data of Bancorp. See "Use of
Proceeds," "Capitalization" and "Pro Forma Data."
(2) Consists of estimated costs to Bancorp arising from the Offering (as
defined herein), including estimated fixed expenses of $600,000, and
marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill"), which marketing fees are estimated to be $205,000. The actual
fees and expenses may vary from the estimated amounts. See "Pro Forma Data"
and "The Reorganization and Stock Offering" for the assumptions used to
determine these estimates.
(3) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory considerations,
changes in market conditions or general financial and economic conditions.
See "Pro Forma Data" and "The Reorganization and Stock Offering -- Stock
Pricing and Number of Shares Issued." For a discussion of the distribution
and allocation of the additional shares, if any, see "The Reorganization and
Stock Offering -- Subscription Offering and Subscription Rights," " --
Community Offering" and "--Limitations on Common Stock Purchases."
SANDLER O'NEILL & PARTNERS, L.P.
The date of this Prospectus is ______________, 1998.
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PURSUANT TO THE BANK'S PLAN, THE SHARES OF COMMON STOCK ARE BEING OFFERED IN A
SUBSCRIPTION OFFERING (THE "SUBSCRIPTION OFFERING") ON A PRIORITY BASIS TO:
(1) HOLDERS OF DEPOSIT ACCOUNTS (AS DEFINED BY THE PLAN AND AS DESCRIBED HEREIN)
AT THE BANK WHICH TOTALLED $50 OR MORE ON FEBRUARY 28, 1997 ("ELIGIBLE ACCOUNT
HOLDERS"); (2) THE BANK'S EMPLOYEE STOCK OWNERSHIP PLAN (THE "ESOP"), A TAX-
QUALIFIED EMPLOYEE STOCK OWNERSHIP PLAN; (3) HOLDERS OF DEPOSIT ACCOUNTS AT THE
BANK WHICH TOTALLED $50 OR MORE ON ___________, 1998 ("SUPPLEMENTAL ACCOUNT
HOLDERS"); AND (4) MEMBERS OF THE BANK CONSISTING OF HOLDERS OF DEPOSIT ACCOUNTS
AT THE BANK AS OF ___________, 1998, THE VOTING RECORD DATE ("VOTING RECORD
DATE") FOR THE SPECIAL MEETING (AS DEFINED HEREIN), OTHER THAN THOSE MEMBERS WHO
OTHERWISE QUALIFY AS ELIGIBLE ACCOUNT HOLDERS OR SUPPLEMENTAL ACCOUNT HOLDERS
("OTHER MEMBERS"). SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS FOUND TO
BE TRANSFERRING SUCH RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND
POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT
SUPERVISION ("OTS").
Subject to the prior rights of holders of subscription rights, Bancorp may
offer shares of Common Stock not subscribed for in the Subscription Offering for
sale in a community offering to certain members of the general public, with
preference given to natural persons residing in Essex, Morris and Bergen
Counties in the State of New Jersey (the "Community Offering") (the Subscription
Offering and Community Offering are referred to collectively as the
"Subscription and Community Offerings"). Shares not subscribed for in the
Subscription and Community Offerings will be offered to members of the general
public in a syndicated community offering (the "Syndicated Community Offering")
(the Subscription and Community Offerings and the Syndicated Community Offering
are referred to collectively as the "Offering").
Pursuant to the Plan: (i) the Bank will establish Bancorp and the Mutual
Company; (ii) the Bank will exchange its mutual savings bank charter for a stock
savings bank charter; (iii) the Bank will issue 100% of its capital stock to
Bancorp and (iv) Bancorp will issue between 3,625,607 and 4,905,233 shares of
Common Stock in the Reorganization: 56.0% of these (or between 2,029,994 and
2,746,463 shares) will be issued to the Mutual Company, 42.2% (or between
1,531,445 and 2,071,955 shares) will be sold through the Offering to the
minority stockholders (the "Minority Stockholders") and 1.8% (or between 64,168
and 86,815 shares) will be issued to a newly formed charitable foundation
(described herein). Interests depositors had in the Bank prior to the
Reorganization will become interests in the Mutual Company, which will own 56.0%
of the shares of Common Stock of Bancorp, while minority ownership in the stock
of Bancorp will be held by the owners of the Common Stock. References herein to
the Bank shall include West Essex in its current form or post-reorganization
stock form, as indicated by the context.
THE SHARES OF COMMON STOCK ISSUED IN THE OFFERING WILL REPRESENT A MINORITY
INTEREST IN BANCORP. THE REMAINING SHARES WILL BE OWNED BY THE MUTUAL COMPANY.
ASSUMING NO CHANGE IN THE ESTIMATED PRO FORMA MARKET VALUE OF BANCORP AS OF THE
DATE OF COMPLETION OF THE OFFERING AND ASSUMING THE ISSUANCE OF SHARES TO THE
CHARITABLE FOUNDATION (AS DESCRIBED HEREIN), 1,801,700 SHARES OF COMMON STOCK
WILL REPRESENT APPROXIMATELY 42.2% OF THE ISSUED AND OUTSTANDING SHARES OF
BANCORP. Except for the ESOP, which intends to subscribe for up to 8% of the
Common Stock issued in the Offering, including shares contributed to the
charitable foundation (as described herein), no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member may, in their respective
capacities as such, purchase in the Subscription Offering more than $350,000 of
the Common Stock offered in the Offering; no person, together with associates of
and persons acting in concert with such person, may purchase in the Community
Offering and the Syndicated Community Offering more than $350,000 of the shares
offered in the Offering; and no person, together with associates of and persons
acting in concert with such person, may purchase in the aggregate more than the
overall maximum purchase limitation of $700,000 of the shares of Common Stock
offered in the Offering; provided, however, that such purchase limitations may
be increased or decreased in the sole discretion of Bancorp without further
approval of subscribers or the Bank's members to the extent permitted by
applicable regulations. See "The Reorganization and Stock Offering --The
Offering," "-- Community Offering" and "-- Limitations on Common Stock
Purchases." The minimum purchase is 25 shares.
Pursuant to the Plan, Bancorp intends to establish a charitable foundation, in
connection with the Reorganization and Offering. The Bank and Bancorp will form
the West Essex Bancorp Charitable Foundation (the "Foundation") which will be
incorporated under Delaware law as a non-stock corporation. The Plan provides
that Bancorp will fund the Foundation with cash and shares of Common stock
contributed by Bancorp from authorized but
2
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unissued shares in an amount equal to approximately 4.2% of the shares sold in
the Offering. The Foundation will be dedicated to charitable purposes within the
Bank's community. The establishment of the Foundation is subject to the approval
of the Bank's members at the Special Meeting being held to consider the Plan.
For a discussion of the Foundation and its effects on the Reorganization, see
"Risk Factors--Establishment of the Charitable Foundation," "Pro Forma Data" and
"The Reorganization and Stock Offering--Establishment of the Charitable
Foundation."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT __:__, EASTERN TIME, ON ________,
1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY BANCORP, WITH THE APPROVAL OF
THE OTS, IF NECESSARY. The Community Offering and Syndicated Community
Offering, if any, must be completed within 45 days of the Subscription Offering,
or __________, 1998, unless extended by Bancorp with the approval of the OTS.
Orders submitted are irrevocable until the completion of the Reorganization and
Offering; provided that, if the Reorganization and Offering is not completed
within the 45 day period referenced to above, unless such period has been
extended with the consent of the OTS, if necessary, all subscribers will have
their funds returned promptly with interest, and all withdrawal authorizations
will be cancelled. Such extensions may not go beyond ________, 2000. See "The
Reorganization and Stock Offering --The Offering," " -- Community Offering"
and "-- Procedure for Purchasing Shares in the Offering."
Bancorp has received conditional approval to have its Common Stock quoted on
the Nasdaq National Market ("Nasdaq") under the symbol "WEBK" upon completion of
the Reorganization and Offering. Prior to this offering there has not been a
public market for the Common Stock, and there can be no assurance that an active
and liquid trading market for the Common Stock will develop or that the Common
Stock will trade at or above the Purchase Price. The absence or discontinuance
of a market may have an adverse impact on both the price and liquidity of the
Common Stock. See "Risk Factors--Absence of a Market for the Common Stock," and
"Market for the Common Stock."
EXPLANATORY NOTE: This Prospectus contains certain forward looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of Bancorp and the Bank. Prospective investors are
cautioned that such forward looking statements are not guarantees of future
performance and are subject to various factors which could cause actual results
to differ materially from these estimates. These factors include changes in
general, economic and market conditions, and the development of an interest rate
environment that adversely affects the interest rate spread or other income
anticipated from Bancorp's and the Bank's operations and investments. See "Risk
Factors" for a discussion of other factors that might cause actual results to
differ from such estimates.
3
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[MAP GOES HERE]
4
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SUMMARY OF THE REORGANIZATION AND THE OFFERING
The following summary of the Reorganization and the Offering is qualified in
its entirety by the terms of the Plan and more detailed information appearing
elsewhere in this Prospectus.
RISK FACTORS .................. A purchase of the Common Stock involves a
substantial degree of risk. Eligible Account
Holders, Supplemental Eligible Account
Holders, Other Members and other prospective
investors should carefully consider the
matters set forth under "Risk Factors." THE
SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC"), THE BANK
INSURANCE FUND ("BIF") OR THE SAVINGS
ASSOCIATION INSURANCE FUND ("SAIF") OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED
BY BANCORP, THE MUTUAL COMPANY OR THE BANK.
WEST ESSEX BANCORP, INC. ...... Bancorp has not yet been incorporated. It will
be incorporated at the direction of the Bank
under Federal law in connection with the
consummation of the Reorganization and
Offering to become a savings and loan holding
company and own all of the Bank's capital
stock to be issued upon the Reorganization. In
connection with the Reorganization and
Offering, Bancorp will offer shares of Common
Stock through the Offering and issue at least
51% of its shares to the Mutual Company. Its
executive office is located at 417 Bloomfield
Avenue, Caldwell, New Jersey 07006 and its
telephone number is (973) 226-7911.
WEST ESSEX BANCORP, M.H.C. .... The Mutual Company is being organized by the
Bank to be a federally chartered mutual
holding company that will own a majority of
the Common Stock of Bancorp following the
Reorganization and Offering. The Mutual
Company's principal assets will be shares of
common stock received in the Reorganization
and Offering and up to $100,000 received as
its initial capitalization.
WEST ESSEX BANK, F.S.B. ....... The Bank is a federally chartered mutual
savings bank. At March 31, 1998, the Bank had
total assets of $312.5 million, total deposits
of $239.1 million and total equity of $29.8
million. The Bank currently operates eight
full service banking offices including its
main office, all of which are located in
Essex, Morris and Bergen Counties, New Jersey.
The Bank has historically operated as a
community-oriented savings institution whose
business currently primarily consists of
accepting deposits from customers in its
primary market area and investing those
deposits in mortgage-backed securities and
one- to four-family residential mortgage
loans, most of which are single-family loans
secured by properties located primarily in the
Bank's primary market area. To a significantly
lesser extent, the Bank originates commercial
real estate loans and home equity loans,
construction and development loans, multi-
family loans and consumer loans and invests in
debt obligations of the federal government and
federal agencies, as well as states and
municipalities. The Bank considers that its
market area consists of Essex, Morris and
Bergen Counties, all of which are located in
Northern New Jersey. Its executive offices are
located at 417 Bloomfield Avenue, Caldwell,
New Jersey 07006 and its telephone number is
(973) 226-7911.
THE REORGANIZATION ............ On March 18, 1998, the Board of Directors of
the Bank adopted the Plan pursuant to which
the Bank will reorganize from a federal mutual
savings bank into a federal mutual holding
company structure. The structure following the
Reorganization will be as follows: the Mutual
Company
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(which will be formed by the Bank) will own up
to at least 51% of Bancorp's Common Stock and
Bancorp will own 100% of the issued and
outstanding capital stock of the Bank. It is
intended that, following approval by the
Bank's members of the Plan and the
satisfaction of all other conditions precedent
to the Reorganization, the Bank will effect
the Reorganization in the following way: (i)
the Bank will form an interim federal stock
savings bank ("Interim I"), which will then
form two subsidiaries, another interim federal
stock savings bank ("Interim II") and Bancorp;
(ii) the Bank will exchange its mutual charter
for a stock charter and Interim I will
exchange its charter for a federal mutual
holding company charter to become the Mutual
Company; (iii) Interim II will then merge with
and into the Bank, with the Bank as the
resulting entity and 100% of the outstanding
capital stock of the Bank will be transferred
to the Mutual Company in exchange for
membership interests in the Bank that existed
when the Bank was in mutual form; and,
finally, (iv) the Mutual Company will transfer
100% of the issued and outstanding capital
stock of the Bank to Bancorp. In connection
with the Reorganization, the Mutual Company
will be capitalized by the Bank with $100,000.
THE MUTUAL COMPANY
STRUCTURE AND REASONS
FOR THE REORGANIZATION ....... In adopting the Plan, the Board of Directors
of the Bank has determined that for the
reasons set forth below, the Reorganization is
advisable and in the best interests of the
Bank and its depositors, and is consistent
with the Bank's business plan to operate as an
independent, community-oriented savings
institution. The Reorganization will enable
the Bank to access capital markets, expand its
current operations, acquire other financial
institutions or establish new branch offices,
diversify into other financial services to the
extent allowable by applicable law and
regulation and to otherwise improve the Bank's
ability to provide services to its community.
Such access to the capital markets will also
make it possible for the Bank to be more
responsive to possible future changes in the
regulations of the bank regulatory agencies
mandating higher capital reserves and/or
capital ratios. AT THE SAME TIME, THE MUTUAL
HOLDING COMPANY STRUCTURE WILL PRESERVE THE
MUTUAL FORM OF OWNERSHIP WITHIN THE MUTUAL
HOLDING COMPANY STRUCTURE, CONSISTENT WITH THE
BANK'S COMMITMENT TO BE AN INDEPENDENT,
COMMUNITY ORIENTED SAVINGS INSTITUTION. IN
THIS REGARD, SO LONG AS THE MUTUAL COMPANY IS
IN EXISTENCE, IT WILL AT ALL TIMES OWN AT
LEAST A MAJORITY INTEREST OF BANCORP, AND
THEREFORE, INDIRECTLY, THE BANK AS WELL.
The Board of Directors believes that these
advantages outweigh the potential
disadvantages of the mutual holding company
structure, which include: (i) the inability to
sell Common Stock in excess of 49.9% of
Bancorp's total issued and outstanding voting
stock so long as the Mutual Company remains in
existence; (ii) the more limited liquidity of
the Common Stock, as compared to a standard
conversion; (iii) the inability of
stockholders other than the Mutual Company to
obtain majority ownership of the Bank and
Bancorp, which may result in the perpetuation
of the existing management and Board of
Directors of Bancorp and the Bank; and (iv)
the added expense of conducting more than one
stock offering should the Mutual Company
convert to the stock form at some future date.
Because the Mutual Company will hold a
majority of the Common Stock of Bancorp
following consummation of the
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Reorganization and Offering, the Mutual
Company could take certain actions that the
Minority Stockholders may not believe is in
their best interest, including but not limited
to, preventing the sale of Bancorp, defeating
Board candidates nominated or supported by
Minority Stockholders, or defeating other
proposals that may be supported by the
Minority Stockholders.
The Reorganization does not preclude the
conversion of the Mutual Company from the
mutual to stock form of organization following
the Reorganization. NO ASSURANCE CAN BE GIVEN
THAT THE MUTUAL COMPANY WILL EVER CONVERT TO
STOCK FORM OR WHAT CONDITIONS THE OTS MAY
IMPOSE ON ANY SUCH TRANSACTION. SEE
"CONVERSION OF MUTUAL COMPANY TO STOCK FORM."
WEST ESSEX BANCORP CHARITABLE
FOUNDATION .................. The Plan provides for the establishment of a
charitable foundation in connection with the
Reorganization. The Foundation, which will be
incorporated under Delaware law as a non-stock
corporation, will be funded with a
contribution by Bancorp equal to approximately
4.2% of the Common Stock sold in the Offering
which, if 2,071,955 shares of Common Stock are
sold in the Offering, would cost the Bank
approximately $868,150, in addition to a cash
contribution of $100,000. The authority for
the affairs of the Foundation will be vested
in the Board of Directors of the Foundation,
all of whom will be Directors of Bancorp or
the Bank or officers of Bancorp or the Bank.
The establishment of the charitable foundation
could have an adverse impact on earnings in
the year the Foundation is established. See
"Risk Factors--Establishment of the Charitable
Foundation," and "The Reorganization and Stock
Offering--Establishment of the Charitable
Foundation."
TERMS OF THE
SUBSCRIPTION OFFERING ........ The Plan of Stock Issuance authorizes Bancorp
to offer Common Stock to persons other than
the MHC in the Offering in an amount less than
50.0% of the issued and outstanding shares of
Bancorp Common stock. Bancorp is offering
between 1,531,445 and 2,071,955 shares in the
Offering, which represents a Minority
Ownership Interest of 42.2%, based upon the
Independent Valuation and taking into account
shares issued to the Foundation. The shares of
Common Stock to be sold in connection with the
Reorganization and Offering are being offered
at a fixed price of $10.00 per share in the
Subscription Offering pursuant to subscription
rights in the following order of priority to:
(i) Eligible Account Holders; (ii) the ESOP;
(iii) Supplemental Eligible Account Holders;
and (iv) Other Members. Subject to the prior
rights of holders of subscription rights, any
shares of Common Stock not subscribed for in
the Subscription Offering will be offered in
the Community Offering at $10.00 per share to
certain members of the general public.
Subscription rights will expire if not
exercised by 12:00 noon, Eastern time, on
________, 1998, unless extended by the Bank
and Bancorp, with the approval of the OTS, if
necessary. Deposit accounts that will provide
a subscription right to holders thereof
include all withdrawable deposits in the Bank,
including non-interest bearing demand
deposits. See "The Reorganization and Stock
Offering--Subscription and Subscription
Rights" and "--Community Offering."
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PROCEDURE FOR ORDERING SHARES
AND PROSPECTUS DELIVERY ...... Forms to order Common Stock offered in the
Subscription Offering and the Community
Offering will be preceded or accompanied by a
Prospectus. Any person receiving a stock order
and certification form who desires to
subscribe for shares must do so prior to the
Expiration Date by delivering to the Bank a
properly executed stock order and
certification form together with full payment.
ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE
REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE
BANK. To ensure that each purchaser receives a
prospectus at least 48 hours prior to the
Expiration Date in accordance with Rule 15c2-8
of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no prospectus
will be mailed any later than five days prior
to the Expiration Date or hand delivered any
later than two days prior to such date. The
Bank is not obligated to accept subscriptions
not submitted on an original stock order form.
See "The Reorganization and Stock Offering--
Procedure for Purchasing Shares in the
Subscription Offering."
FORM OF PAYMENT FOR SHARES .... Payment for subscriptions may be made: (i) in
cash (if delivered in person); (ii) by check,
bank draft or money order; or (iii) by
authorization of withdrawal from deposit
accounts maintained at the Bank. See "The
Reorganization and Stock Offering--Procedure
for Purchasing Shares in the Offering."
NONTRANSFERABILITY OF
SUBSCRIPTION RIGHTS .......... The subscription rights of Eligible Account
Holders and Supplemental Eligible Account
Holders are nontransferable. Certificates
representing shares of Common Stock purchased
in the Subscription Offering must be
registered in the name of the Eligible Account
Holder or the Supplemental Eligible Account
Holder, as the case may be. Joint stock
registration will be allowed only if the
qualifying deposit account is so registered.
See "The Reorganization and Stock Offering--
Restrictions on Transfer of Subscription
Rights and Shares."
PURCHASE LIMITATIONS .......... Except for the ESOP, no Eligible Account
Holder, Supplemental Eligible Account Holder
or Other Member may purchase in the
Subscription Offering more than $350,000 of
Common Stock. No person, together with
associates or persons acting in concert with
such person, may purchase in the Community
Offering and the Syndicated Community Offering
more than $350,000 of Common Stock. No person,
together with associates or persons acting in
concert with such person, may purchase in the
aggregate more than $700,000 of Common Stock.
However, the ESOP may purchase up to 10% of
the Common Stock issued in the Offering,
including shares issued to the Foundation.
Pursuant to the Plan, it is intended that the
ESOP will purchase 8% of the Common Stock
issued in the Offering, including shares
issued to the Foundation. The minimum purchase
is 25 shares of Common Stock. At any time
during the Reorganization and Offering and
without approval of the Bank's depositors or a
resolicitation of subscribers, the Bank and
Bancorp may, in their sole discretion,
decrease the maximum purchase limitation below
$350,000 of Common Stock; however, such amount
may not be reduced to less than 0.10% of the
Common Stock offered. Additionally, at any
time during the Reorganization and Offering,
the Bank and Bancorp may, in their sole
discretion, increase the maximum purchase
limitation in the Subscription and Community
Offerings to an amount in excess of $350,000,
up to a maximum of 5% of the shares to be
issued in the Reorganization and Offering.
Similarly, the $700,000 overall maximum
purchase limitation may be decreased to an
amount not below 1% of the Common Stock
offered or increased up to 5% of the total
shares of Common Stock offered in the
Offering.
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES OFFERED AND
PURCHASE PRICE ............... Bancorp is offering between 1,531,445 and
2,071,955 shares of Common Stock at a purchase
price of $10.00 per share. The maximum of the
Offering Range may be increased by up to 15%
and the maximum number of shares of Common
Stock to be offered may be increased up to
2,382,748 shares due to regulatory
considerations and changes in market or
general financial or economic conditions. See
"The Reorganization and Stock Offering--Stock
Pricing and Number of Shares Issued."
INDEPENDENT VALUATION ......... The purchase price per share has been fixed at
$10.00. The total number of shares to be
issued in the Conversion is based upon an
independent appraisal prepared by FinPro,
dated as of June 12, 1998, which states that
the estimated pro forma market value of the
Common Stock ranged from $36.3 million to
$49.1 million, taking into account shares
issued to the Foundation. Establishing the
Foundation in connection with the
Reorganization and Offering will result in a
lower aggregate market valuation than if the
Reorganization and Offering were completed
without the Foundation. See "Comparison of
Valuation and Pro Forma Information With No
Foundation." The final aggregate value will be
determined at the time of closing of the
Offering and is subject to change due to
changing market conditions and other factors.
See "The Reorganization and Stock Offering--
Stock Pricing and Number of Shares Issued."
USE OF PROCEEDS ............... Bancorp will use up to 75% of the net proceeds
of the Offering to acquire 100% of the capital
stock of the Bank. The remaining net proceeds
will be used for general business activities,
including the loan of funds to the ESOP (to
the extent such loan is not funded by a third
party) to enable the ESOP to purchase up to 8%
of the stock issued in the Offering, including
shares issued to the Foundation. Bancorp
intends initially to invest the remaining net
proceeds in federal funds and securities,
primarily mortgage-related securities and
federal agency obligations. In connection with
the Reorganization, the Mutual Company will be
capitalized by the Bank with $100,000. The
Bank intends to utilize the net proceeds
received by it for general business purposes,
including investment in loans and mortgage-
related securities. On an interim basis, it is
anticipated that most of the net proceeds will
be invested in investments that qualify as
short-term liquidity for regulatory purposes
until such proceeds can be deployed in longer-
term investments. See "Use of Proceeds."
DIVIDEND POLICY ............... Upon consummation of the Reorganization and
Offering, the Board of Directors of Bancorp
will have the authority to declare dividends
on the Common Stock, subject to statutory and
regulatory requirements. In the future, the
Board of Directors of Bancorp may consider a
policy of paying cash dividends on the Common
Stock. However, no decision has been made with
respect to such dividends, if any. See
"Dividend Policy."
BENEFITS OF THE REORGANIZATION
TO MANAGEMENT ................. Among the benefits to the Bank and Bancorp
anticipated from the Reorganization and
Offering is the ability to attract and retain
personnel through the use of stock options and
other stock related benefit programs.
Subsequent to the Reorganization, Bancorp
intends to adopt a Stock-Based Incentive Plan
(as defined herein) for the benefit of
directors, officers and employees of Bancorp
and Bank. If the Stock-Based Incentive Plan is
adopted within one year after the
Reorganization, the plan will be subject to
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
stockholders' approval at a meeting of
stockholders which may not be held earlier
than six months after the Reorganization. The
Stock-Based Incentive Plan would provide for
the granting of stock-based benefits,
including Common Stock in an amount equal to
4% of the Common Stock issued in the Offering,
including shares issued to the Foundation, and
options to purchase Common Stock in an amount
equal to 10% of the Common Stock issued in the
Offering, including shares issued to the
Foundation. Any Common Stock awarded under the
Stock-Based Incentive Plan will be awarded at
no cost to the recipients.
Additionally, certain officers of Bancorp and
the Bank will be provided with employment
agreements or change in control agreements
which provide such officers with employment
rights and/or payments upon their termination
of service following a change in control. The
Stock-Based Incentive Plan may also provide
participants with benefits upon a change in
control of Bancorp or the Bank. For a further
description of the Stock-Based Incentive Plan
and employment and change in control
agreements, see "Risk Factors--Stock Based
Benefits to Management and Directors,
Employment Contracts and Change in Control
Payments" and "Management of the Bank--Other
Benefit Plans." See "Management of the Bank--
Subscriptions by Executive Officers and
Directors," "Certain Restrictions on
Acquisition of Bancorp" and "The
Reorganization and Stock Offering--
Establishment of the Charitable Foundation."
VOTING CONTROL OF OFFICERS
AND DIRECTORS ................ Directors and executive officers of the Bank
and Bancorp expect to purchase approximately
18.8% or 13.9% of shares of Common Stock sold
in the Offering, based upon the minimum and
the maximum of the Offering Range, including
shares issued to the Foundation, respectively.
Additionally, assuming the implementation of
the ESOP and Stock-Based Incentive Plan,
directors, executive officers and employees
have the potential to control the voting of
approximately 36.4% or 32.1% of the Common
Stock at the minimum and the maximum of the
Offering Range, including shares issued to the
Foundation, respectively. See "Management of
the Bank--Subscriptions by Executive Officers
and Directors," and "Certain Restrictions on
Acquisition of Bancorp." In addition, the
Mutual Company will control the voting of at
least 51% of the total outstanding Common
Stock of Bancorp, and the Bank's current Board
of Directors will control the Mutual Company.
WAIVER OF DIVIDENDS BY THE
MUTUAL COMPANY ............... It has been the recent practice of the OTS to
permit mutual holding companies to waive the
receipt of cash dividends declared by savings
association subsidiaries or subsidiary holding
companies on a case-by-case basis and pursuant
to OTS regulations, subject to the
satisfaction of certain conditions, although
there can be no assurance that the OTS will
permit future dividend waivers, or of the
terms of such permitted waivers. The Board of
Directors of the Mutual Company, which
initially will consist of the same individuals
as the Board of Directors of the Bank, will
determine whether the Mutual Company will
waive receipt of such dividends as such
dividends are declared by Bancorp. The Mutual
Company may elect to receive dividends and to
utilize the dividends received, if any, for
general corporate purposes and to fund the
purchase of Common Stock in the open market,
as well as the payment of miscellaneous
expenses. Any waiver of
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
dividends by the Mutual Company may result in
an adjustment to the ratio pursuant to which
shares of Common Stock are exchanged for
shares of a stock holding company should the
Mutual Company convert from the mutual to
stock form of organization. Such an adjustment
would have the effect of diluting the Minority
Ownership Interest. See "Risk Factors--Waiver
of Dividends by the Mutual Company," "Waiver
of Dividends by the Mutual Company" and
"Conversion of the Mutual Company to Stock
Form."
CONVERSION OF THE MUTUAL
COMPANY TO STOCK FORM ........ Although the Mutual Company may convert to the
stock form of organization in the future (a
"Conversion Transaction") and OTS regulations
provide for a Conversion Transaction, there
can be no assurance when, if ever, a
Conversion Transaction will occur, or what
conditions may be imposed by the OTS on any
Conversion Transaction. Any Conversion
Transaction would be subject to federal
securities laws and the regulations of the OTS
in effect at the time of the Conversion
Transaction. In the event of a Conversion
Transaction, subject to OTS approval, (1) the
stockholders of Bancorp other than the Mutual
Company will be entitled to exchange their
shares of Common Stock for shares of the stock
holding company in a manner that is fair and
reasonable to the stockholders and subject to
the stock purchase limitations of the OTS
conversion regulations (which may require, as
a condition to the approval of the Conversion
Transaction by the OTS, that certain insiders
of Bancorp who have accumulated shares in
excess of the stock purchase limitations of
the Conversion Transaction to divest such
shares, and may also potentially restrict or
prohibit additional purchases of common stock
of the stock holding company in the Conversion
Transaction by other stockholders that could
be in excess of such stock purchase
limitation), or (2) the Mutual Company may
conduct a Conversion Transaction that does not
exchange shares of Common Stock for stock of
the stock holding company; provided, however,
the Mutual Company must purchase all shares
not owned by it simultaneously with the
closing of such Conversion Transaction at the
fair market value of such shares, determined
as if such shares had such exchange rights, as
determined by an independent appraisal. The
precise treatment of a Conversion Transaction
by the OTS cannot be determined at this time
and the OTS may impose, or the regulations of
the OTS may require, restrictions or
conditions that may adversely affect minority
stockholders. See "Conversion of the Mutual
Company to Stock Form."
EXPIRATION DATE FOR THE
SUBSCRIPTION OFFERING ........ The Expiration Date for the Subscription
Offering is 12:00 noon Eastern Time on
________, 1998 unless extended by the Bank and
Bancorp and subject to any applicable
regulatory approvals.
MARKET FOR STOCK .............. As a mutual institution, the Bank has never
issued capital stock and, consequently, there
is no existing market for the Common Stock.
Bancorp has received conditional approval to
have its Common Stock listed on the Nasdaq
under the symbol "WEBK" subject to the
completion of the Offering and compliance with
certain conditions. See "Market for the Common
Stock."
CONVERSION CENTER ............. If you have any questions regarding the
Reorganization and Offering, call the Stock
Offering Center at (___) ___-____.
- --------------------------------------------------------------------------------
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT
MARCH 31, AT DECEMBER 31,
--------- ---------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets(2)...................................... $312,522 $299,025 $235,969 $223,165 $199,580 $195,714
Loans receivable, net(3)............................. 114,302 112,735 82,134 85,031 84,611 89,419
SECURITIES AVAILABLE-FOR-SALE(4):
Investment securities, net...................... 7,105 7,081 1,647 1,932 1,857 20,315
SECURITIES HELD-TO-MATURITY(4):
Investment securities, net...................... 28,768 22,929 22,476 18,482 7,498 7,502
Mortgage-backed securities, net................. 122,633 130,174 113,254 100,032 89,300 49,695
Deposits............................................. 239,120 238,192 179,946 178,392 164,181 168,004
Borrowed money....................................... 42,300 30,300 23,650 17,000 10,000 5,000
Retained earnings-substantially restricted........... 29,801 29,275 28,452 26,856 24,477 21,838
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------ --------------------------------------------------------------
1998(1) 1997(1) 1997 1996 1995 1994 1993
----------- ----------- ---------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income........................ $5,115 $4,252 $18,116 $16,467 $15,735 $13,235 $13,819
Interest expense....................... 2,870 2,152 9,656 8,300 7,618 5,121 5,882
------ ------ ------- ------- ------- ------- -------
Net interest income................. 2,245 2,100 8,460 8,167 8,117 8,114 7,937
Provision for (recapture of) loan
losses............................... (22) 55 487 232 510 (247) (200)
------ ------ ------- ------- ------- ------- -------
Net interest income after
provision for loan losses......... 2,267 2,045 7,973 7,935 7,607 8,361 8,137
Noninterest income..................... 140 113 373 476 332 32 399
Noninterest expense(5)................. 1,636 1,351 7,173 5,919 4,446 4,648 4,492
------ ------ ------- ------- ------- ------- -------
Income before income taxes(5)....... 771 807 1,173 2,492 3,493 3,745 4,044
Income taxes(5)........................ 260 284 436 836 1,221 977 1,744
------ ------ ------- ------- ------- ------- -------
Income before cumulative effect
of change in accounting for
income taxes(6)..................... 511 523 737 1,656 2,272 2,768 2,300
Cumulative effect of change in
accounting for income taxes.......... -- -- -- -- -- -- 1,096
------ ------ ------- ------- ------- ------- -------
Net income............................. $ 511 $ 523 $ 737 $ 1,656 $ 2,272 $ 2,768 $ 3,396
====== ====== ======= ======= ======= ======= =======
</TABLE>
(continued on next page)
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------
1998(1) 1997(1) 1997 1996 1995 1994 1993
---------- ----------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS(7):
Return on average assets(5)............... 0.68% 0.89% 0.29% 0.74% 1.07% 1.44% 1.74%
Return on average retained earnings(5).... 6.92 7.29 2.51 5.95 8.84 11.98 16.07
Average retained earnings
/average assets.......................... 9.88 12.15 11.55 12.37 12.09 11.98 10.82
Interest rate spread(8)................... 2.77 3.03 2.87 3.15 3.34 3.92 3.78
Net interest margin(9).................... 3.17 3.66 3.44 3.74 3.93 4.33 4.19
Non-interest expenses to average assets(5) 2.19 2.29 2.82 2.63 2.09 2.41 2.30
Retained earnings to assets............... 9.54 12.27 9.79 12.06 12.03 12.26 11.16
Efficiency ratio(10)...................... 61.41 53.92 57.04 56.58 52.86 50.37 50.93
REGULATORY CAPITAL RATIOS(7)(11):
Tangible capital.......................... 7.84 12.27 7.98 12.06 12.02 12.26 11.16
Core capital.............................. 7.84 12.27 7.98 12.06 12.02 12.26 11.16
Risk-based capital........................ 19.95 40.13 26.10 39.15 37.50 35.89 25.18
ASSET QUALITY RATIOS(7):
Non-performing loans to total assets...... 0.74 1.20 0.84 1.26 0.96 1.55 2.72
Non-performing loans to total loans
receivable.............................. 1.95 3.36 2.16 3.51 2.46 3.52 5.76
Non-performing assets to total assets..... 1.10 1.66 1.24 1.85 1.57 2.48 4.38
Allowance for loan losses to
non-performing loans..................... 80.79 57.15 75.19 52.70 55.84 40.00 29.12
Average interest-earning assets to average
interest-bearing liabilities............ 109.52 116.73 114.39 115.46 115.94 114.86 112.96
Net interest income after provision for
loan losses to non-interest expenses(5). 138.57 151.37 111.15 134.06 171.10 179.88 181.14
NUMBER OF FULL-SERVICE CUSTOMER
facilities................................ 8 5 8 5 5 5 5
</TABLE>
______________________________
(1) The data presented at March 31, 1998 and for the three months ended
March 31, 1998 and 1997 were derived from unaudited consolidated
financial statements and reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for such interim periods.
Interim results at and for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. All operating results presented for
selected financial ratios and other data for the three month periods
ended March 31, 1998 and 1997 are presented on an annualized basis.
(2) The increase in assets in fiscal 1997 was due primarily to the purchase
of three branch offices from Summit Bank. See "Management's Discussion
and Analysis."
(3) The allowance for loan losses at March 31, 1998 and December 31, 1997,
1996, 1995, 1994 and 1993 was $1.9 million, $1.9 million, $1.6
million, $1.2 million, $1.2 million and $1.5 million, respectively.
(4) The Bank adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"), as of December 31, 1993.
(5) Includes, for the year ended December 31, 1996, the SAIF Special
Assessment of $1.1 million and the related income tax benefit of
$395,000. If excluded, return on average assets, return on average
retained earnings, non-interest expenses to average assets and net
interest income after provision for loan losses to non-interest
expenses would be 1.05%, 8.47%, 2.14% and 164.59%, respectively for the
year ended December 31, 1996. Includes, for the three months ended
March 31, 1998 and the year ended December 31, 1997, amortization
expense related to the excess of cost over assets acquired from Summit
Bank of $148,000 and $1.7 million, respectively, and the related income
tax benefit of $53,000 and $627,000, respectively. If excluded, return
on average assets, return on average retained earnings, non-interest
expenses to average assets and net interest income after provision for
loan losses to non-interest expense would be 0.81%, 8.20%, 1.99% and
152.35%, respectively, for the three months ended March 31, 1998 and
0.73%, 6.30%, 2.13% and 146.83%, respectively, for the year ended
December 31, 1997.
(6) Represents the cumulative effect, as of January 1, 1993, of the initial
application of Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes."
(7) With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are
annualized where appropriate.
(8) The interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(9) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(10) The efficiency ratio represents non-interest expenses, excluding the
SAIF Special Assessment, impairment loss and amortization relating to
intangible assets and loss on REO, divided by the sum of net interest
and non-interest income excluding income on REO and security gain/loss.
(11) For definitions and further information relating to the Bank's
regulatory capital requirements, see "Regulation and Supervision -
Federal Savings Institution Regulation -- Capital Requirements." See
"Regulatory Capital Compliance" for the Bank's pro forma capital levels
as a result of the Offerings.
13
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain consolidated financial and other
information of the Bank for the periods and at the dates indicated. The
selected consolidated financial data, operating data and ratios and other data
as of June 30, 1998 and for the three and six months ended June 30, 1998 and
1997 are derived from unaudited consolidated financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for the fair presentation of financial data and
operating data for the three and six months ended June 30, 1998 and 1997 are
included. The results of operations and ratios and other data presented for the
three and six months ended June 30, 1998 are not necessarily indicative of the
results of operations for the year ending December 31, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
--------------- ------------------
1998(1) 1997
--------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets............................... $321,555 $299,025
Loans receivable, net(2)................... 132,003 112,735
SECURITIES AVAILABLE-FOR-SALE:
Investment securities, net.............. 8,157 7,081
SECURITIES HELD-TO-MATURITY:
Investment securities, net.............. 32,627 22,929
Mortgage-backed securities, net......... 122,594 130,174
Deposits................................... 239,735 238,192
Borrowed money............................. 50,041 30,300
Retained earnings-substantially restricted. 30,304 29,275
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
-------------------------------------- ----------------------------------------
1998(1) 1997(1) 1998(1) 1997(1)
----------------- ------------------- ----------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income............................ $5,342 $4,358 $10,457 $8,610
Interest expense........................... 3,117 2,259 5,987 4,411
------ ------ ------- ------
Net interest income....................... 2,225 2,099 4,470 4,199
Provision for (recapture of) loan losses... -- 187 (22) 242
------ ------ ------- ------
Net interest income after
provision for loan losses............... 2,225 1,912 4,492 3,957
Noninterest income......................... 121 96 261 209
Noninterest expense........................ 1,607 1,350 3,243 2,701
------ ------ ------- ------
Income before provision for income tax
expense.................................. 739 658 1,510 1,465
Income tax expense......................... 257 235 517 519
------ ------ ------- ------
Net income................................. $ 482 $ 423 $ 993 $ 946
====== ====== ======= ======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
1998(1) 1997(1) 1998(1) 1997(1)
------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS(3):
Return on average assets....................... 0.61% 0.70% 0.64% 0.79%
Return on average retained earnings............ 6.42 5.80 6.66 6.54
Average retained earnings
/average assets............................... 9.48 12.10 9.67 12.13
Interest rate spread(4)........................ 2.51 2.97 2.64 3.00
Net interest margin(5)......................... 2.95 3.59 3.06 3.63
Non-interest expenses to average assets........ 2.03 2.24 2.10 2.26
Retained earnings to assets.................... 9.42 11.93 9.42 11.93
Efficiency ratio(6)............................ 61.04 52.30 61.21 53.13
REGULATORY CAPITAL RATIOS(3)(7):
Tangible capital............................... 7.81 11.95 7.81 11.95
Core capital................................... 7.81 11.95 7.81 11.95
Risk-based capital............................. 23.13 38.14 23.13 38.14
ASSET QUALITY RATIOS(3):
Non-performing loans to total assets........... 0.65 1.02 0.65 1.02
Non-performing loans to total loans
receivable................................... 1.57 2.67 1.37 2.67
Non-performing assets to total assets.......... 0.86 1.52 0.86 1.52
Allowance for loan losses to
non-performing loans.......................... 87.60 75.80 87.60 75.80
Average interest-earning assets to average
interest-bearing liabilities................. 110.36 116.01 110.16 116.37
Net interest income after provision
for loan losses to non-interest
expenses..................................... 138.46 141.63 138.51 146.50
NUMBER OF FULL-SERVICE CUSTOMER
facilities..................................... 8 5 8 5
</TABLE>
__________________
(1) The data presented at June 30, 1998 and for the three and six months
ended June 30, 1998 and 1997 was derived from unaudited consolidated
financial statements and reflects, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for such interim periods.
Interim results at and for the three and six months ended June 30, 1998
are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. All operating results presented for
selected financial ratios and other data for the three and six month
periods ended June 30, 1998 and 1997 are presented on an annualized
basis.
(2) The allowance for loan losses at June 30, 1998 and December 31, 1997 was
$1.8 million and $1.9 million, respectively.
(3) With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(4) The interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents non-interest expenses, excluding
impairment loss and amortization relating to intangible assets and loss
on REO, divided by the sum of net interest and non-interest income
excluding income on REO and security gain/loss.
(7) For definitions and further information relating to the Bank's
regulatory capital requirements, see "Regulation and Supervision -
Federal Savings Institution Regulation -- Capital Requirements." See
"Regulatory Capital Compliance" for the Bank's pro forma capital levels
as a result of the Offerings.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Total assets were $321.6 million at June 30, 1998, compared to $299.0
million at December 31, 1997, an increase of $22.6 million, or 7.5%. The
increase in assets was funded primarily by an increase in borrowings of $19.7
million.
Cash and cash equivalents, primarily interest-bearing deposits with the
FHLB, decreased $3.2 million to $5.5 million at June 30, 1998 from $8.7 million
at December 31, 1997. Additionally, the Bank invested in term deposits with the
FHLB totalling $3.0 million. These term deposits have initial periods to
maturity of between three and seven months. The overall decrease in cash and
cash equivalents and term deposits was $163,000.
In the aggregate, mortgage-backed securities and investment securities,
including available for sale and held to maturity issues, totalled $163.4
million at June 30, 1998, an increase of $3.2 million from $160.2 million at
December 31, 1997. Mortgage-backed securities, all of which are held to
maturity, decreased $7.6 million due to repayments. Investment securities held
to maturity increased $9.7 million, primarily due to security purchases, and
investment securities available for sale increased $1.1 million due primarily to
purchases.
Loans receivable increased $19.3 million to $132.0 million at June 30, 1998
from $112.7 million at December 31, 1997. The increase was primarily in the
one- to four-family mortgage loan category and resulted from strong loan
origination volume.
Deposits totaled $239.7 million at June 30, 1998, an increase of $1.5
million, or 0.6%, over the $238.2 million balance at December 31, 1997.
Borrowed money increased $19.7 million to $50.0 million at June 30, 1998,
as compared to $30.3 million at December 31, 1997. Based on the lower cost of
wholesale funds as compared to comparable maturity retail deposits, management
chose to fund the asset growth discussed above with additional borrowings.
Retained earnings increased $1.0 million, or 3.4%, to $30.3 million,
primarily due to the retention of net income.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
NET INCOME. Net income increased $59,000, or 13.9%, to $482,000 for the
three months ended June 30, 1998 compared with $423,000 for the same period in
1997. The increase in net income during the 1998 period resulted from increases
in net interest income and non-interest income and a decrease in provision for
loan losses, partially offset by increases in non-interest expense and income
taxes.
INTEREST INCOME. Total interest income increased $984,000, or 22.6%, to
$5.3 million for the three months ended June 30, 1998 from $4.4 million for the
same 1997 period. The increase was the result of a 29.3% increase in average
interest-earning assets between the periods, which more than offset a 39 basis
point decline in yield. The increase in the average balance was the result of
increased loan originations and securities purchased funded by cash received in
connection with the deposits purchased from Summit and increased borrowings. The
decrease in yield was the result of lower rates obtained on loans originated and
mortgage-backed securities purchased since June 30, 1997.
INTEREST EXPENSE. Interest expense increased $858,000, or 38.0%, to $3.1
million during the three months ended June 30, 1998 when compared to $2.3
million during the same 1997 period. Such increase was primarily attributable
to increases of $72.4 million in the average balance of interest-bearing
liabilities and seven basis points in the cost thereof. The increased average
balance is the result of the purchase of $51.0 million in deposits from Summit
in October 1997 and increased borrowings.
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NET INTEREST INCOME. Net interest income increased $126,000, or 6.0%,
during the three months ended June 30, 1998 when compared with the same 1997
period. Such increase was due to an increase in total interest income of
$984,000, which was sufficient to offset an increase in total interest expense
of $858,000. The Bank's net interest rate spread decreased to 2.51% in 1998
from 2.97% in 1997. The decrease in the interest rate spread resulted from a
decrease of 39 basis points in the yield earned on interest-earning assets along
with a seven basis point increase in the cost of interest-bearing liabilities.
Despite the decline in interest rate spread, the Bank improved net interest
income due to the additional income generated by the $68.4 million increase in
average interest-earning assets, which more than offset the additional cost
incurred by the $72.4 million increase in average interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. During the three months ended June 30, 1998,
the Bank did not record a provision for loan losses. During the three months
ended June 30, 1997, the Bank provided $187,000 as a provision for loan losses.
The allowance for loan losses is based on management's evaluation of the risk
inherent in its loan portfolio and gives due consideration to the changes in
general market conditions and in the nature and volume of the Bank's loan
activity. The Bank intends to continue to provide for loan losses based on its
periodic review of the loan portfolio and general market conditions. At June
30, 1998 and 1997, loans delinquent ninety days or more totalled $2.1 million
and $2.5 million, respectively, representing 1.57% and 2.67%, respectively, of
total loans. At June 30, 1998, the allowance for loan losses stood at $1.8
million, representing 1.38% of total loans and 87.6% of loans delinquent ninety
days or more. At June 30, 1997, the allowance for loan losses stood at $1.9
million, representing 2.03% of total loans and 75.8% of loans delinquent ninety
days or more.
NON-INTEREST INCOME. Non-interest income increased $25,000, or 26.0%, to
$121,000 during the three months ended June 30, 1998 from $96,000 during the
same 1997 period. The increase resulted from increased fees and service
charges.
NON-INTEREST EXPENSES. Non-interest expenses increased by $257,000, or
19.0%, to $1.61 million during the three months ended June 30, 1998 when
compared with $1.35 million during the same 1997 period. Salaries and employee
benefits, net occupancy expense, equipment, advertising, and miscellaneous
expense increased in the aggregate by $284,000, or 24.7%, to $1.43 million
during the three months ended June 30, 1998 from $1.15 million during the same
prior year period due primarily to the purchase of three branches from Summit.
Such purchase in October 1997 increased the Bank's number of office locations
from 5 to 8 and resulted in increases in the aforementioned expenses. Loss on
REO decreased $175,000 to $27,000 during the three months ended June 30, 1998
from $202,000 during the same prior year period due primarily to a reduction in
loss provisions recorded between the two periods. During the three month period
ended June 30, 1998, amortization expense of $148,000 was recorded in connection
with the acquisition of deposits from Summit in October 1997. No comparable
expense was recorded during the same 1997 period.
INCOME TAXES. Income tax expense totalled $257,000, or 34.8%, of income
before income taxes, during the three months ended June 30, 1998 as compared to
$235,000, or 35.7% of income before income taxes, during the comparable 1997
period.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NET INCOME. Net income increased $47,000, or 5.0%, to $993,000 for the
six months ended June 30, 1998 compared with $946,000 for the same period in
1997. The increase in net income during the 1998 period resulted from increases
in net interest income and non-interest income and decreases in provision for
loan losses and income taxes, partially offset by increases in non-interest
expense and income taxes.
INTEREST INCOME. Total interest income increased $1.9 million, or 21.5%,
to $10.5 million for the six months ended June 30, 1998 from $8.6 million for
the same 1997 period. The increase was the result of a 26.3 % increase in
average interest-earning assets between the periods, which more than offset a 28
basis point decline in yield. The increase in the average balance was the
result of increased loan originations and securities purchased funded by cash
received in connection with the deposits purchased from Summit and increased
borrowings. The decrease in yield was the result of lower rates obtained on
loans originated and mortgage-backed securities purchased since June 30, 1997.
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INTEREST EXPENSE. Interest expense increased $1.6 million, or 35.7%, to
$6.0 million during the six months ended June 30, 1998 when compared to $4.4
million during the same 1997 period. Such increase was primarily attributable
to increases of $66.4 million in the average balance of interest-bearing
liabilities and eight basis points in the cost thereof. The increased average
balance is the result of the purchase of $51.0 million in deposits from Summit
in October 1997 and increased borrowings.
NET INTEREST INCOME. Net interest income increased $271,000, or 6.5%,
during the six months ended June 30, 1998 when compared with the same 1997
period. Such increase was due to an increase in total interest income of $1.9
million, which was sufficient to offset an increase in total interest expense of
$1.6 million. The Bank's net interest rate spread decreased to 2.64% in 1998
from 3.00% in 1997. The decrease in the interest rate spread resulted from a
decrease of 28 basis points in the yield earned on interest-earning assets along
with an eight basis point increase in the cost of interest-bearing liabilities.
Despite the decline in interest rate spread, the Bank improved net interest
income due to the additional income generated by the $60.8 million increase in
average interest-earning assets, which more than offset the additional cost
incurred by the $66.4 million increase in average interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. During the six months ended June 30, 1998, the
Bank recorded a recapture of the provision for loan losses of $22,000. During
the six months ended June 30, 1997, the Bank provided $242,000 as a provision
for loan losses. The allowance for loan losses is based on management's
evaluation of the risk inherent in its loan portfolio and gives due
consideration to the changes in general market conditions and in the nature and
volume of the Bank's loan activity. The Bank intends to continue to provide for
loan losses based on its periodic review of the loan portfolio and general
market conditions.
NON-INTEREST INCOME. Non-interest income increased $52,000, or 24.9%, to
$261,000 during the six months ended June 30, 1998 from $209,000 during the same
1997 period. The increase resulted from increased fees and service charges.
NON-INTEREST EXPENSES. Non-interest expenses increased by $542,000, or
20.1%, to $3.2 million during the six months ended June 30, 1998 when compared
with $2.7 million during the same 1997 period. Salaries and employee benefits,
net occupancy expense, equipment, advertising, and miscellaneous expense
increased in the aggregate by $554,000, or 23.7%, to $2.9 million during the six
months ended June 30, 1998 from $2.3 million during the same prior year period
due primarily to the purchase of three branches from Summit. Such purchase in
October 1997 increased the Bank's number of office locations from 5 to 8 and
resulted in increases in the aforementioned expenses. Loss on REO decreased
$308,000 to $51,000 during the six months ended June 30, 1998 from $359,000
during the same prior year period due primarily to a reduction in loss
provisions recorded between the two periods. During the six month period ended
June 30, 1998, amortization expense of $296,000 was recorded in connection with
the acquisition of deposits from Summit in October 1997. No comparable expense
was recorded during the same 1997 period.
INCOME TAXES. Income tax expense totalled $517,000, or 34.2%, of income
before income taxes, during the six months ended June 30, 1998 as compared to
$519,000, or 35.4% of income before income taxes, during the comparable 1997
period.
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RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
COMPETITION FOR MORTGAGE LOANS IN MARKET AREA
The Bank faces significant competition both in making loans and in
attracting deposits. While its lending area extends throughout New Jersey, most
of the Bank's mortgage loans are secured by properties located in Essex, Morris
and Bergen Counties, New Jersey (the Bank's "primary market area"). The State
of New Jersey has a high density of financial institutions, many of which have a
state-wide or regional presence, and, in some cases, a national presence, all of
which are competitors of the Bank to varying degrees. The Bank'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, many of which are significantly larger than the Bank and, therefore,
have greater financial and marketing resources than those of the Bank. Limited
mortgage lending opportunities in the Bank's primary market area may exist for
the foreseeable future. In an effort to address the intense competition for
mortgage loans, the Bank is aggressively seeking lending opportunities,
including through using loan brokers, expanding available lending products and
aggressively pricing its loan products. Although the Bank has been successful in
substantially increasing loan originations in the past year, there can be no
assurance the Bank will be able to continue to do so in the future. The Bank
faces additional competition for deposits from short-term money market funds,
common stock funds, other corporate and government securities funds and from
other financial institutions such as brokerage firms and insurance companies.
See "Business of the Bank -- Market Area and Competition."
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. One method of analyzing an institution's exposure
to interest rate risk is by measuring the change in the institution's Net
Portfolio Value ("NPV") under various interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. An NPV Ratio, in any interest rate scenario, is defined as the
NPV in that scenario divided by the market value of assets in the same scenario.
The sensitivity measure is the decline in the NPV Ratio, in basis points, caused
by a 2% increase or decrease in rates, whichever produces a larger decline. The
higher an institution's sensitivity measure is, the greater its exposure to
interest rate risk is considered to be. As of March 31, 1998, the most
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recent date for which information is available, the Bank's sensitivity measure,
as measured by the OTS, indicated that a 2% increase in interest rates would
cause a 206 basis point decline in the Bank's NPV Ratio. This NPV Ratio
sensitivity measure does not exceed the thresholds at which the Bank could be
required to hold additional risk-based capital under OTS regulation, if so
determined by the OTS. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Management of Interest Rate Risk and
Market Risk Analysis -- Net Portfolio Value" and "Regulation and Supervision --
Federal Savings Institution Regulation -- Capital Requirements."
Increases in the level of interest rates also may adversely affect the
amount of loans originated by the Bank. Increases in interest rates can
adversely affect the type (fixed-rate or adjustable-rate) of loans originated by
the Bank and the average life of loans and securities owned by the Bank, which
can adversely impact the yields earned on the Bank's loan portfolio. In periods
of decreasing interest rates, the average life of loans held by the Bank may be
shortened to the extent increased prepayment activity occurs during such
periods, which may result in the Bank investing funds from such prepayments in
lower yielding assets. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets and liabilities in response to such
movements. However, management believes its substantial investment in
adjustable-rate mortgage-backed securities will help offset that risk. In
addition, fluctuations in interest rates may also result in disintermediation,
which is the flow of funds away from depository institutions into direct
investments which pay a higher rate of return, and may adversely affect the
value of the Bank's investment securities and other interest-earning assets.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Interest Rate Risk and Market Risk Analysis" and
"Regulation and Supervision -- Federal Savings Institution Regulation -- Capital
Requirements."
POTENTIAL LOW RETURN ON EQUITY AND ASSETS AND RESULTING IMPACT ON STOCK PRICE
At March 31, 1998, the Bank's ratio of retained earnings to assets was
9.5%. Bancorp's equity position will be significantly increased as a result of
the Offering. On a pro forma basis as of March 31, 1998, assuming the sale of
Common Stock and issuance of shares to the Foundation at the midpoint of the
Estimated Price Range, Bancorp's ratio of equity to assets would exceed 13.0%.
Bancorp's ability to deploy this new capital through investments in interest-
earning assets, such as loans and securities which bear rates of return
comparable to its current loans and securities investments, will be
significantly affected by industry competition. Bancorp currently anticipates
that it will take time to prudently deploy such capital. As a result, Bancorp's
return on equity initially is expected to be below its historical return on
equity and may be below peer group institutions after the Reorganization. In
addition, Bancorp's return on assets could also be adversely affected depending
upon the success the Bank has in deploying the offering proceeds. See "Pro Forma
Data." No assurances can be made as to when or if Bancorp will achieve returns
on its equity that are comparable to industry peers or industry averages.
Additionally, due to implementation of stock-
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based benefit plans such as the ESOP and Stock-Based Incentive Plan, Bancorp's
future compensation expense will be increased, thereby, adversely affecting its
net income and return on equity. Any adverse effect on net income and Bancorp's
return on equity would likely have a similar adverse effect on the market value
of Bancorp's Common Stock.
CONSIDERATIONS RESULTING FROM MUTUAL HOLDING COMPANY STRUCTURE
GENERAL. The mutual holding company structure is a relatively new form of
corporate organization. Final mutual holding company regulations were adopted
by the OTS, effective March 1993 and those final regulations were revised on
April 1, 1998 to allow for the two-tier mutual holding company structure that
the Bank is utilizing. Accordingly, prospective investors should be aware that
there is limited historical experience for the market of the common stock of a
subsidiary of a mutual holding company, and there can be no assurance as to the
regulatory requirements regarding the treatment of the stockholders of the Bank
in the event of a subsequent mutual-to-stock conversion of the Mutual Company.
See "Market for the Common Stock" and "Conversion of Mutual Company to Stock
Form."
ANTITAKEOVER CONDITIONS. Pursuant to OTS regulations, the Mutual Company
must own more than 50% of the outstanding voting stock of Bancorp as long as the
Mutual Company remains in existence. This effectively precludes the possibility
of a sale of Bancorp separate and apart from the Mutual Company. As the
majority owner of Bancorp, the Mutual Company will elect Bancorp's directors and
direct the affairs and business operations of Bancorp. The directors of the
Mutual Company are the current directors of Bancorp. The Mutual Company's
members consist of depositors of the Bank. Accordingly, the purchasers of the
Common Stock in the Offering will be Minority Stockholders of Bancorp who will
have limited influence in electing directors or otherwise directing the affairs
of Bancorp. Moreover, such Minority Stockholders have no influence over the
affairs of the Mutual Company, except to the extent that they are also members
of the Mutual Company. No assurance can be given that the Mutual Company and
Minority Stockholders will have the same interest in matters affecting Bancorp,
and, therefore, no assurance can be given that the Mutual Company will not take
actions which the Minority Stockholders believe to be adverse to their
interests. For example, the Mutual Company could prevent the sale of control of
Bancorp, or defeat a candidate for election to the Board of Directors of
Bancorp, prevent a conversion transaction or other proposals put forth by
Minority Stockholders.
WAIVER OF DIVIDENDS BY THE MUTUAL COMPANY. The Board of Directors of the
Mutual Company will determine whether the Mutual Company will waive the receipt
of dividends declared by Bancorp each time Bancorp declares a dividend. The
Board of Directors of the Mutual Company presently intends to waive the receipt
of dividends declared by Bancorp. There is no assurance that the Mutual Company
will waive the receipt of cash dividends, and any dividend waiver by the Mutual
Company will require the prior approval of the OTS. For a discussion of OTS
regulations with respect to a mutual holding company's waiver of dividends, see
"Waiver of Dividends by the Mutual Company."
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Immediately after consummation of the Reorganization and the Offering, it
is expected that the Mutual Company's operations will consist of activities
relating to its investment in, and control of, a majority of the Common Stock of
Bancorp and maintenance of books and records relating to members of the Mutual
Company. In the future, the Mutual Company may accept dividends paid by Bancorp
to be used for the payment of operating expenses and other purposes, including
purchasing Common Stock from time to time in the open market or from Bancorp.
There can be no assurance that the Mutual Company will accept dividends paid by
Bancorp, or if such dividends are accepted, that the Mutual Company will
purchase shares of Common Stock in the open market. Any purchase of Common
Stock other than from the Mutual Company will increase the percentage of
Bancorp's outstanding shares of Common Stock held by the Mutual Company and
increase the number of shares eligible to be sold in any subsequent secondary
offering or mutual to stock conversion of the Mutual Company. Any waiver of
dividends by the Mutual Company is likely to result in an adjustment to the
ratio pursuant to which shares of Common Stock are exchanged for shares of the
converted Mutual Company in a Conversion Transaction, which adjustment will have
the effect of diluting Minority Stockholders' percentage ownership interest in
the converted Mutual Company's shares. For a discussion of dividend waiver
considerations, see "Waiver Dividends by the Mutual Company."
POTENTIAL DILUTION TO MINORITY STOCKHOLDERS RESULTING FROM ANY MUTUAL TO STOCK
CONVERSION OF THE MUTUAL COMPANY
In the event of a Conversion Transaction, the Plan provides that, subject
to written OTS approval, (i) the stockholders of Bancorp will be entitled to
exchange their shares of stock for shares of the newly converted holding company
in a manner that is fair and reasonable to such stockholders and maintains
approximately the same percentage ownership interest in the newly converted
holding company after the Conversion Transaction as such stockholders held in
the Bank immediately prior to the Conversion Transaction or, (ii) the holding
company may purchase all shares not owned by it simultaneously with the
consummation of the Conversion Transaction at the fair market value of such
shares. The OTS's policy with respect to dividends waived by mutual holding
companies requires that in the case of mutual to stock conversion of recently
formed mutual holding companies, the aggregate amount of cash dividends waived
by a mutual holding company must be considered when establishing a fair and
reasonable basis for exchanging subsidiary savings institution common stock for
converted holding company common stock, and that the OTS will not permit a pro
rata exchange if the mutual holding company has waived the receipt of cash
dividends paid by the subsidiary savings institution. ACCORDINGLY, ANY WAIVER
OF DIVIDENDS BY THE MUTUAL COMPANY IS LIKELY TO RESULT IN AN ADJUSTMENT TO THE
RATIO PURSUANT TO WHICH SHARES OF COMMON STOCK ARE EXCHANGED FOR SHARES OF THE
NEWLY CONVERTED HOLDING COMPANY IN A CONVERSION TRANSACTION,
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WHICH ADJUSTMENT WILL HAVE THE EFFECT OF DILUTING MINORITY STOCKHOLDERS'
PERCENTAGE OWNERSHIP INTEREST IN NEWLY CONVERTED HOLDING COMPANY SHARES. See
"Conversion of the Mutual Company to Stock Form."
ABSENCE OF A MARKET FOR THE COMMON STOCK
The Bank is a mutual savings association and, therefore, has never issued
capital stock. Bancorp has received approval conditioned upon consummation of
the Reorganization and the Offering, to have its Common Stock traded on the
Nasdaq under the symbol "WEBK." However, there can be no assurance that an
established and liquid trading market for the Common Stock will develop or, once
developed, will continue, nor can there by any assurances that purchasers of
Common Stock will be able to resell their shares at or above the Purchase Price.
The absence or discontinuance of a market for the Common Stock would have an
adverse impact on both the price and liquidity of the Common Stock. As
discussed herein and taking into account the shares issued to the Foundation,
the Mutual Company will hold 56.0% of the outstanding common stock, while 42.2%
of the outstanding common stock will be sold by Bancorp in the Offering,
resulting in a maximum of 2,382,748 shares of Bancorp's Common Stock trading
publicly. Traditionally, companies with larger amounts of stock outstanding have
greater market liquidity for their stock than companies with fewer shares
outstanding. Although the market liquidity for Bancorp's stock will be primarily
affected by Bancorp's performance and market factors, were Bancorp to issue more
stock publicly (as opposed to having such shares held by the Mutual Company), it
would likely increase the market liquidity for Bancorp's stock. No assurance can
be given that the Mutual Company will ever convert to stock form or what
conditions the OTS may impose on any such transaction. See "Conversion of Mutual
Company to Stock Form." As a result, there can be no assurance that the number
of shares of Bancorp's stock that are publicly traded will increase. See "Market
for the Common Stock."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings institution. Bancorp will be regulated as a federally chartered
corporation and, in addition, the Mutual Company, as a savings institution
mutual holding company, will be subject to extensive regulation and supervision.
Such regulations that affect the Mutual Company, Bancorp and the Bank on a daily
basis, may be changed at any time, and the interpretation of the relevant law
and regulations is also subject to change by the authorities who examine the
Bank and interpret those laws and regulations. Any change in the regulatory
structure or the applicable statutes or regulations, whether by the OTS, the
FDIC or the Congress, could have a material impact on the Mutual Company,
Bancorp, the Bank, its operations or the Bank's Reorganization. See "Regulation
and Supervision."
THRIFT RECHARTERING
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the BIF (the deposit insurance fund
that covers most commercial bank deposits) and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in the current Congress that would eliminate the federal
thrift charter and the OTS. A bill originally reported by the House Banking
Committee would have required federal thrifts to become national banks or state
banks within two years of enactment or they would have become national banks by
operation of law. OTS would have been abolished and its functions transferred
to the bank regulatory agencies. The bill as passed by the House of
Representatives, however, did not provide for the elimination of the federal
thrift charter or OTS, but did provide that unitary savings and loan holding
companies existing or applied for after March 31, 1998 would not have the
ability to engage in unlimited activities but would be subject to the activities
restrictions applicable to multiple savings and loan holding companies. Unitary
holding companies existing or applied for before 1998 would be grandfathered and
could continue to engage in unlimited activities and could transfer the
grandfather rights to acquirors of the holding company. The
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Senate has not acted on the legislation but if such legislation was enacted,
Bancorp would not qualify for unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. The Bank is unable to predict whether the legislation will be enacted
or, given such uncertainty, determine the extent to which the legislation, if
enacted, would affect its business. The Bank is also unable to predict whether
the SAIF and BIF will eventually be merged or the federal thrift charter
eliminated, and what effect, if any, such legislation would have on the Bank.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, Bancorp intends to establish a charitable foundation
in connection with the Reorganization and Offering. The Plan provides that the
Bank, Bancorp and the Mutual Company will establish the Foundation, which will
be incorporated under Delaware law as a non-stock corporation and will be funded
with $100,000 in cash and with shares of Common Stock contributed by Bancorp.
DILUTION OF STOCKHOLDERS' INTERESTS. Bancorp proposes to establish the
Foundation with Bancorp Common Stock in an amount equal to 1.8% of the Common
Stock issued by Bancorp, including stock issued to the Mutual Company. At the
minimum, midpoint and maximum of the Estimated Price Range, the contribution to
the Foundation would be 64,168, 75,491 and 86,815 shares, with a value of
$641,680, $754,910 and $868,150, respectively, based on the Purchase Price of
$10.00 per share. Upon completion of the Offering and establishment of the
Foundation, Bancorp will have 4,905,233 shares issued and outstanding (2,071,955
to Minority Stockholders) at the maximum of the Estimated Price Range, of which
the Foundation will own 86,815 shares, or 1.77%. Due to the issuance of shares
of Common Stock to the Foundation, the Mutual Company and persons purchasing
shares in the Offering will have their voting and ownership interests diluted by
approximately 1.77%. Consequently, the Mutual Company's ownership and voting
interests in Bancorp will decrease from 57.0% to 56.0%, and the ownership and
voting interests of persons purchasing Common Stock will decrease from 43.0% to
42.2%. SEE "PRO FORMA DATA."
NEGATIVE IMPACT ON EARNINGS. Assuming receipt of approval of the Bank's
members, establishment of the Foundation will have an adverse impact on
Bancorp's earnings in the year in which the contribution is made. Bancorp will
recognize an expense in the amount of the contribution to the Foundation in the
quarter in which it occurs, which is expected to be the fourth quarter of fiscal
1998. Such expense will reduce earnings and have a material adverse impact on
Bancorp's earnings for the year. The contribution expense will be partially
offset by the tax deductibility of the expense. Bancorp has been advised by its
independent accountants that the contribution to the Foundation will be
deductible for federal income tax purposes, subject to a limitation based on 10%
of Bancorp's annual taxable income. Assuming a contribution of $868,149 in
Common Stock plus the $100,000 cash, based on the maximum of the Offering Range,
Bancorp estimates a net tax effected expense of $620,000. If the Foundation had
been established at December 31, 1997, the Bank would have reported net income
of $117,000 for fiscal 1997 rather than reporting net income of $737,000.
POSSIBLE NONDEDUCTIBILITY OF THE CONTRIBUTION. Bancorp, the Bank and the
Mutual Company have been advised by their tax accountants that an organization
created for charitable purposes will qualify as a Section 501(c)(3) exempt
organization under the Code, and will be classified as a private foundation. In
this
24
<PAGE>
regard, the Foundation will submit a request to the Internal Revenue Service
("IRS") to be recognized as a tax-exempt organization. Bancorp, the Bank and the
Mutual Company have received an opinion of their tax accountants that the
Foundation will qualify as a Section 501(c)(3) exempt organization under the
Code, except that such opinion does not consider the impact of the regulatory
condition on the gift imposed by the OTS which requires the shares of Common
Stock of Bancorp held by the Foundation to be voted in the same ratio as all
other shares of Bancorp's Common Stock on all proposals considered by
stockholders of Bancorp. See "The Reorganization and Stock Offering--
Establishment of the Charitable Foundation--Regulatory Conditions Imposed on the
Foundation." In the event that Bancorp or the Foundation receives an opinion of
their tax counsel satisfactory to OTS that compliance with the voting
restriction would have the effect of causing the Foundation to lose its tax
exempt status, otherwise have material adverse tax consequences on the
Foundation or subject the Foundation to an excise tax under Section 4941 of the
Code, the OTS will waive such voting restriction upon submission of such
opinion(s) by Bancorp or the Foundation. The tax accountants' opinion further
provides that Bancorp's contribution of its own stock to the Foundation will not
constitute an act of self-dealing, and that Bancorp will be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
contribution less the nominal par value that the Foundation is required to pay
to Bancorp for such stock, subject to an annual limitation based on 10% of
Bancorp's annual taxable income. Bancorp, however, would be able to carry
forward any unused portion of the deduction for five years following the year in
which the contribution is initially made for federal tax purposes, subject to
the 10% annual limitation. Thus, while Bancorp expects, based on the maximum of
the Offering Range, to be able to utilize for federal income tax purposes a
charitable contribution deduction of approximately $348,000 in fiscal year 1998,
Bancorp is permitted under the Code to carryover the excess of the total
contribution over such 1998 deduction over a five-year period for federal tax
purposes. For New Jersey state income tax purposes, Bancorp also will be able to
deduct its contributions and to carry forward the unused portion of the
deduction for a five-year period following the year in which the contribution is
initially made, subject to limitations based on 10% of Bancorp's unconsolidated
annual taxable income, and provided Bancorp generates sufficient state taxable
income on an unconsolidated basis. Assuming the sale of Common Stock at the
maximum of the Offering Range, Bancorp estimates that substantially all of the
contribution should be deductible for federal tax purposes over the combined
six-year period. However, no assurances can be made that Bancorp will have
sufficient pre-tax income over the five-year period following the year in which
the contribution is initially made to fully utilize the carryover related to the
excess contribution. Although Bancorp, the Bank and the Mutual Company have
received an opinion of their independent accountants that Bancorp will be
entitled to the deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Foundation as a Section 501(c)(3)
exempt organization or that the deduction will be permitted. In such event,
there would be no tax benefit related to the Foundation.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE REORGANIZATION. Bancorp proposes to capitalize the
Foundation with Common Stock in an amount equal to 4.19% of the total amount of
Common Stock sold in connection with the Reorganization and Offering and
$100,000. At the minimum, midpoint, maximum and 15% above the maximum of the
Offering Range, the contribution to the Foundation would equal 64,168, 75,491,
86,815 and 99,837 shares, respectively, which would have a market value of
$641,680, $754,910, $868,150 and $998,370, respectively, based on the Purchase
Price. As a result of the establishment of the Foundation, the Offering Range,
as estimated by FinPro, has decreased and the amount of stock available for sale
in the Offering has also correspondingly decreased. The amount of the decrease
is 62,135, 73,100, 84,065 and 96,675 shares, or $621,350, $731,000, $840,650 and
$966,750 at the minimum, midpoint, maximum and 15% above the maximum of the
Offering Range, respectively. See "Pro Forma Data" and "Comparison of Valuation
and Pro Forma Data Information with No Foundation." Accordingly, certain
depositors of the Bank who subscribe to purchase Common Stock in the
Subscription Offering may receive fewer shares depending on the appraisal
valuation if the Foundation is not established, the number of shares sold based
on that appraisal, the size of a depositor's stock order, the amount of his or
her qualifying deposits in the Bank and the overall level of subscriptions. In
addition, the establishment and funding of the Foundation results in dilution to
the
25
<PAGE>
Mutual Company's interest by 1.77% and results in the Mutual Company owning a
1.01% less interest in Bancorp than if the Foundation was not being established.
The decrease in the amount of Common Stock being offered will not have a
significant effect on Bancorp or the Bank's capital position. The Bank's
regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the Offering.
The Bank's tangible, leverage and risk-based capital ratios at March 31, 1998
were 7.84%, 7.84% and 19.95%, respectively. Assuming the sales of shares at the
midpoint of the Offering Range, the Bank's pro forma tangible, leverage and
risk-based capital ratios at March 31, 1998 would be 10.89%, 10.89% and 27.11%,
respectively. On a consolidated basis, Bancorp's pro forma stockholders' equity
would be $44.9 million or approximately 13.7% of pro forma consolidated assets,
assuming the sale of shares at the midpoint of the Offering Range. Pro forma
stockholders' equity per share and pro forma net earnings per share would be
$10.52 and $0.13, respectively. If the Foundation was not being established in
the Reorganization, based on the FinPro estimate, Bancorp's pro forma
stockholders' equity would be approximately $45.3 million or approximately 13.8%
of pro forma consolidated assets at the midpoint of the estimate and pro forma
stockholders' equity per share and pro forma net earnings per share would be
$10.41 and $0.13, respectively. See "Comparison of Valuation and Pro Forma
Information with No Foundation."
The establishment of the Foundation was taken into account by FinPro in
determining the estimated pro forma market value of Bancorp. The aggregate price
of the shares of Common Stock being offered in the Subscription is based upon
the independent appraisal conducted by FinPro of the estimated pro forma market
value of Bancorp. This estimate by FinPro was prepared at the request of the OTS
and is solely for purposes of providing depositors with sufficient information
with which to make an informed decision on the Foundation. There is no assurance
that if the Foundation is not approved the appraisal prepared at that time would
conclude that the pro forma market value of Bancorp would be the same as the
amount estimated herein. Any appraisal prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
POTENTIAL CHALLENGES. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in a limited
number of instances in connection with a mutual holding company reorganization.
As such, the Foundation may be subject to potential challenges notwithstanding
that the Boards of Directors of the Mutual Company, Bancorp and the Bank have
carefully considered the various factors involved in the establishment of the
Foundation in reaching its determination to establish the Foundation as part of
the Reorganization. See "The Reorganization and Stock Offering--Establishment
of the Charitable Foundation--Purpose of the Foundation." In conjunction with
its approval of the Reorganization, the Bank determined to submit the Foundation
for a vote of members so that members have a right to vote on whether the
Foundation should be established as part of the Reorganization. If certain
parties were to institute an action seeking to require the Bank to eliminate
establishment of the Foundation in connection with the Reorganization, no
assurances can be made that the resolution of such action would not result in a
delay in the consummation of the Reorganization or that any objecting persons
would not be ultimately successful in obtaining such removal or other equitable
relief or monetary damages against the Mutual Company, Bancorp or the Bank.
Additionally, if the Mutual Company, Bancorp and the
26
<PAGE>
Bank are forced to eliminate the Foundation, Bancorp may be required to
resolicit subscribers in the Offerings.
APPROVAL OF MEMBERS. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered
as a separate matter from approval of the Plan. If the Bank's members approve
the Plan, but not the establishment of the Foundation, the Bank intends to
complete the Reorganization and Stock Offering without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the pro
forma market value of the Common Stock being offered for sale in the Offerings
since the Valuation Range, as set forth herein, takes into account the dilutive
impact of the issuance of shares to the Foundation. If the pro forma market
value of the Common Stock without the Foundation is either greater than $23.8
million or less than $15.3 million, the Bank will establish a new Offering Range
and commence a resolicitation of subscribers (i.e., subscribers will be
permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscriptions funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to
increase, decrease, or cancel their subscriptions). Any change in the Estimated
Price Range must be approved by the OTS. See "The Reorganization and Stock
Offering--Stock Pricing and Number of Shares Issued." A resolicitation, if any,
following the conclusion of the Subscription and Community Offerings would not
exceed 45 days unless further extended by the OTS for periods of up to 90 days
not to extend beyond ___________, 2000.
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS, EMPLOYMENT CONTRACTS AND
CHANGE IN CONTROL PAYMENTS
STOCK-BASED INCENTIVE PLAN. Bancorp intends to adopt a Stock-Based
Incentive Plan which would provide for the granting of options to purchase
common stock ("Stock Options"), awards of common stock ("Stock Awards"), and
certain related rights to eligible officers, employees and directors of Bancorp
and Bank. While Bancorp currently anticipates granting Stock Options and Stock
Awards under a single plan, it may establish separate plans to provide for such
awards. In the event such plan is adopted within one year after the
Reorganization and Offering, OTS regulations require the plan to be approved by
stockholders at a meeting of stockholders which may be held no earlier than six
months after completion of the Offering. It is anticipated the Stock-Based
Incentive Plan will provide for the granting of options to purchase shares of
Common Stock equal to 10% of the shares of Common Stock issued in the Offering,
including shares issued to the Foundation (159,561 shares and 215,877 shares at
the minimum and maximum of the Offering Range, respectively) and the granting of
Stock Awards in an amount equal to 4% of the shares of Common Stock issued in
the Offering, including shares issued to the Foundation (64,168 shares and
86,815 shares at the minimum and maximum of the Offering Range, respectively).
Shares of common stock used to satisfy such awards will be acquired by the Plan
or a trust established for the Plan either through open market purchases or from
authorized but unissued Common Stock. See "--Possible Dilutive Effect of Stock-
Based Incentive Plan."
It is anticipated that the exercise price of Stock Options granted under
the Stock-Based Incentive Plan will be equal to the fair market value of the
underlying Common Stock on the date of grant. Such
27
<PAGE>
options will permit such officers and directors to benefit from any increase in
the market value of the shares in excess of the exercise price at the time of
exercise. Officers and directors receiving Stock Options will not be required to
pay for the shares until the date of exercise. The granting of Stock Awards and
the exercise of non-statutory stock options (and disqualifying dispositions of
stock acquired through the exercise of incentive stock options) will result in
additional compensation expense to Bancorp and, accordingly, may result in an
increase in the overall compensation expense in future periods. See "Management
of the Bank--Other Benefit Plans."
Although no specific award determinations have been made, Bancorp
anticipates that it will provide Stock Awards and/or Stock Options to directors,
officers and employees to the extent permitted by applicable regulations.
Current OTS regulations provide that, with respect to any non-tax qualified
stock benefit plan, such as the Stock-Based Incentive Plan, which is implemented
within one year after consummation of the Reorganization and Offering, no
individual may receive more than 25% of the shares or options of any such plan
and non-employee directors may not receive more than 5% individually, or 30% in
the aggregate, of the shares or options awarded under any such plan. Such
regulations also provide that any awards granted under such a Plan may not vest
at a rate greater than 20% per year except in limited circumstances. It is also
anticipated that the Stock-Based Incentive Plan will provide for cash payments
to participants in the event of a change in control of Bancorp or the Bank.
The Board of Directors, in determining specific allocations and grants of
Stock Awards and Stock Options, will consider various factors, including but not
limited to, the financial condition of Bancorp, current and past performance of
plan participants and tax and securities law and regulation requirements.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL PROVISIONS. Employment and
change in control agreements with certain officers and the employee severance
compensation plan provide for benefits and cash payments in the event of a
change in control of Bancorp or the Bank. The provisions in such agreements
and plan would provide the recipient with a change in control payment in the
event of the recipient's involuntary or, in certain circumstances, voluntary
termination of employment subsequent to a change in control of Bancorp or the
Bank. In addition to any payments which may be made under the Stock-Based
Incentive Plan upon a change in control, these provisions may have the effect of
increasing the cost of acquiring Bancorp, thereby discouraging future attempts
to take over Bancorp or the Bank. Based on current salaries, cash payments to
be paid in the event of a change in control pursuant to the terms of the
employment agreements, change in control agreements and an employee severance
compensation plan would be approximately $____ million. However, the actual
amount to be paid in the event of a change in control of Bancorp or the Bank
cannot be estimated at this time because the actual amount is based on the
average salary of the employee and other factors existing at the time of the
change in control. See "Certain Restrictions on Acquisition of Bancorp,"
"Management of the Bank--Employment Agreements," "-- Change in Control
Agreements," and "-- Benefits."
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
Following the Reorganization, the Stock-Based Incentive Plan will acquire
an amount of shares equal to 4% of the shares of Common Stock issued in the
Offering, including shares issued to the Foundation, either through open market
purchases or the issuance of authorized but unissued shares of Common Stock from
Bancorp. If the Stock-Based Incentive Plan is funded by the issuance of
authorized but unissued shares, the voting interests of existing stockholders at
that time will be diluted by 1.82%. Also following the Offering, directors,
officers and employees will be granted stock options under the Stock-Based
Incentive Plan in an amount equal to 10% of the Common Stock issued in the
Offering, including shares issued to the Foundation. The exercise of such stock
options may be satisfied by the issuance of authorized but unissued shares.
Under certain circumstances, such options may be exercised and sold on the
28
<PAGE>
same day, thereby eliminating any risk to officers and directors in exercising
options in the event that the market price exceeds the exercise price. If all of
the stock options were to be exercised using authorized but unissued Common
Stock and the stock awards granted under the Stock-Based Incentive Plan were
funded with authorized but unissued shares, the voting interests of existing
stockholders at that time would be diluted at that time by 4.37%.
POSSIBLE INCREASE IN OFFERING RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Offering, including shares issued
to the Foundation may be increased as a result of an increase in the Offering
Range of up to 15% to reflect changes in market and financial conditions
following the commencement of the Subscription Offering. In the event that the
Offering Range is so increased, it is expected that Bancorp will offer up to
2,382,748 shares of Common Stock at the Purchase Price for an aggregate purchase
price of up to $23.8 million. An increase in the number of shares issued will
decrease a subscriber's pro forma net earnings per share and stockholders'
equity per share and will increase Bancorp's pro forma consolidated
stockholders' equity and net earnings. Such an increase will also increase the
Purchase Price as a percentage of pro forma stockholders' equity per share and
net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of FinPro that, pursuant to FinPro's
Valuation, subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members have no value. However, such
valuation is not binding on the IRS. If the subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are deemed to have an ascertainable value, receipt of such rights could
result in taxable gain to those Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members who receive and/or exercise the subscription
rights in an amount equal to such value. Additionally, the Bank could recognize
a gain for tax purposes on such distribution. Whether subscription rights are
considered to have ascertainable value is an inherently factual determination.
See "The Reorganization and Stock Offering -- Tax Aspects of Reorganization."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "98" is stored on the
system and represents 1998. Although there can be no assurance that the Bank and
its vendors will be successful in remedying all potential problems, Bancorp has
been identifying potential problems associated with the "Year 2000" issue and
has implemented a plan designated to ensure that all software used in connection
with Bancorp's business will manage and manipulate data involving the transition
with data from 1999 to 2000 without functional or data abnormality and without
inaccurate results related to such data. The Bank is requiring its computer
systems and software vendors to represent that the products provided are or will
be Year 2000 compliant and has planned a program of testing for compliance. The
Bank has received representations from its primary third party vendors that they
will have resolved any Year 2000 problems in their software by December 31, 1998
and anticipates that all of its vendors also will have resolved any Year 2000
problems in their software by that same date. All Year 2000 issues for the Bank,
including testing, are expected to be addressed by December 31, 1998 and any
problems would be remedied by March 31, 1999. The Bank believes that its costs
related to Year 2000 will be approximately $135,000. See
29
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000").
WEST ESSEX BANCORP, M.H.C.
The Bank has submitted a Notice of Reorganization ("Notice") to the OTS
pursuant to which the Bank has requested approval to reorganize into a mutual
holding company structure. It is anticipated that the Bank will receive
approval of the Notice, however it is unknown prior to actual receipt of the
OTS's final approval of the Notice as to what conditions, if any, the OTS may
impose on the Reorganization. In the event the OTS approval contains conditions
which, in the opinion of the Board of Directors of the Bank, are unacceptable,
the Bank may determine to terminate the Reorganization and the Stock Issuance
and return all funds collected in connection with the minority stock offering.
As part of the Reorganization, the Bank will establish a federal mutual holding
company under the laws of the United States with the powers set forth in its
proposed charter and bylaws. As long as they remain depositors of the Bank,
Members of the Bank as of February 28, 1997 shall continue to have ownership and
liquidation rights solely with respect to the Mutual Company after the
Reorganization. Such persons shall elect the directors of the Mutual Company
until the Mutual Company converts to stock form. There can be no assurances,
however, that the Mutual Company will convert to stock form in the future. In
connection with the Reorganization, the Bank will capitalize the Mutual Company
with $100,000. The Mutual Company will be a mutual corporation chartered and
regulated by the OTS. The Mutual Company shall be subject to the limitations
and restrictions imposed on savings and loan holding companies by Section
10(o)(5) of Home Owners' Loan Act, as amended ("HOLA"). Following the
Reorganization, the Mutual Company will hold a majority of the outstanding
Common Stock of Bancorp, the subsidiary holding company. See "Regulation and
Supervision -- Holding Company Regulation."
Immediately after consummation of the Reorganization, it is expected that
the Mutual Company will not engage in any business activity other than to hold a
majority of the Common Stock of Bancorp and to invest the funds retained at the
Mutual Company level.
The Mutual Company's principal executive office will be located at 417
Bloomfield Avenue, Caldwell, New Jersey 07006, and its telephone number at that
address will be (973) 226-7911.
WEST ESSEX BANCORP, INC.
Bancorp has not yet been incorporated. As part of the Bank's
Reorganization, Bancorp will be organized as a federally chartered corporation.
Following the Reorganization and Offering, Bancorp will own 100% of the Bank's
outstanding capital stock. The Mutual Company will own 56.0% of Bancorp's
Common Stock taking into account the shares issued to the Foundation. Bancorp
expects to retain at least 25% of the net proceeds obtained in the Offering and
will contribute the remaining net proceeds to the Bank in return for its capital
stock. Immediately after consummation of the Reorganization and Offering,
Bancorp will have no significant liabilities. The management of Bancorp is set
forth under "Management of Bancorp." Initially, Bancorp will neither lease nor
own any property, but will instead use the premises, equipment and furniture of
the Bank. At the present time, Bancorp does not expect to employ any persons
other than officers of Bancorp who are also officers of the Bank, but will use
the support staff of the Bank from time to time.
30
<PAGE>
As a holding company, Bancorp will have greater flexibility than the Bank
to diversify its business through existing or newly formed subsidiaries or
through an acquisition or merger with other financial institutions, although
Bancorp does not currently have any plans, agreements, arrangements or
understandings with respect to such diversification, acquisitions or mergers.
After the Reorganization and Offering, Bancorp will be a savings and loan
holding company subsidiary of a mutual holding company and will be subject to
regulation by the OTS.
Bancorp's executive offices are located at 417 Bloomfield Avenue, Caldwell,
New Jersey 07006.
WEST ESSEX BANK
The Bank was originally organized in 1915 as a New Jersey chartered
building and loan association and, in 1995, became a federally chartered savings
bank. The Bank conducts business from its administrative/branch office located
in Caldwell, New Jersey and its seven other full service banking branch offices
located in West Orange, Franklin Lakes, River Vale, Pine Brook, Old Tappan and
Northvale, New Jersey. See "Business of the Bank -- Market Area and
Competition." At March 31, 1998, the Bank had total assets of $312.5 million,
total deposits of $239.1 million and retained earnings of $29.8 million. The
Bank's deposits are insured up to the maximum allowable amount by FDIC.
The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage-backed securities and mortgage loans secured by one-
to four-family residences located in the Bank's primary market area. To a
significantly lesser extent, the Bank originates commercial real estate, home
equity, construction and development, multi-family and consumer loans and
invests in debt obligations of the federal government and federal agencies as
well as obligations of states and municipalities. The Bank generally retains
for its portfolio all one- to four-family mortgage loans which it originates.
At March 31, 1998 the Bank's securities portfolio totalled $158.5 million, or
50.7% of total assets, and its gross loan portfolio totalled $118.2 million, or
37.8% of total assets, of which $89.5 million were one- to four family mortgage
loans, $10.3 million were commercial real estate loans, $8.4 million were home
equity loans, $7.1 million were construction and development loans, $2.1 million
were multi-family loans, and $801,000 were consumer loans. Of the Bank's total
mortgage-backed securities portfolio, 36.1% are secured by fixed-rate loans and
63.9% are secured by adjustable-rate loans. The Bank generally retains for its
portfolio all mortgage loans which it originates. Subsequent to the
Reorganization and the Offering, the Bank intends to continue to seek means to
increase its loan portfolio. At March 31, 1998, the Bank's deposit accounts
totalled $239.1 million, or 84.6% of total liabilities, of which $95.9 million,
or 40.3%, were core deposits, which included all of the Bank's savings and club
accounts and demand accounts. From time to time, the Bank has utilized
borrowings from the Federal Home Loan Bank ("FHLB") of New York ("FHLB-NY") as a
source of funds, and may utilize such borrowings to a greater extent in the
future. At March 31, 1998, such borrowings totalled $42.3 million, or 15.0% of
total liabilities. See "Business of the Bank."
The Bank's executive offices are located at 417 Bloomfield Avenue,
Caldwell, New Jersey 07006.
31
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At March 31, 1998, the Bank exceeded all regulatory capital requirements.
See "Regulation and Supervision -- Federal Savings Institution Regulation --
Capital Requirements." Set forth below is a summary of the Bank's compliance
with regulatory capital standards as of March 31, 1998, on a historical and pro
forma basis assuming that the indicated number of shares of Common Stock were
sold at $10.00 per share as of such date and receipt by the Bank of up to 75% of
the net proceeds. For purposes of the table below, the amount expected to be
borrowed by the ESOP and the cost of the shares expected to be acquired by the
Stock Programs are deducted from pro forma regulatory capital. In addition, the
table assumes that the Mutual Company will be capitalized with $100,000 of
proceeds of the Offering.
<TABLE>
<CAPTION>
WEST ESSEX BANK
Pro Forma at March 31, 1998 Based Upon Sale at $10.00 Per Share
---------------------------------------------------------------------------
1,531,445 SHARES 1,801,700 SHARES
(MINIMUM OF (MIDPOINT OF
HISTORICAL AT ESTIMATED ESTIMATED
MARCH 31, 1998 PRICE RANGE) PRICE RANGE)
------------------------ --------------------------- -------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- ----------- ---------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital(3)............. $29,801 9.54% $38,647 12.03% $40,307 12.48%
======= ======= =======
Tangible Capital:
Capital Level.......... $24,040 7.84% $32,886 10.42% $34,546 10.89%
Requirement............ 4,600 1.50 4,733 1.50 4,758 1.50
------- ----- ------- ----- ------- -----
Excess................. $19,440 6.34% $28,153 8.92% $29,788 9.39%
======= ======= =======
Core Capital:
Capital Level.......... $24,040 7.84% $32,886 10.42% $34,546 10.89%
Requirement(4)......... 12,268 4.00 $12,622 4.00 12,688 4.00
------- ----- ------- ----- ------- -----
Excess................. $11,772 3.84% $20,264 6.42% $21,858 6.89%
======= ======= =======
Risk-Based Capital:
Capital Level(5)(6).... $25,292 19.95% $34,138 26.01% $35,798 27.11%
Requirement............ 10,144 8.00 10,498 8.00 10,564 8.00
------- ----- ------- ----- ------- -----
Excess................. $15,148 11.95% $23,640 18.01% $25,234 19.11%
======= ======= =======
<CAPTION>
WEST ESSEX BANK
Pro Forma at March 31, 1998 Based Upon Sale at $10.00 Per Share
---------------------------------------------------------------------------
2,382,748 SHARES
2,071,955 SHARES (15% ABOVE
(MAXIMUM OF (MAXIMUM
ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE)
------------------------ ---------------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP Capital(3)............. $41,969 12.93% $43,879 13.44%
======= =======
Tangible Capital:
Capital Level.......... $36,208 11.36% $38,118 11.88%
Requirement............ 4,783 1.50 4,812 1.50
------- ----- ------- -----
Excess................. $31,425 9.86% $33,307 10.38%
======= =======
Core Capital:
Capital Level.......... $36,208 11.36% $38,118 11.88%
Requirement(4)......... 12,755 4.00 12,831 4.00
------- ----- ------- -----
Excess................. $23,453 7.36% $25,287 7.88%
======= =======
Risk-Based Capital:
Capital Level(5)(6).... $37,460 28.19% $39,370 29.42%
Requirement............ 10,631 8.00 10,707 8.00
------- ----- ------- -----
Excess................. $26,829 20.19% $28,663 21.42%
. ======= =======
</TABLE>
- ------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% as a
result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets.
Core capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighted
assets.
(3) Generally accepted accounting principles ("GAAP") Capital includes
unrealized gain on available-for-sale securities, net, which is not
included as regulatory capital.
(4) The current OTS core capital requirement for savings associations is 3%
of total adjusted assets. The OTS has proposed core capital
requirements which would require a core capital ratio of 3% of total
adjusted assets for thrifts that receive the highest supervisory rating
for safety and soundness and a 4% to 5% core capital ratio requirement
for all other thrifts. See "Regulation and Supervision-- Federal
Savings Institution Regulation-- Capital Requirements."
(5) Assumes net proceeds are invested in assets that carry a 50% risk-
weighting.
(6) The difference between equity under GAAP and regulatory risk-based
capital is attributable to the addition of the general valuation
allowance of $1,252,000 at March 31 1998, the subtraction of
intangibles of $5,681,000 and the subtraction of the unrealized gain on
available-for-sale securities, net of $80,000.
32
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Offering is completed, it is presently anticipated that the
net proceeds from the sale of the Common Stock will be between $14.3 million and
$19.6 million (or $22.7 million if the Offering Range is increased by 15%). See
"Pro Forma Data" and "The Reorganization and Stock Offering--Stock Pricing and
Number of Shares Issued" as to the assumptions used to arrive at such amounts.
Bancorp will be unable to utilize any of the net proceeds of the Offerings until
the consummation of the Conversion.
Bancorp will purchase all of the outstanding capital stock of the Bank to be
issued upon Reorganization in exchange for up to 75% of the net proceeds, with
the remaining net proceeds to be retained by Bancorp. Based on the midpoint of
the Offering Range, Bancorp expects to utilize $12.8 million of net proceeds to
purchase the common stock of the Bank. Such portion of net proceeds will be
added to the Bank's general funds which the Bank currently intends to utilize
for general corporate purposes, including investments in loans, mortgage-backed
and investment securities, the possible repayment of FHLB borrowings under
appropriate market conditions, and the funding of stock-based benefit plans.
The Bank may also use such funds for the expansion of its facilities, and to
expand operations through acquisitions of other financial institutions, branch
offices or other financial services companies. The Bank has not yet determined
the approximate amount of net proceeds to be used for any of the purposes
mentioned above.
Bancorp intends to use a portion of the net proceeds to make a loan directly
to the ESOP to enable the ESOP to purchase 8% of the Common Stock issued in the
Offering, including shares issued to the Foundation. Bancorp and the Bank may
alternatively choose to fund the ESOP's stock purchases through a loan by a
third-party financial institution. The remaining net proceeds retained by
Bancorp will initially be invested in mortgage-related securities and federal
agency obligations. Based upon the sale of 1,531,445 shares or 2,071,955 shares
at the minimum and maximum of the Offering Range, and the issuance of shares to
the Foundation, the amount of the loan to the ESOP (assuming a per share price
of $10.00) would be $1.3 million or $1.7 million, respectively (or $2.0 million
if the Offering Range is increased by 15%) to be repaid over a 10-year period at
the prevailing prime rate of interest, which currently is 8.5%. See "Management
of the Bank -- Other Benefit Plans--Employee Stock Ownership Plan."
The net proceeds retained by Bancorp may also be used to support the future
expansion of operations through branch acquisitions, the establishment of branch
offices and the acquisition of other financial institutions or their assets,
including those located within the Bank's market area or diversification into
other banking related businesses. Bancorp has no current arrangements,
understandings or agreements regarding any such opportunities or transactions.
The OTS requires that neither Bancorp nor the Bank may take any action to
further the payment of a return of capital dividend for one year following the
Reorganization. There can be no assurance that any such action would occur
following one year after consummation of the Reorganization.
Upon completion of the Reorganization and Offering, the Board of Directors of
Bancorp will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Unless approved by the OTS, Bancorp,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
the Common Stock for three years except: (i) for an offer to all stockholders
on a pro rata basis (except that the Mutual Company may be excluded from the
repurchase without the OTS' approval); or (ii) for the repurchase of qualifying
shares of a director.
33
<PAGE>
Based upon facts and circumstances following Reorganization and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
are not limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve
Bancorp's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of Bancorp and its shareholders.
Although Bancorp has no current plans to repurchase its stock, in the event
Bancorp does determine to repurchase stock, such repurchases may be made at
market prices which may be in excess of the Purchase Price in the Offering.
Any stock repurchases will be subject to the determination of the Board of
Directors that both Bancorp and the Bank will be capitalized in excess of all
applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, Bancorp's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment, tax and other considerations. See "The Reorganization and Stock
Offering--Certain Restrictions on Purchase or Transfer of Common Stock."
DIVIDEND POLICY
Upon completion of the Offering, the Board of Directors of Bancorp will have
the authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon a
number of factors, including the amount of net proceeds retained by Bancorp in
the Offering, investment opportunities available to Bancorp or the Bank, capital
requirements, regulatory limitations, Bancorp's and the Bank's financial
condition and results of operations, tax considerations and general economic
conditions. No assurances can be given, however, that any dividends will be
paid or, if commenced, will continue to be paid. Furthermore, the OTS requires
that neither Bancorp nor the Bank may take any action to further the payment of
a return of capital dividend for one year following the Reorganization. There
can be no assurance that any such action would occur following one year after
consummation of the Reorganization.
The Bank's ability to pay dividends to Bancorp on its capital stock is
subject to certain regulatory regulations. For information concerning federal
regulations which apply to the Bank in determining the amount of proceeds which
may be retained by Bancorp and regarding a savings institution's ability to make
capital distributions, including payment of dividends to its holding company,
see "Federal and State Taxation--Federal Taxation--Distributions" and
"Regulation and Supervision--Federal Savings Institution Regulation--Limitation
on Capital Distributions."
WAIVER OF DIVIDENDS BY THE MUTUAL COMPANY
The Board of Directors of the Mutual Company will determine whether the
Mutual Company will waive the receipt of dividends declared by Bancorp each time
Bancorp declares a dividend. The Board of Directors of the Mutual Company
presently intends to waive the receipt of dividends declared by Bancorp. OTS
regulations with respect to a mutual holding company's waiver of dividends state
that the Mutual Company may not waive its right to receive any dividend declared
by Bancorp unless either: (1) no insider
34
<PAGE>
of the Mutual Company, associate of an insider, or tax-qualified or non-tax-
qualified employee stock benefit plan of the Mutual Company holds any share of
stock in the class of stock to which the waiver would apply; or (2) the Mutual
Company provides the OTS with written notice of its intent to waive its right to
receive dividends 30 days prior to the proposed date of payment of the dividend,
and the OTS does not object. The regulations further state that the OTS shall
not object to a notice of intent to waive dividends if: (1) the waiver would not
be detrimental to the safe and sound operation of the Bank; and (2) the Board of
Directors of the Mutual Company expressly determines that waiver of the dividend
by the Mutual Company is consistent with the Directors' fiduciary duties to the
mutual members of the Mutual Company. It is the OTS' recent practice to review
dividend waiver notices on a case-by-case basis, and, in general, not to object
to any such waiver if: (1) the mutual holding company's board of directors
determines that such waiver is consistent with such directors' fiduciary duties
to the mutual holding company's members; (2) for as long as the subsidiary
holding company is controlled by the mutual holding company, the dollar amount
of dividends waived by the mutual holding company is considered to be a
restriction on the stockholders' equity of the subsidiary holding company, which
restriction, if material, is disclosed in the public financial statements of the
subsidiary holding company as a note to the financial statement; (3) the amount
of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS No. 5, where the subsidiary holding company determines that
the payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (4) the amount of any
waived dividend is considered as having been paid by the subsidiary holding
company in evaluating any proposed dividend under OTS capital distribution
regulations; and (5) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the Conversion
Transaction takes into account the amount of the dividends waived by the mutual
holding company. In addition, the OTS has announced that the dividends waived by
mutual holding companies will affect the ratio pursuant to which shares of
Common Stock of a subsidiary holding company held by Minority Stockholders would
be exchanged for shares of common stock of the converted holding company in a
Conversion Transaction.
The Mutual Company's Board of Directors may conclude that a dividend waiver
by the Mutual Company, which permits retention of capital by Bancorp, is in the
best interest of the Mutual Company's members because, among other reasons: (i)
the Mutual Company has no need for the dividend for its business operations,
(ii) the cash that would be received could be invested by Bancorp more
effectively; and (iii) such waiver preserves the retained earnings of the Mutual
Company through its principal asset (Bancorp), which would be available for
distribution in the unlikely event of a voluntary liquidation of Bancorp after
satisfaction of claims of depositors and other creditors. The Board of
Directors may consider other factors in determining whether such waiver is
consistent with its fiduciary duties to members of the Mutual Company. There is
no assurance that the Mutual Company will waive the receipt of the dividends.
Immediately after consummation of the Reorganization and the Offering, it is
expected that the Mutual Company's operations will consist of activities
relating to its investment in, and control of, a majority of the Common Stock of
Bancorp and maintenance of books and records relating to members of the Mutual
Company. In the future, the Mutual Company may accept dividends paid by Bancorp
to be used for the payment of operating expenses and other purposes, including
purchasing Common Stock from time to time in the open market or from Bancorp.
There can be no assurance that the Mutual Company will accept dividends paid by
Bancorp, or if such dividends are accepted, that the Mutual Company will
purchase shares of Common Stock in the open market. Any purchase of Common
Stock other than from the Mutual Company will increase the percentage of
Bancorp's outstanding shares of Common Stock held by the Mutual Company and
increase the number of shares eligible to be sold in any subsequent secondary
offering or mutual to stock conversion of the Mutual Company. Any waiver of
dividends by the Mutual Company is likely to result in an adjustment to the
ratio pursuant to which shares of Common Stock are exchanged for
35
<PAGE>
shares of the converted Mutual Company in a Conversion Transaction, which
adjustment will have the effect of diluting Minority Stockholders' percentage
ownership interest in the converted Mutual Company's shares.
CONVERSION OF THE MUTUAL COMPANY TO STOCK FORM
As long as the Mutual Company remains a mutual holding company, it must own
at least a majority of the outstanding voting stock of Bancorp. OTS regulations
specifically authorize mutual holding companies to (i) convert to stock form
pursuant to the conversion regulations of the OTS (the "Conversion
Transaction"), and (ii) exchange stock issued by the converted holding company
for stock issued by a subsidiary holding company or subsidiary stock savings
bank. The Bank's Plan provides that any such exchange will maintain
approximately the same percentage ownership interest in the newly converted
holding company after the Conversion Transaction as such stockholders held in
Bancorp immediately prior to the Conversion Transaction. OTS regulations
require that such exchange be "fair and reasonable" but do not specify the basis
for such exchange. Although the Mutual Company may conduct a Conversion
Transaction in the future, the Bank has no current plans to do so and there can
be no assurance as to when, if ever, such a Conversion Transaction will occur.
Any Conversion Transaction would be subject to federal securities laws and
regulations of the OTS in effect at the time of the Conversion Transaction. A
decision by the Mutual Company to convert to stock form would require the
approval of its members prior to the Conversion Transaction. It is expected
that these members will have subscription rights to purchase stock of the
converted Mutual Company. Under OTS regulations, the Mutual Company, Bancorp or
the Bank will have to demonstrate to the OTS that the terms of such exchange are
fair and reasonable. The fairness of the exchange may be supported by an
opinion from an independent third party.
The OTS policy with respect to dividends waived by mutual holding companies
requires that, in the case of mutual-to-stock conversions of recently formed
mutual holding companies, such as the Mutual Company, the aggregate amount of
cash dividends waived by a mutual holding company must be considered when
establishing a fair and reasonable basis for exchanging subsidiary holding
company common stock for converted mutual holding company common stock. The OTS
will not permit a pro rata exchange if the mutual holding company has waived the
receipt of cash dividends paid by the subsidiary holding company. Accordingly,
the precise treatment of any Conversion Transaction cannot be assured. ANY
WAIVER OF DIVIDENDS BY THE MUTUAL COMPANY IS LIKELY TO RESULT IN AN ADJUSTMENT
TO THE RATIO PURSUANT TO WHICH SHARES OF COMMON STOCK ARE EXCHANGED FOR SHARES
OF THE CONVERTED MUTUAL COMPANY IN A CONVERSION TRANSACTION, WHICH ADJUSTMENT
WOULD HAVE THE EFFECT OF DILUTING THE OWNERSHIP INTERESTS OF MINORITY
STOCKHOLDERS.
In addition to the possible adjustment to the exchange ratio due to waived
dividends, the percentage of the converted Mutual Company's common stock
received by Minority Stockholders in any Conversion Transaction may be affected
by a number of other factors including any purchases of Common Stock by the
Mutual Company, any other stock issuances by Bancorp, any acquisitions by the
Mutual Company of other savings associations or Bancorp's dividend policy and
the amount of regular or special dividends paid by Bancorp.
As an alternative to the exchange of shares discussed above, the Plan of
Reorganization provides that if the stockholders of Bancorp do not receive, for
any reason, shares of the Converted Mutual Company or the stock institution
resulting from the Conversion Transaction based upon a fair and reasonable
exchange ratio, or cash from the resulting institution in an amount equal to the
fair market value of their stock given the circumstances of the Conversion
Transaction, Bancorp or the Mutual Company (and its successors) may purchase all
shares not owned by it simultaneously with the consummation of the Conversion
Transaction at the fair market value of the stock on the date of the Conversion
Transaction, subject to OTS approval and compliance with the limitations of the
OTS regulations governing capital distributions and other conditions
36
<PAGE>
that the OTS may impose. The fair market value of the common stock of the
Converted Mutual Company shall be established by the independent appraisal
utilized in the Conversion Transaction pursuant to OTS regulations governing
conversions. Moreover, if the Common Stock is traded and has an established and
liquid trading market, of which there is no assurance, the fair market value of
the Common Stock, as established by the independent appraisal, may be greater
than or less than the trading price of such stock.
In addition, the Plan of Reorganization provides, in the event that the
Mutual Company converts to stock form in a Conversion Transaction, that any
options or other convertible securities held by any officer, director or
employee of Bancorp, convertible into shares of Common Stock shall be
convertible into shares of the converted Mutual Company; provided, however, that
if such shares cannot be so converted, the holders of such options or other
convertible securities shall be entitled to receive a cash payment for such
shares in an amount equal to the offering price of the number of shares of the
converted Holding Company into which such securities would otherwise be
converted, less the exercise price of such options or other convertible
securities. Any such exchange or redemption of these securities will be subject
to the written approval of the OTS, and there can be no assurance that such
approval would be obtained.
Further, in the event the MHC were to undertake a second-step conversion and
in connection therewith were to make an additional contribution to the
Foundation at that time, the OTS has advised the Bank that under its current
policy any such additional contribution would require the separate approval of:
(i) the holders of at least a majority of the minority stockholders eligible to
vote at a duly called meeting of stockholders; and (ii) the approval of at least
a majority of the total number of votes eligible to be cast by members of the
mutual company at a duly called meeting of members. In addition, as a result of
the establishment of the Foundation, in the event the MHC were to undertake a
second-step conversion in the future, the percentage of common stock to be
offered by the converting MHC in such transaction would be approximately 1.01%
less than the percentage of stock that would be offered if the Foundation were
not established as part of the Reorganization and Offering.
Management of the Mutual Company may consider a Conversion Transaction in the
future. However, there is no plan, agreement or understanding with respect to a
Conversion Transaction and there can be no assurance that such a conversion will
occur.
MARKET FOR THE COMMON STOCK
Bancorp and the Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. Bancorp has
received conditional approval to have its Common Stock listed on the Nasdaq
under the symbol "WEBK" upon completion of the Reorganization and Offering. Such
approval is subject to various conditions, including completion of the
Reorganization and Offering and the satisfaction of applicable listing criteria.
There can be no assurance that the Common Stock will be able to meet the
applicable listing criteria in order to maintain its listing on the Nasdaq or
that an active and liquid trading market will develop or, if developed, will be
maintained. A public market having the desirable characteristics of depth,
liquidity and orderliness, however, depends upon the presence in the marketplace
of both willing buyers and sellers of Common Stock at any given time, which is
not within the control of Bancorp. No assurance can be given that an investor
will be able to resell the Common Stock at or above the purchase price of the
Common Stock after the Offering.
37
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical capitalization of the
Bank at March 31, 1998, and the pro forma capitalization of Bancorp after giving
effect to the Offering, including the issuance of shares to the Foundation,
based upon the sale of the number of shares indicated in the table and the other
assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
BANK PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------------------------------
2,382,748
1,531,445 1,801,700 2,071,955 Shares
Shares Shares Shares (15% above
(Minimum of (Midpoint of (Maximum of Maximum of
Bank Offering Offering Offering Offering
Historical Range) Range) Range) Range)(1)
---------- ----------- ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposit accounts and Borrowings:
Deposit accounts(2)................. $239,120 $ 239,120 $ 239,120 $ 239,120 $ 239,120
FHLB advances and other
borrowings....................... 42,300 42,300 42,300 42,300 42,300
Total.................................. 281,420 281,420 281,420 281,420 281,420
Stockholders' equity:
Preferred Stock, $.01 par value,
1,000,000 shares authorized;
none to be issued................. -- -- -- -- --
Common Stock, $.01 par value,
9,000,000 shares authorized;
shares to be issued as
reflected......................... -- 36 42 48 55
Additional paid-in capital(3)....... -- 15,053 17,825 20,598 23,786
Retained earnings(4)................ 29,721 29,721 29,721 29,721 29,721
Less: Expense of contribution to
Foundation(5)...................... -- 742 855 968 1,098
Plus: Tax effect of
Foundation(6)................. -- 267 308 348 395
Unrealized gain on
available-for-sale
securities, net.............. 80 80 80 80 80
Less: Common Stock acquired
by the ESOP(7).............. -- 1,276 1,502 1,727 1,986
Common Stock acquired
by the Stock-Based
Incentive Plan(8).............. -- 638 751 864 993
-------- ---------- ----------- ---------- ----------
Total stockholders' equity(9).......... $ 29,801 $ 42,501 $ 44,868 $ 47,236 $ 49,960
======== ========== ========== ========== ==========
</TABLE>
- -------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% as a
result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $10.00 per share or to the
issuance of additional shares for option grants under Bancorp's Stock-
Based Incentive Plans intended to be adopted by Bancorp and presented
for approval of Minority Stockholders at a meeting of stockholders
following the Reorganization. If approved by the Minority Stockholders
of Bancorp, an amount equal to 10% of the shares of Common Stock issued
in the Offering, including shares issued to the Foundation, will be
reserved for issuance upon the exercise of options to be granted under
the Stock-Based Incentive Plans. See "Risk Factors -- Possible
Dilutive Effect of the ESOP and Stock-Based Incentive Plans," Footnotes
5 and 4 to the tables under "Pro Forma Data" at or for the three months
ended March 31, 1998 and at or for the year ended March 31, 1997,
respectively, and "Management of the Bank -- Benefits -- Stock-Based
Incentive Plans."
(4) The retained earnings of the Bank will be substantially restricted
after the Offering. See "The Reorganization and Stock Offering".
(5) Includes $100,000 in cash that will be contributed to the
Foundation.
(6) Represents the value of the contribution of Common Stock to the
Foundation at $10.00 per share reduced by the associated tax benefit of
$267,000, $308,000, $349,000 and $395,000 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively. The
realization of the federal tax benefit is limited annually to 10% of
Bancorp's annual taxable income, subject to the ability of Bancorp to
carry forward any unused portion of the deduction for five years
following the year in which the contribution is made. For state income
tax purposes, Bancorp will be able to deduct the contribution and to
carry forward any unused portion of the deduction for a five-year
period following the year in which the contribution is initially made.
Such deductions by Bancorp for New Jersey income tax purposes can be
utilized only if Bancorp generates sufficient state taxable income on
an unconsolidated basis, and also are subject to the limitation of 10%
of unconsolidated income of Bancorp.
(7) Assumes that 8% of the shares issued in the Offering, including shares
issued to the Foundation, will be purchased by the ESOP and that the
funds used to acquire such shares will be borrowed from Bancorp. The
Common Stock acquired by the ESOP is reflected as a reduction of
stockholders' equity. See "Management of the Bank--Benefits--Employee
Stock Ownership Plan."
(8) Assumes that no sooner than six months following the Reorganization and
Offering, an amount equal to 4% of the shares of Common Stock sold in
the Offering and issued to the Foundation, is purchased by the Stock-
Based Incentive Plan through open market purchases at the offering
price of $10.00 per share. The Common Stock purchased by the Stock-
Based Incentive Plan is reflected as a reduction of stockholders'
equity. See "Risk Factors--Possible Dilutive Effect of Stock-Based
Incentive Plan," Footnote 3 to the tables under "Pro Forma Data" and
"Management of the Bank--Other Benefit Plans."
(9) The Mutual Company will be capitalized with proceeds from the Offering
of $100,000.
38
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be determined
until the Offering is completed. However, net proceeds are currently estimated
to be between $14.3 million and $19.6 million (or $22.7 million in the event the
Offering Range is increased by 15%) based upon the following assumptions: (i)
100% of the shares of Common Stock offered will be sold in the Subscription
Offering to Eligible Account Holders, the ESOP and Supplemental Eligible Account
Holders; (ii) directors, officers and employees of the Bank and members of their
immediate families (collectively, "Insiders") will purchase an aggregate of
$2,880,000 of Common Stock and the ESOP will purchase 8% of the Common Stock
issued in connection with the Offering including shares issued to the
Foundation; (iii) Sandler O'Neill will receive an advisory, management and a
marketing fee equal to 1.5% of the aggregate Purchase Price of shares sold in
the Subscription and Community Offerings, excluding shares purchased by
directors, officers, employees and any immediate family member thereof and the
ESOP and shares contributed to the Foundation, for which Sandler O'Neill will
not receive a fee; and (iv) Offering expenses, excluding the marketing fees paid
to Sandler O'Neill, will be approximately $600,000. Actual Offering expenses
may vary from those estimated. As part of the Reorganization and Offering, the
Mutual Company will be capitalized at $100,000 and the Foundation will receive
$100,000 in cash, which will result in a reduction of the Bank's assets and
retained earnings by the same amount.
Pro forma net income of Bancorp for the three months ended March 31, 1998, and
for the year ended December 31, 1997, have been calculated as if the Common
Stock had been sold at the beginning of the respective periods and the net
proceeds had been invested at an average yield of 5.41% which is equivalent to
the one year Treasury rate at March 31, 1998. The calculations have been based
on the one year Treasury rate, as opposed to the Bank's yield on average assets,
because the Bank will initially invest the proceeds in short-term assets, at a
lower yield, and will more effectively invest the proceeds over time.
The table also reflects $100,000 being utilized to capitalize the Mutual Company
in connection with the Reorganization. The tables below do not reflect the
effect of withdrawals from deposit accounts for the purchase of Common Stock or
the effect of any possible use of the net proceeds. The pro forma after-tax
yield for Bancorp and the Bank is assumed to be 3.46% for the three months ended
March 31, 1998 and 3.46% for the year ended December 31, 1997, based on an
effective tax rate of 36%. Historical and pro forma net earnings per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued as adjusted to give effect to
the purchase of shares by the ESOP and the issuance of shares to the Foundation.
Historical and pro forma stockholders' equity per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of Common Stock issued.
The following pro forma information may not be representative of the financial
effects of the foregoing transactions at the dates on which such transactions
actually occur and should not be taken as indicative of future results of
operations. Pro forma consolidated stockholders' equity represents the
difference between the stated amount of assets and liabilities of Bancorp. The
pro forma stockholders' equity is not intended to represent the fair market
value of the Common Stock and may be stated in an amount greater than amounts
that would be available for distribution to stockholders in the event of
liquidation.
The following tables summarize historical data of the Bank and pro forma data
of Bancorp at or for the three months ended March 31, 1998, based on the
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the Offering. The
tables below give effect to Stock Awards reserved for grant under the Stock-
Based Incentive Plan, which is expected to be adopted by Bancorp following the
Reorganization and Offering. See Footnote 3 to the tables and "Management of
the Bank-- Benefits." No effect has been given in the tables to the possible
issuance of additional shares of Common Stock upon the exercise of stock options
to be granted under the
39
<PAGE>
Stock-Based Incentive Plan, nor does book value give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or, in the event of
liquidation of the Bank, to the tax effect of the bad debt reserve and other
factors. See Footnote 5 to the tables below, "The Reorganization and Stock
Offering" and "Management of the Bank-- Benefits." THE FOLLOWING TABLE ASSUMES
THAT THE FOUNDATION IS APPROVED AS PART OF THE REORGANIZATION AND THEREFORE
GIVES EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF BANCORP'S
COMMON STOCK TO THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE OFFERING.
THE VALUATION RANGE, AS SET FORTH HEREIN AND IN THE TABLE BELOW, TAKES INTO
ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.
40
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------------------
1,531,445 1,801,700 2,071,955 2,382,748
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00 Per
Per Share Per Share Per Share Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Offering of Offering of Offering of Offering
Range)(8) Range) Range) Range)(9)
----------- ------------- ------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.............................................. $ 15,314 $ 18,017 $ 20,720 $ 23,827
Plus: Shares issued to Foundation (equal to 4.19% of the
stock sold in the Offering).......................... 642 755 868 998
---------- ---------- ---------- ----------
Pro forma market capitalization............................. 15,956 18,772 21,588 24,825
---------- ---------- ---------- ----------
Gross proceeds.............................................. 15,314 18,017 20,720 23,827
Less: Offering expenses and commission..................... (767) (805) (842) (884)
---------- ---------- ---------- ----------
Estimated net proceeds...................................... 14,547 17,212 19,878 22,943
Less: Cash to Foundation................................... (100) (100) (100) (100)
Less: Cash to Mutual Company............................... (100) (100) (100) (100)
Less: Common Stock purchased by ESOP....................... (1,276) (1,502) (1,727) (1,986)
Common Stock purchased by Stock-Based Incentive
Plan................................................. (638) (751) (864) (993)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted..................... 12,433 14,759 17,087 19,764
Consolidated net earnings:(1)
Historical.............................................. 511 511 511 511
Pro forma earnings on net proceeds...................... 108 128 148 171
Less: Pro forma ESOP adjustment(2)..................... (20) (24) (28) (32)
Pro forma Stock-Based Incentive Plan
adjustment(3).................................... (20) (24) (28) (32)
---------- ---------- ---------- ----------
Pro forma net earnings............................... 579 591 603 618
Per share net earnings:(1)
Historical.............................................. 0.15 0.12 0.11 0.09
Pro forma earnings on net proceeds...................... 0.03 0.03 0.03 0.03
Less: Pro forma ESOP adjustment(2)..................... (0.01) (0.01) (0.01) (0.01)
Pro forma Stock-Based Incentive Plan
adjustment(3).................................... (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma net earnings per share.................... 0.16 0.13 0.12 0.10
Stockholders' equity:
Historical............................................. 29,801 29,801 29,801 29,801
Estimated net proceeds................................. 14,547 17,212 19,878 22,943
Plus: Tax benefit of contribution to Foundation(4).... 267 308 348 395
Less: Capitalization of Mutual Company................ (100) (100) (100) (100)
Cash to Foundation.............................. (100) (100) (100) (100)
Common Stock acquired by ESOP(2)................ (1,276) (1,502) (1,727) (1,986)
Common Stock acquired by Stock-Based
Incentive Plan(3).............................. (638) (751) (864) (993)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(3)(4)(5)(6).......... 42,501 44,868 47,236 49,960
Stockholders' equity per share:(7)
Historical............................................. 8.22 6.99 6.08 5.28
Estimated net proceeds................................. 4.01 4.03 4.05 4.07
Plus: Tax benefit of contribution to Foundation(4).... 0.07 0.07 0.07 0.07
Less: Capitalization of Mutual Company................ (0.03) (0.02) (0.02) (0.02)
Cash to Foundation.............................. (0.03) (0.02) (0.02) (0.02)
Common Stock acquired by ESOP(2)................ (0.35) (0.35) (0.35) (0.35)
Common Stock acquired by Stock-Based
Incentive Plan(3).............................. (0.18) (0.18) (0.18) (0.18)
---------- ---------- ---------- ----------
Pro forma stockholders' equity
per share(3)(4)(5)(6)........................... 11.71 10.52 9.63 8.85
Offering price as a percentage of pro forma
stockholders' equity per share......................... 85.32% 95.06% 103.84% 112.99%
Offering price to pro forma annualized net
earnings per share..................................... 15.63x 19.23x 20.83x 25.00x
</TABLE>
41
<PAGE>
_____________________
(1) Does not give effect to the non-recurring expense that is expected to
be recognized in the fourth quarter of fiscal 1998 if the
establishment of the Foundation is approved. In that event, Bancorp
will recognize an after-tax expense for the amount of the contribution
to the Foundation which is expected to be $475,000, $547,000, $620,000
and $703,000 at the minimum, midpoint, maximum, and maximum as
adjusted, of the Estimated Price Range, respectively. Pro forma net
earnings per share for the three month period ended March 31, 1998,
assuming the Foundation expense was incurred during the quarter, would
have been $0.03, $0.01, $0.00 and ($0.02) at the minimum, midpoint,
maximum and maximum, as adjusted, respectively. The number of shares
utilized for all earnings per share calculations is 3,501,149,
4,118,999, 4,736,849 and 5,447,376 at the minimum, midpoint, maximum
and maximum, as adjusted, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Offering, including shares issued to the Foundation, will be purchased
by the ESOP. For purposes of this table, the funds used to acquire
such shares are assumed to have been borrowed by the ESOP from
Bancorp. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions
to the ESOP in an amount at least equal to the principal and interest
requirement of the debt. The Bank's total annual payment of the ESOP
debt is based upon ten equal annual installments of principal, with an
assumed interest rate at 8.5%. The pro forma net earnings assume:
(i) that the Bank's contribution to the ESOP is equivalent to the debt
service requirement for the three months ended March 31, 1998, and was
made at the end of the period; (ii) that 3,191, 3,754, 4,318 and 4,965
shares at the minimum, midpoint, maximum and 15% above the maximum of
the range, respectively, were committed to be released during the
three months ended March 31, 1998 at an average fair value of $10.00
per share in accordance with Statement of Position ("SOP") 93-6; and
(iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net earnings per share calculations.
See "Management of the Bank-- Benefits--Employee Stock Ownership
Plan."
(3) Gives effect to the Stock Awards available for grant under the Stock-
Based Incentive Plan expected to be adopted by Bancorp following the
Offering and presented for approval at a meeting of stockholders. The
Stock-Based Incentive Plan intends to acquire an amount of Common
Stock equal to 4% of the shares of Common Stock sold in the Offering
and issued to the Foundation, or 63,825, 75,088, 86,351 and 99,303
shares of Common Stock at the minimum, midpoint, maximum and 15% above
the maximum of the Offering Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued
shares of Common Stock or treasury stock of Bancorp, if any. Funds
used by the Stock-Based Incentive Plan to purchase the shares will be
contributed to the Stock-Based Incentive Plan by the Bank. In
calculating the pro forma effect of the Stock-Based Incentive Plan, it
is assumed that the shares were acquired by the Stock-Based Incentive
Plan at the beginning of the period presented in open market purchases
at the Purchase Price and that 20% of the amount contributed was an
amortized expense during such period. The issuance of authorized but
unissued shares of Bancorp's Common Stock to the Stock-Based Incentive
Plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.82% and pro
forma net earnings per share would be $0.16, $0.14, $0.13, and $0.11
at the minimum, midpoint, maximum, and 15% above the maximum of the
range, respectively, and pro forma stockholders' equity per share
would be $11.52, $10.34, $9.46 and $8.70 at the minimum, midpoint,
maximum, and 15% above the maximum of the range, respectively. There
can be no assurance that stockholder approval of the Stock-Based
Incentive Plan will be obtained, or that the actual purchase price of
the shares will be equal to the Purchase Price. See "Management of
the Bank--Benefits."
(4) Assumes the issuance of 64,168, 75,491, 86,815 and 99,837 shares of
authorized but unissued shares to the Foundation at the minimum,
midpoint, maximum and maximum as adjusted, respectively. The issuance
of shares to the Foundation and the contribution to the Foundation
(excluding the tax benefit of the contribution) represent offsetting
amounts to stockholders' equity. As such, these offsetting amounts are
not shown separately in the table. Stockholders' equity is increased
by the tax benefit arising from the contribution which amounts to
$267,000, $308,000, $348,000 and $395,000 at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively. Pro
forma net income and pro forma income per share do not give effect to
the nonrecurring expense that will be recognized upon establishment of
the Foundation and the contribution of shares to it. The after-tax
expense is expected to be approximately $475,000, 547,000, 620,000 and
703,000, assuming a marginal tax rate of 36%. Assuming the
contribution were expensed during the three months ended March 31,
1998, the pro forma net earnings per share would be $0.03, $0.01,
$0.00 and $(0.02) at the minimum, midpoint, maximum and maximum as
adjusted, respectively.
(5) No effect has been given to the issuance of additional shares of
Common Stock upon the exercise of options to be granted under the
Stock-Based Incentive Plan. An amount equal to 10% of the Common
Stock issued in the Offering, including shares issued to the
Foundation, or 159,561, 187,719, 215,877 and 248,259 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Offering
Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Stock-Based Incentive
Plan. The issuance of Common Stock pursuant to the exercise of
options under the Stock-Based Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming all options
were exercised at the end of the period at an exercise price of $10.00
per share, the pro forma net earnings per share would be $0.16, $0.14,
$0.12, and $0.11, respectively, and the pro forma stockholders' equity
per share would be $11.25, $10.09, $9.24 and $8.50, respectively. See
"Management of the Bank--Benefits."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Reorganization. See "Dividend Policy," "The
Reorganization and Stock Offering" and "Regulation and Supervision--
Federal Savings Institution Regulation--Limitation on Capital
Distributions."
(7) The number of shares utilized in the stockholders' equity per share
calculations were 3,625,607, 4,265,420, 4,905,233 and 5,641,018 at the
minimum, midpoint, maximum and maximum, as adjusted, respectively.
(8) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Offering Range of up to
15% as a result of regulatory considerations or changes in market or
general financial and economic conditions following the commencement
of the Subscription and Community Offerings.
42
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------
1,531,445 1,801,700 2,071,955 2,382,748
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00 Per
Per Share Per Share Per Share Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Offering of Offering of Offering of Offering
Range)(8) Range) Range) Range)(8)
------------- ------------- ------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds................................................. $ 15,314 $ 18,017 $ 20,720 $ 23,827
Plus: Shares issued to Foundation (equal to 4.19% of the
stock sold in the Offering)............................. 642 755 868 998
---------- ---------- ---------- ----------
Pro forma market capitalization................................ 15,956 18,772 21,588 24,825
Gross proceeds................................................. 15,314 18,017 20,720 23,827
Less: Offering expenses and commission........................ (767) (805) (842) (884)
---------- ---------- ---------- ----------
Estimated net proceeds........................................ 14,547 17,212 19,878 22,943
Less: Cash to Foundation...................................... (100) (100) (100) (100)
Less: Cash to Mutual Company.................................. (100) (100) (100) (100)
Less: Common Stock purchased by ESOP.......................... (1,276) (1,502) (1,727) (1,986)
Common Stock purchased by Stock-Based Incentive
Plan.................................................... (638) (751) (864) (993)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted......................... 12,433 14,759 17,087 19,764
Consolidated net earnings:(1)
Historical.................................................. 737 737 737 737
Pro forma earnings on net proceeds.......................... 430 511 592 684
Less: Pro forma ESOP adjustment(2)......................... (82) (96) (111) (127)
Pro forma Stock-Based Incentive Plan
adjustment(3)........................................ (82) (96) (111) (127)
---------- ---------- ---------- ----------
Pro forma net earnings.................................... 1,003 1,056 1,107 1,167
Per share net earnings:(1)
Historical.................................................. 0.21 0.18 0.16 0.13
Pro forma earnings on net proceeds.......................... 0.12 0.12 0.12 0.13
Less: Pro forma ESOP adjustment(2)......................... (0.02) (0.02) (0.02) (0.02)
Pro forma Stock-Based Incentive Plan
adjustment(3)........................................ (0.02) (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Pro forma net earnings per share.......................... 0.29 0.26 0.24 0.22
Stockholders' equity:
Historical.................................................. 29,275 29,275 29,275 29,275
Estimated net proceeds...................................... 14,547 17,212 19,878 22,943
Plus: Tax benefit of contribution to Foundaiton(4)......... 267 308 348 395
Less: Capitalization of Mutual Company..................... (100) (100) (100) (100)
Cash to Foundation................................... (100) (100) (100) (100)
Common Stock acquired by ESOP(2)..................... (1,276) (1,502) (1,727) (1,986)
Common Stock acquired by Stock-Based
Incentive Plan(3)................................... (638) (751) (864) (993)
---------- ---------- ---------- ----------
Pro forma stockholders' equity(3)(4)(5)(6)................ 41,975 44,342 46,710 49,434
Stockholders' equity per share(7):
Historical.................................................. 8.07 6.86 5.97 5.19
Estimated net proceeds...................................... 4.00 4.03 4.05 4.07
Plus: Tax benefit of contribution to Foundation(4)......... 0.07 0.07 0.07 0.07
Less: Capitalization of Mutual Company..................... (0.03) (0.02) (0.02) (0.02)
Cash to Foundation................................... (0.03 (0.02) (0.02) (0.02)
Common Stock acquired by ESOP(2)..................... (0.35) (0.35) (0.35) (0.35)
Common Stock acquired by Stock-Based
Incentive Plan(3)................................... (0.18) (0.18) (0.18) (0.18)
---------- ---------- ---------- ----------
Pro forma stockholders' equity
per share(3)(4)(5)(6)................................... 11.57 10.39 9.52 8.76
Offering price as a percentage of pro forma
stockholders' equity per share.............................. 86.43% 96.25% 105.04% 114.16%
Offering price to pro forma annualized net
earnings per share........................................... 34.48x 38.46x 41.67x 45.45x
</TABLE>
43
<PAGE>
_____________________
(1) Does not give effect to the non-recurring expense that is expected to
be recognized in the fourth quarter of fiscal 1998 if the
establishment of the Foundation is approved. In that event, Bancorp
will recognize an after-tax expense for the amount of the contribution
to the Foundation which is expected to be $475,000, $547,000, $620,000
and $703,000 at the minimum, midpoint, maximum, and maximum as
adjusted, of the Estimated Price Range, respectively. Pro forma net
earnings per share for the three month period ended March 31, 1998,
assuming the Foundation expense was incurred during the quarter, would
have been $0.13, $0.12, $0.10 and $0.09 at the minimum, midpoint,
maximum and maximum, as adjusted, respectively. The number of shares
utilized for all earnings per share calculations is 3,510,723
4,130,262, 4,749,802 and 5,462,272 at the minimum, midpoint, maximum
and maximum, as adjusted, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Offering, including shares issued to the Foundation, will be purchased
by the ESOP. For purposes of this table, the funds used to acquire
such shares are assumed to have been borrowed by the ESOP from
Bancorp. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions
to the ESOP in an amount at least equal to the principal and interest
requirement of the debt. The Bank's total annual payment of the ESOP
debt is based upon ten equal annual installments of principal, with an
assumed interest rate at 8.5%. The pro forma net earnings assume:
(i) that the Bank's contribution to the ESOP is equivalent to the debt
service requirement for the year ended December 31, 1997, and was made
at the end of the period; (ii) that 12,765, 15,018, 17,270 and 19,861
shares at the minimum, midpoint, maximum and 15% above the maximum of
the range, respectively, were committed to be released during the year
ended December 31, 1997 at an average fair value of $10.00 per share
in accordance with Statement of Position ("SOP") 93-6; and (iii) only
the ESOP shares committed to be released were considered outstanding
for purposes of the net earnings per share calculations. See
"Management of the Bank-- Benefits--Employee Stock Ownership Plan."
(3) Gives effect to the Stock Awards available for grant under the Stock-
Based Incentive Plan expected to be adopted by Bancorp following the
Offering and presented for approval at a meeting of stockholders. The
Stock-Based Incentive Plan intends to acquire an amount of Common
Stock equal to 4% of the shares of Common Stock sold in the Offering
and issued to the Foundation, or 64,168, 75,491, 86,815 and 99,837
shares of Common Stock at the minimum, midpoint, maximum and 15% above
the maximum of the Offering Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued
shares of Common Stock or treasury stock of Bancorp, if any. Funds
used by the Stock-Based Incentive Plan to purchase the shares will be
contributed to the Stock-Based Incentive Plan by the Bank. In
calculating the pro forma effect of the Stock-Based Incentive Plan, it
is assumed that the shares were acquired by the Stock-Based Incentive
Plan at the beginning of the period presented in open market purchases
at the Purchase Price and that 20% of the amount contributed was an
amortized expense during such period. The issuance of authorized but
unissued shares of Bancorp's Common Stock to the Stock-Based Incentive
Plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.82% and pro
forma net earnings per share would be $0.28, $0.25, $0.23, and $0.21
at the minimum, midpoint, maximum, and 15% above the maximum of the
range, respectively, and pro forma stockholders' equity per share
would be $11.38, $10.22, $9.36 and $8.61 at the minimum, midpoint,
maximum, and 15% above the maximum of the range, respectively. There
can be no assurance that stockholder approval of the Stock-Based
Incentive Plan will be obtained, or that the actual purchase price of
the shares will be equal to the Purchase Price. See "Management of
the Bank--Benefits."
(4) Assumes the issuance of 64,168, 75,491, 86,815 and 99,837 shares of
authorized but unissued shares to the Foundation at the minimum,
midpoint, maximum and maximum as adjusted, respectively. The issuance
of shares to the Foundation and the contribution to the Foundation
(excluding the tax benefit of the contribution) represent offsetting
amounts to stockholders' equity. As such, these offsetting amounts are
not shown separately in the table. Stockholders' equity is increased
by the tax benefit arising from the contribution which amounts to
$267,000, $308,000, $348,000 and $395,000 at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively. Pro
forma net income and pro forma income per share do not give effect to
the nonrecurring expense that will be recognized upon establishment of
the Foundation and the contribution of shares to it. The after-tax
expense is expected to be approximately $475,000, 547,000, 620,000
and 703,000, assuming a marginal tax rate of 36%. Assuming the
contribution were expensed during the year ended December 31, 1997,
the pro forma net earnings per share would be $0.15, $0.12, $0.10, and
$0.08 at the minimum, midpoint, maximum and maximum as adjusted,
respectively.
(5) No effect has been given to the issuance of additional shares of
Common Stock upon the exercise of options to be granted under the
Stock-Based Incentive Plan. An amount equal to 10% of the Common
Stock issued in the Offering, including shares issued to the
Foundation, or 159,561, 187,719, 215,877 and 248,259 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Offering
Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Stock-Based Incentive
Plan. The issuance of Common Stock pursuant to the exercise of
options under the Stock-Based Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming all options
were exercised at the end of the period at an exercise price of $10.00
per share, the pro forma net earnings per share would be $0.27, $0.25,
$0.22, and $0.20, respectively, and the pro forma stockholders' equity
per share would be $11.11, $9.98, $9.14 and $8.41, respectively. See
"Management of the Bank--Benefits."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Reorganization. See "Dividend Policy," "The
Reorganization and Stock Offering" and "Regulation and Supervision--
Federal Savings Institution Regulation--Limitation on Capital
Distributions."
(7) The number of shares utilized in the stockholders' equity per share
calculations were 3,625,607, 4,265,420, 4,905,233 and 5,641,018 at the
minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(8) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Offering Range of up to
15% as a result of regulatory considerations or changes in market or
general financial and economic conditions following the commencement
of the Subscription and Community Offerings.
44
<PAGE>
COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not established as part of the
Reorganization, FinPro has estimated that the pro forma aggregate market
capitalization of Bancorp would be approximately $43.6 million, at the midpoint,
which is approximately $43.6 million, at the midpoint, which is approximately
$900,000 greater than the pro forma aggregate market capitalization of Bancorp
if the Foundation is approved by members of Bancorp. Based on a Minority
Ownership Interest of 42.2% of total shares of Common Stock to be issued and
outstanding, the pro forma market capitalization of Bancorp without the
Foundation would be approximately $18.7 million, at the midpoint, which is
approximately $24,000 less than the pro forma market capitalization of Bancorp
if the Foundation is approved by members of Bancorp and would result in
approximately a $731,000 increase, or 4.1%, in the amount of Common Stock
offered for sale in the Offering. Assuming the midpoint of the Offering Range,
pro forma stockholders' equity per share and pro forma earnings per share would
be substantially the same with the Foundation as without the Foundation. In this
regard, pro forma stockholders' equity and pro forma net income per share would
be $10.52 and $0.13 respectively, at the midpoint of the estimate, assuming no
Foundation, and $10.41 and $0.13, respectively, with the Foundation. The pro
forma price to book ratio and the pro forma price to earnings ratio are 95.06%
and 19.23x, respectively, at the midpoint of the estimate, assuming no
Foundation and are 96.06% and 19.23x, respectively, with the Foundation. This
estimate by FinPro was prepared at the request of the OTS and is solely for
purposes of providing members with sufficient information with which to make an
informed decision on the Foundation. There is no assurance that in the event the
Foundation is not approved at the Special Meeting of Members that the appraisal
prepared at that time would conclude that the pro forma market value of Bancorp
would be the same as that estimated herein. Any appraisal prepared at that time
would be based on the facts and circumstances existing at that time, including,
among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios and
financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Offering Range, assuming the Offering was completed at March
31, 1998.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MIDPOINT
------------------------ -----------------------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated offering amount............... $ 15,314 $ 15,936 $ 18,017 $ 18,748
Pro forma market capitalization......... 15,956 15,936 18,772 18,748
Total assets............................ 325,222 325,605 327,589 328,040
Total liabilities....................... 282,721 282,721 282,721 282,721
Pro forma stockholders' equity.......... 42,501 42,884 44,868 45,319
Pro forma consolidated net
earnings.............................. 579 584 591 597
Pro forma stockholders' equity
per share............................. 11.72 11.58 10.52 10.41
Pro forma consolidated net
earnings per share.................... 0.16 0.15 0.13 0.13
Pro Forma Pricing Ratios:
Offering Price as a percentage
of pro forma stockholders'
equity per share.................... 85.32% 86.36% 95.06% 96.06%
Offering price to pro forma net
earnings per share.................. 15.63x 16.67x 19.23x 19.23x
Offering price to assets............. 11.15% 11.38% 13.02% 13.29%
Pro Forma Financial Ratios:
Return on Assets..................... 0.71% 0.72% 0.72% 0.73%
Return on stockholders' equity....... 5.45% 5.45% 5.27% 5.27%
Stockholders' equity to assets....... 13.07% 13.17% 13.70% 13.82%
<CAPTION>
AT THE MAXIMUM,
AT THE MAXIMUM AS ADVERTISED
------------------------- ------------------------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated offering amount............... $ 20,720 $ 21,560 $ 23,827 $ 24,794
Pro forma market capitalization......... 21,588 21,560 24,825 24,794
Total assets............................ 329,957 330,477 332,681 333,277
Total liabilities....................... 282,721 282,721 282,721 282,721
Pro forma stockholders' equity.......... 47,236 47,756 49,960 50,556
Pro forma consolidated net
earnings.............................. 603 610 618 626
Pro forma stockholders' equity
per share............................. 9.63 9.53 8.85 8.78
Pro forma consolidated net
earnings per share.................... 0.12 0.12 0.10 0.10
Pro Forma Pricing Ratios:
Offering Price as a percentage
of pro forma stockholders'
equity per share.................... 103.84% 104.93% 112.99% 113.90%
Offering price to pro forma net
earnings per share.................. 20.83x 20.83x 25.00x 25.00x
Offering price to assets............. 14.87% 15.17% 16.96% 17.30%
Pro Forma Financial Ratios:
Return on Assets..................... 0.73% 0.74% 0.74% 0.75%
Return on stockholders' equity....... 5.11% 5.11% 4.95% 4.95%
Stockholders' equity to assets....... 14.32% 14.45% 15.02% 15.17%
</TABLE>
If the contribution to the Foundation were expensed during the three month
period ended March 31, 1998, the pro forma price to earnings, return on assets
and return on equity would be as
<TABLE>
<CAPTION> AT THE
AT THE AT THE AT THE MAXIMUM,
MINIMUM MIDPOINT MAXIMUM AS ADJUSTED
------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Offering price to pro forma net earnings per share............ 84.06x 235.10x N/A N/A
Pro forma return on assets.................................... 0.13% 0.05% (0.02)% (0.10)%
Pro forma return on equity.................................... 0.98% 0.39% (0.14)% (0.68)%
</TABLE>
45
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME FOR
WEST ESSEX BANK AND SUBSIDIARIES
The following Consolidated Statements of Income of the Bank and subsidiaries
for each of the years in the three year period ended December 31, 1997 have been
audited by Radics & Co., LLC, independent certified public accountants, whose
report thereon is included elsewhere in this Prospectus. With respect to the
information for the three months ended March 31, 1998 and 1997, which is
unaudited, in the opinion of management, all adjustments necessary for a fair
presentation of such interim periods have been included and are of a normal
recurring nature. Results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. These Statements of Income should be read in conjunction
with the Financial Statements and notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Offering Circular.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------ -------------------------------------------------
1998 1997 1997 1996 1995
--------------- ---------------- ------------- ------------ ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans............................... $2,298,412 $1,744,900 $ 7,908,541 $ 7,268,237 $ 7,603,186
Mortgage-backed securities.......... 2,117,926 1,930,007 7,908,940 6,982,443 6,559,192
Investment securities............... 602,150 465,039 1,897,153 1,700,819 1,188,096
Other interest-earning assets....... 96,925 112,324 400,842 515,475 384,395
---------- ---------- ----------- ----------- -----------
Total interest income.......... 5,115,413 4,252,270 18,115,476 16,466,974 15,734,869
---------- ---------- ----------- ----------- -----------
Interest expense:
Deposits............................ 2,433,347 1,809,177 8,089,473 7,148,794 6,551,335
Borrowed money...................... 436,628 343,500 1,566,165 1,151,419 1,066,987
---------- ---------- ----------- ----------- -----------
Total interest expense......... 2,859,975 2,152,677 9,655,638 8,300,213 7,618,322
---------- ---------- ----------- ----------- -----------
Net interest income................... 2,245,438 2,099,593 8,459,838 8,166,761 8,116,547
Provision for loan losses............. (22,050) 55,000 487,015 232,103 509,729
---------- ---------- ----------- ----------- -----------
Net interest income after
provision for loan losses...... 2,267,488 2,044,593 7,972,823 7,934,658 7,606,818
---------- ---------- ----------- ----------- -----------
Non-interest income:
Fees and service charges............ 94,162 64,042 273,443 210,286 157,183
(Loss) gain on sale of securities
available for sale................ -- -- (20,245) 102,752 (22,014)
Income on real estate owned......... -- -- -- 20,563 58,933
Other............................... 45,749 49,714 120,039 141,996 138,328
---------- ---------- ----------- ----------- -----------
Total noninterest income.... 139,911 113,756 373,237 475,597 332,430
---------- ---------- ----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits...... 767,131 705,818 2,847,886 2,621,753 2,439,036
Occupancy expense of premises....... 85,578 66,563 245,879 228,411 219,771
Equipment........................... 162,626 113,711 495,742 426,179 385,802
Loss on real estate owned........... 23,748 157,321 379,870 -- --
Advertising......................... 49,956 17,202 127,732 78,395 87,621
Federal insurance premiums.......... 29,079 28,219 114,755 1,478,029 381,317
Amortization of intangible.......... 148,192 -- 1,743,062 -- --
Other............................... 370,389 261,974 1,218,015 1,085,529 932,929
---------- ---------- ----------- ----------- -----------
Total noninterest expenses..... 1,636,699 1,350,808 7,172,941 5,918,296 4,446,476
---------- ---------- ----------- ----------- -----------
Income before income taxes............ 770,700 807,541 1,173,119 2,491,959 3,492,772
Income taxes.......................... 259,559 284,485 436,279 835,951 1,220,817
---------- ---------- ----------- ----------- -----------
Net income............................ $ 511,141 $ 523,056 $ 736,840 $ 1,656,008 $ 2,271,955
========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Bancorp has not yet been formed and, accordingly, has no results of
operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on interest-
earning assets, primarily its loan and investment portfolios, and its cost of
funds, consisting of interest paid on deposits and borrowings. Results of
operations are also affected by the Bank's provision for loan losses and non-
interest expense. The Bank's non-interest expense principally consists of
salaries and employee benefits, office occupancy and equipment expense,
amortization of intangibles, advertising, federal deposit insurance premiums,
expenses of real estate owned and other expenses. Results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities.
MANAGEMENT STRATEGY
The Bank's current strategic plan is to maintain profitability and its well-
capitalized position to take advantage of future expansion or growth
opportunities, while managing growth, maintaining asset quality, controlling
expenses and reducing exposure to credit and interest rate risk. Management
seeks to accomplish these goals by: (1) emphasizing its retail banking services
through its network of branch offices, which includes the origination of one- to
four-family mortgage loans, as well as commercial real estate, home equity,
multi-family, construction and development and consumer loans, in the
communities it serves as market conditions permit; (2) enhancing earnings and
offsetting the effects of the extreme competition for real estate loans in the
Bank's market area through the purchase of primarily adjustable rate mortgage-
backed securities, which provide a source of liquidity, low credit risk and low
administrative cost as well as helping to manage interest rate risk; and (3)
continuing to monitor interest rate risk. Management has aggressively sought to
increase loan originations in recent years and was successful in increasing
total loans receivable, net, from $82.1 million at December 31, 1996 to $112.7
million and $114.3 million at December 31, 1997 and March 31, 1998,
respectively. Management was successful in increasing its loan origination
primarily by increasing the amount of advertizing the Bank does in its primary
market area, paying fees to mortgage brokers who send loan applicants to the
Bank to whom the Bank originates loans and providing cash incentives to its
mortgage origination staff to increase loan originations. Competition, however,
has remained intense in the Bank's market area, which has resulted in the Bank's
total securities portfolio representing a greater percentage of total assets
than its loan portfolio in each of the last five years. Management believes
that continuing to seek lending opportunities, as well as investing in mortgage-
backed securities, the majority of which are adjustable rate, enables the Bank
to effectively control its interest rate risk while at the same time enabling it
to maintain a balance of high quality, diversified investments, provide for
collateral for short and long-term borrowings and lessen exposure to credit
risk.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Board of Directors has
established an Asset/Liability Committee, which is responsible for reviewing
asset/liability policies and interest rate risk position. The Asset/Liability
Committee meets at least on a quarterly basis, reports trends and interest rate
risk position to the Board of Directors and reviews with the Board its
activities and strategies, the effect of those strategies on the Bank's net
interest margin, the market value of the portfolio, and the effect the changes
in interest rates will have on the Bank's portfolio and exposure
47
<PAGE>
limits. The extent of the movement of interest rates is an uncertainty that
could have a negative impact on the earnings of the Bank. See "Risk Factors--
Potential Impact of Changes in Interest Rates."
In recent years the Bank has used the following strategies to manage interest
rate risk: (i) emphasize the origination of long-term mortgage loans, and (ii)
offsetting the effects of holding fixed-rate mortgage loans by purchasing
adjustable rate mortgage-backed securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Management
Strategy."
The Bank continues to seek opportunities to originate for its portfolio one-
to four-family residential mortgage loans, as well as other loans, in its
primary market area of Essex, Morris and Bergen Counties, New Jersey. The
Bank's total loan portfolio had decreased as a percent of the Bank's total
assets from 1993 through 1996 when loan originations began to increase. The
decrease in loan originations occurred primarily due to intense competition in
the Bank's market area for loan originations. Further, due to the relatively
low interest rate environment that has existed in recent years, the Bank has
originated primarily fixed-rate one- to four-family mortgage loans. The Bank's
purchase of primarily adjustable rate mortgage-backed securities, as well as
various debt obligations of federal, state and local governments, has enabled
the Bank to effectively manage its interest rate risk. At March 31, 1998, the
Bank had $122.6 million or 39.2% of total assets in mortgage-backed securities
classified as held-to-maturity, and $35.9 million or 11.5% of total assets in
investment securities, of which $7.1 million or 2.3% of total assets were
classified as available for sale. At the same date, the Bank's total loans
receivable, net, totalled $114.3 million or 36.6% of total assets.
NET PORTFOLIO VALUE. The Bank's interest rate sensitivity is monitored by
management through the use of the OTS model which estimates the change in the
Bank's NPV over a range of interest rate scenarios. NPV is the present value of
expected cash flows from assets, liabilities, and off-balance sheet contracts.
The NPV ratio, under any interest rate scenario, is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. The OTS
produces its analysis based upon data submitted on the Bank's quarterly Thrift
Financial Reports. See "Regulation and Supervision -- Federal Savings
Institution Regulation." The following table sets forth the Bank's NPV as of
March 31, 1998, as calculated by the OTS.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES --------------------------------------- ---------------------------
IN BASIS POINTS $ % NPV
(RATE SHOCK) AMOUNT CHANGE CHANGE RATIO CHANGE (1)
--------------- ------- -------- ------ ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $17,365 $(17,782) (51) 5.98 (512)
300 22,615 (12,533) (36) 7.60 (350)
200 27,535 (7,613) (22) 9.04 (206)
100 31,846 (3,301) (9) 10.24 (86)
Static 35,147 -- -- 11.10 --
(100) 37,179 2,032 6 11.57 47
(200) 38,104 2,956 8 11.71 61
(300) 38,911 3,764 11 11.81 71
(400) 40,920 5,773 16 12.21 111
</TABLE>
_____________________
(1) Expressed in basis points.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Bank's interest
sensitive assets and liabilities
48
<PAGE>
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly, although
the NPV measurements and net interest income models provide an indication of the
Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income and
will differ from actual results.
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
also depends upon the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rates earned or paid on them.
49
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Bank at March 31, 1998, for the three months ended March 31,
1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995. The
average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from average month-
end balances except for the average balances of Other interest-earning assets
and Borrowed money, which are derived from average daily balances. Management
does not believe that the use of average monthly balances instead of average
daily balances has caused any material differences in the information presented.
The yields and costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
---------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------
AT MARCH 31, 1998 1998
------------------- -----------------------------------------
AVERAGE
YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST
------- ------ ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable................................... $116,165 7.96% $115,308 $2,298 7.97%
Mortgage-backed securities......................... 122,633 6.75 126,510 2,118 6.70
Investment securities.............................. 35,874 6.98 32,889 602 7.32
Other interest-earning assets...................... 22,771 5.69 8,156 97 4.76
-------- -------- ------
Total interest-earning assets.................. 297,443 7.17 282,863 5,115 7.23
Allowance for loan losses.......................... (1,863) (1,880)
Non-interest-earning assets........................ 16,942 18,240
-------- --------
Total assets................................... $312,522 $299,223
======== ========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits................................ $ 22,256 1.69 $ 21,560 94 1.74
Savings and club accounts...................... 61,840 2.58 62,849 407 2.59
Certificates of deposit........................ 143,591 5.49 142,728 1,932 5.41
-------- -------- ------
Total interest-bearing deposits........... 227,687 4.33 227,137 2,433 4.28
Borrowed money.................................... 42,300 5.86 30,144 437 5.80
-------- -------- ------
Total interest-bearing liabilities............. 269,987 4.57 257,281 2,870 4.46
Non-interest bearing deposits......................... 11,433 11,471
Other non-interest-bearing liabilities................ 1,301 921
-------- --------
Total liabilities......................... 282,721 269,673
Retained earnings..................................... 29,801 29,550
-------- --------
Total liabilities and retained earnings........... $312,522 $299,223
======== ========
Net interest income/interest rate spread.............. 2.60% $2,245 2.77%
===== ====== ====
Net interest-earning assets/net yield on
interest-earning assets........................... $ 27,456 $ 25,582 3.17%
======== ======== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities...................... 1.10x 1.10x
==== ====
<CAPTION>
---------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1997
---------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----------
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable................................... $ 84,353 $1,745 8.27%
Mortgage-backed securities......................... 111,406 1,930 6.93
Investment securities.............................. 25,851 465 7.20
Other interest-earning assets...................... 8,093 112 5.54
-------- ------
Total interest-earning assets................ 229,703 4,252 7.40
Allowance for loan losses.......................... (1,518)
Non-interest-earning assets........................ 8,089
--------
Total assets................................. $236,274
========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits.............................. $ 15,171 67 1.77
Savings and club accounts.................... 50,260 314 2.50
Certificates of deposit...................... 108,699 1,428 5.25
-------- ------
Total interest-bearing deposits............ 174,130 1,809 4.16
Borrowed money..................................... 22,650 343 6.06
-------- ------
Total interest-bearing liabilities........... 196,780 2,152 4.37
Non-interest bearing deposits......................... 7,106
Other non-interest-bearing liabilities................ 3,674
--------
Total liabilities............................ 207,560
Retained earnings..................................... 28,714
--------
Total liabilities and retained earnings............ $236,274
========
Net interest income/interest rate spread.............. $2,100 3.03%
====== ====
Net interest-earning assets/net yield on
interest-earning assets........................... $ 32,923 3.66
======== ====
Ratio of average interest-earning assets to average
interest-bearing liabilities................... 1.17x
====
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
FOR THE 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable................ $ 97,277 $ 7,908 8.13% $ 85,973 $ 7,268 8.45% $ 86,379 $ 7,603 8.80%
Investment securities........... 114,996 7,909 6.88 101,196 6,983 6.90 96,865 6,559 6.77
Mortgage-backed securities...... 26,774 1,897 7.09 23,035 1,701 7.38 15,926 1,188 7.46
Other interest-earning assets... 7,019 401 5.71 8,130 515 6.33 7,251 385 5.31
-------- ------- -------- ------- -------- -------
Total interest-earning assets. 246,016 18,115 7.36 218,334 16,467 7.54 206,421 15,735 7.62
------- ------- -------
Allowance for loan losses....... (1,739) (1,354) (1,161)
Other non-interest earning assets 10,422 8,126 7,342
-------- -------- --------
Total assets.................. $254,699 $225,106 $212,602
======== ======== ========
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand........................ $ 16,360 293 1.79% $ 14,736 269 1.83% $ 13,601 311 2.29%
Savings and club.............. 53,221 1,357 2.55 51,138 1,278 2.50 55,888 1,397 2.50
Certificates of deposit....... 119,272 6,439 5.40 105,141 5,602 5.33 92,938 4,843 5.21
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits................... 188,853 8,089 4.28 171,015 7,149 4.18 162,427 6,551 4.03
Borrowed money.................. 26,223 1,566 5.97 18,092 1,151 6.36 15,615 1,067 6.83
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities.................. 215,076 9,655 4.49 189,107 8,300 4.39 178,042 7,618 4.28
------- ------- -------
Non-interest-bearing deposits..... 8,503 6,943 7,937
Other non-interest bearing
liabilities...................... 1,711 1,203 916
-------- -------- --------
Total liabilities............. 225,290 197,253 186,895
Retained earnings................. 29,409 27,853 25,707
-------- -------- --------
Total liabilities and retained
earnings..................... $254,699 $225,106 $212,602
======== ======== ========
Net interest income/interest
rate spread..................... $ 8,460 2.87% $ 8,167 3.15% $ 8,117 3.34%
======= ==== ======= ==== ======= ====
Net interest-earning assets/net
yield on interest-earning assets. $ 30,940 3.44% $ 29,227 3.74% $ 28,379 3.93%
======== ==== ======== ==== ======== ====
Ratio of interest-earning assets
to interest-bearing liabilities.. 1.14x 1.15x 1.16x
======== ======= ========
</TABLE>
51
<PAGE>
RATE/VOLUME ANALYSIS. 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 Bank'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 volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
COMPARED TO COMPARED TO
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
--------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------- ---------------------
VOLUME RATE NET VOLUME RATE NET
------- ------ --- -------- ------- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable............................... $ 618 $ (65) $553 $ 923 $(283) $ 640
Mortgage-backed securities..................... 254 (66) 188 946 (20) 926
Investment securities.......................... 129 8 137 265 (69) 196
Other interest-earning assets.................. 1 (16) (15) (66) (48) (114)
------ ----- ---- ------ ----- ------
Total........................................... 1,002 (139) 863 2,068 (420) 1,648
------ ----- ---- ------ ----- ------
Interest expense:
Demand deposits(1)............................. 28 (1) 27 30 (6) 24
Savings and club accounts...................... 81 12 93 53 26 79
Certificates of deposit........................ 459 45 504 762 75 837
Borrowed money................................. 109 (15) 94 489 (74) 415
------ ----- ---- ------ ----- ------
Total........................................... 678 40 718 1,334 21 1,355
------ ----- ---- ------ ----- ------
Net change in net interest income............... $ 324 $(179) $145 $ 734 $(441) $ 293
====== ===== ==== ====== ===== ======
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
COMPARED TO
YEAR ENDED
DECEMBER 31, 1995
---------------------------------
INCREASE (DECREASE)
DUE TO
----------------------
VOLUME RATE NET
------- ------ ---
(In thousands)
<S> <C> <C> <C>
Interest income:
Loans receivable............................... $ (35) $(300) $(335)
Mortgage-backed securities..................... 296 128 424
Investment securities.......................... 526 (13) 513
Other interest-earning assets.................. 50 80 130
------ ----- -----
Total........................................... 837 (105) 732
------ ----- -----
Interest expense:
Demand deposits(1)............................. 24 (66) (42)
Savings and club accounts...................... (119) -- (119)
Certificates of deposit........................ 646 113 759
Borrowed money................................. 161 (77) 84
------ ----- -----
Total........................................... 712 (30) 682
------ ----- -----
Net change in net interest income............... $ 125 $ (75) $ 50
====== ===== =====
</TABLE>
______________________
(1) Includes NOW and Money Market accounts.
52
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997
Total assets were $312.5 million at March 31, 1998, compared to $299.0 million
at December 31, 1997, an increase of $13.5 million, or 4.5%. The increase in
assets was funded primarily by an increase in FHLB borrowings of $12.0 million.
Cash and cash equivalents, primarily interest-bearing deposits with the FHLB,
increased $8.6 million to $17.3 million at March 31, 1998 from $8.7 million at
December 31, 1997. Additionally, the Bank invested in term deposits with the
FHLB totalling $5.0 million during the first quarter of 1998. These term
deposits have initial periods to maturity of between three and seven months.
The overall increase of $13.6 million in cash and cash equivalents and term
deposits was funded primarily by the $12.0 million increase in borrowed money
and serves to increase the Bank's liquidity position.
In the aggregate, mortgage-backed securities and investment securities,
including available for sale and held to maturity issues, totalled $158.5
million at March 31, 1998, a decrease of $1.7 million from $160.2 million at
December 31, 1997. Such decrease was used to fund an increase of $1.6 million
in the loan portfolio. Mortgage-backed securities, all of which are held to
maturity, decreased $7.5 million due to repayments. Investment securities held
to maturity increased $5.8 million, primarily due to security purchases and
investment securities available for sale remained unchanged at $7.1 million. At
March 31, 1998, 99.6% of the Bank's investment securities, including available
for sale and held to maturity, consisted of U.S. Government and Agency
obligations, while virtually all of the mortgage-backed securities portfolio
consisted of GNMA, FNMA and FHLMC issues. Investment securities available for
sale included only U.S. Treasury notes while investment securities held to
maturity consisted of $3.7 million of U.S. Treasury notes, $25.2 million of U.S.
Government Agencies notes and a $150,000 municipal bond anticipation note.
Loans receivable increased $1.6 million to $114.3 million at March 31, 1998
from $112.7 million at December 31, 1997. The increase was primarily in the
one- to four-family mortgage loan category, which increased $2.0 million. At
March 31, 1998, 88.0% of the outstanding balance of loans in the Bank's
portfolio consisted of one- to four-family loans, compared to 87.3% at December
31, 1997.
Deposits totaled $239.1 million at March 31, 1998, an increase of $928,000, or
0.4%, over the $238.2 million balance at December 31, 1997.
Borrowed money increased $12.0 million to $42.3 million at March 31, 1998, as
compared to $30.3 million at December 31, 1997. Based on the lower cost of
wholesale funds as compared to comparable maturity retail deposits, management
chose to fund the asset growth discussed above with additional FHLB borrowings.
During the quarter ended March 31, 1998, short-term borrowings totalling $18.0
million were repaid, while $30.0 million in borrowings with five to ten year
maturities and an average interest rate of 5.62% were incurred.
Retained earnings increased $526,000, or 1.8%, to $29.8 million, primarily due
to the retention of net income.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets were $299.0 million at December 31, 1997, as compared to $236.0
million at December 31, 1996, an increase of $63.0 million, or 26.7%. The
increase in assets was funded primarily by deposit growth of $58.2 million and
an increase in FHLB borrowings of $6.6 million. The $58.2 million increase
53
<PAGE>
in deposits was primarily due to the Bank's purchase of three branch offices
from Summit Bank ("Summit") in October 1997, with total deposits of $51.0
million.
Securities available for sale increased to $7.1 million at December 31, 1997
from $1.6 million at December 31, 1996. The securities owned at December 31,
1996 consisted of a municipal bond which was called and mutual fund shares which
were sold during the year ended December 31, 1997. The mutual fund shares were
sold to provide funds for the purchase of a higher yield investment. The
complete liquidation of the December 31, 1996 portfolio resulted in a loss of
$20,000. The Bank purchased $7.0 million in U.S. Treasury notes for the
available for sale portfolio during 1997, all of which remain at December 31,
1997.
Investment securities held to maturity increased to $22.9 million at December
31, 1997 from $22.5 million at December 31, 1996 as $10.0 million of securities
that matured during the period were replaced with $10.4 million in new
securities. The investment securities held to maturity portfolio consists of
$2.5 million of U.S. Treasury notes and bonds and $19.4 million of U.S.
Government Agency securities.
Mortgage-backed securities held to maturity increased to $130.2 million at
December 31, 1997 from $113.3 million at December 31, 1996. The Bank purchased
$37.0 million in mortgage-backed securities during 1997, which more than offset
$20.1 million in repayments received. The bulk of the issues purchased during
1997 were adjustable rate issues, increasing the level of adjustable-rate
mortgage-backed securities to 63.7% of the portfolio at December 31, 1997 from
55.5% at December 31, 1996. Virtually the entire mortgage-backed securities
portfolio consists of securities issued by GNMA, FNMA and FHLMC.
Loans receivable increased $30.6 million, or 14.9%, to $112.7 million at
December 31, 1997 from $82.1 million at the prior year end. This increase was
consistent with the Bank's strategy of increasing assets in anticipation of the
deposit purchase consummated in late 1997. To this end, the Bank utilized
mortgage brokers during 1997 to significantly increase the volume of
originations, while continuing to adhere to prudent underwriting standards. The
following significant increases by loan category were experienced: one- to four-
family mortgage loans -- $26.7 million; home equity lines of credit and loans -
- - $1.9 million; and construction and land loans (net of loans in process) --
$3.4 million. Commercial real estate loans decreased $1.6 million. The Bank
remains predominantly a one- to four-family residential lender. At December 31,
1997, 87.3% of the balance of outstanding loans relates to one- to four-family
lending, up from 81.1% at December 31, 1996.
Premises and equipment increased to $3.1 million at December 31, 1997 from
$1.6 million at December 31, 1996. Of this increase, $1.4 million is due to the
acquisition of the three branch offices from Summit Bank.
In conjunction with the branch offices and deposits acquired from Summit, a
premium of $7.6 million was recorded as the excess of cost over assets acquired.
Such amount was based upon the amount of deposits the Bank had agreed to
acquire. However, during the period between the purchase agreement date and the
October 17, 1997 consummation date, the deposits subject to purchase declined
over 18%. By December 31, 1997, the balance of deposits at the three branch
offices had stabilized. Management performed a reassessment of the
recoverability of this asset and, as a result, an impairment loss of $1.6
million was recorded, leaving a balance of $5.8 million at December 31, 1997.
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Deposits totaled $238.2 million at December 31, 1997, an increase of $58.3
million, or 32.4%, over the balance of $179.9 million at December 31, 1996. The
increase resulted primarily from the purchase of the three Summit branches and
the crediting of $8.1 million in interest on deposits.
Borrowings increased $6.6 million to $30.3 million at December 31, 1997, as
compared to $23.7 million at December 31, 1996. The increase was due to the
Bank's increased usage of short-term sales of mortgage-backed securities under
repurchase agreements. All outstanding borrowings are with the FHLB.
Retained earnings increased $822,000, or 2.9%, to $29.3 million, due largely
to the retention of net income.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997
NET INCOME. Net income decreased $12,000 or 2.3% to $511,000 for the three
months ended March 31, 1998 compared with $523,000 for the same 1997 period.
The decrease in net income during the 1998 period resulted from an increase in
non-interest expenses, which was partially offset by increases in net interest
income and non-interest income and decreases in provision for loan losses and
income taxes.
INTEREST INCOME. Total interest income increased $863,000 or 20.3% to $5.1
million for the three months ended March 31, 1998 from $4.3 million for the same
1997 period. The increase was the result of a 23.1 % increase in average
interest-earning assets between the periods, which more than offset a 17 basis
point decline in yield. The increase in the average balance was the result of
increased loan originations and securities purchased during the last three
quarters of 1997 funded by cash received in connection with the deposits
purchased from Summit. The decrease in yield was the result of lower rates
obtained on loans originated and mortgage-backed securities purchased since
March 31, 1997.
Interest income on loans increased by $553,000 or 31.7% to $2.3 million during
the three months ended March 31, 1998 when compared with $1.7 million for the
same 1997 period. The increase during the 1998 period resulted from an increase
of $31.0 million in the average balance of loans outstanding, which was
sufficient to offset a 30 basis point decrease in the yield earned on the loan
portfolio. The increased average balance was the result of increased lending
volume during the last nine months of 1997. The decreased yield is the result
of lower rates obtained on originations as well as downward interest rate
adjustments on the Bank's adjustable-rate mortgage loans.
Interest on mortgage-backed securities, all of which are held to maturity,
increased $188,000 or 9.7% to $2.1 million during the three months ended March
31, 1998 when compared with $1.9 million for the same 1997 period. The increase
during the 1998 period resulted from a $15.1 million or 13.6% increase in the
average balance of mortgage-backed securities, which was more than sufficient to
offset a 23 basis point decline in yield. The increased average balance is the
result of purchases of mortgage-backed securities exceeding repayments. The
decrease in yield is the result of lower interest rates obtained on securities
purchased since March 31, 1997, many of which were adjustable rate issues with
customarily low initial interest rates.
Interest earned on investment securities, including both available for sale
and held to maturity issues, increased by $137,000 or 29.5% to $602,000 during
the three months ended March 31, 1998, when compared to $465,000 during the same
1997 period, primarily due to an increase of $7.0 million in the average balance
of such assets along with a twelve basis point increase in the yield earned.
The increase in average balance was the result of purchases of U.S. Government
and Agency securities exceeding maturities thereof.
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Interest on other interest-earning assets decreased $15,000 or 13.4% to
$97,000 during the three months ended March 31, 1998 as compared to $112,000 for
the same 1997 period. The decrease was primarily due to a 78 basis point
decline in yield as the average balance of such assets increased by $63,000 or
0.8%.
INTEREST EXPENSE. Interest expense on deposits increased $624,000 or 34.5%
to $2.4 million during the three months ended March 31, 1998 when compared to
$1.8 million during the same 1997 period. Such increase was primarily
attributable to increases of $53.0 million in the average balance of interest-
bearing deposits and twelve basis points in the cost of interest-bearing
deposits. The increased average balance is the result of the purchase of $51.0
million in deposits from Summit in October 1997. The increase in cost is due to
higher interest rates paid on certificates of deposit, which averaged 5.41 % for
the three months ended March 31, 1998 as compared to 5.25% for the same 1997
period. The cost of non-certificate deposits increased to a lesser degree, to
2.37% for the three months ended March 31, 1998 as compared to 2.33% for the
same prior year period.
Interest expense on borrowed money increased by $94,000 or 27.4% to $437,000
during the three months ended March 31, 1998 when compared with $343,000 during
the same 1997 period, primarily due to an increase of $7.5 million in the
average balance of borrowings outstanding from the FHLB, which was sufficient
to offset a twenty-six basis point decrease in the cost of borrowed money.
During the three months ended March 31, 1998, the Bank repaid $18.0 million in
short-term borrowings under repurchase agreements having an average interest
rate of 5.82% and obtained $30.0 million in borrowings with five to ten year
maturities with an average interest rate of 5.62%.
NET INTEREST INCOME. Net interest income increased $145,000 or 6.9% during
the three months ended March 31, 1998 when compared with the same 1997 period.
Such increase was due to an increase in total interest income of $863,000, which
was sufficient to offset an increase in total interest expense of $718,000. The
Bank's net interest rate spread decreased to 2.77% in 1998 from 3.03% in 1997.
The decrease in the interest rate spread resulted from a decrease of 17 basis
points in the yield earned on interest-earning assets along with a 9 basis point
increase in the cost of interest-bearing liabilities. Despite the decline in
interest rate spread, the Bank improved net interest income due to the
additional income generated by the $53.2 million increase in average interest-
earning assets, which more than offset the additional cost incurred by the $60.5
million increase in average interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. During the three months ended March 31, 1998, the
Bank recorded a recapture of the provision for loan losses of $22,000. The
recapture was the result of the adjustment of the balance of the allowance for
loan losses, based upon management's quarterly analysis, to $1.86 million at
March 31, 1998 from $1.89 million at December 31, 1997. There were no loan
charge-offs or recoveries during the three months ended March 31, 1997. During
the three months ended March 31, 1998, the Bank provided $55,000 as a provision
for loan losses and recorded no loan charge-offs or recoveries. The allowance
for loan losses is based on management's evaluation of the risk inherent in its
loan portfolio and gives due consideration to the changes in general market
conditions and in the nature and volume of the Bank's loan activity. The Bank
intends to continue to provide for loan losses based on its periodic review of
the loan portfolio and general market conditions. At March 31, 1998 and 1997,
loans delinquent ninety days or more totalled $2.3 million and $2.7 million,
respectively, representing 1.93% and 3.22%, respectively, of total loans. At
March 31, 1998, the allowance for loan losses stood at $1.9 million,
representing 1.58% of total loans and 82.4% of loans delinquent ninety days or
more. At March 31, 1997, the allowance for loan losses stood at $1.6 million,
representing 1.90% of total loans and 59.2% of loans delinquent ninety days or
more. No loans were charged off during the three month periods ended March
31,
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1998 and 1997. The Bank monitors its loan portfolio on a continuing basis and
intends to continue to provide for loan losses based on its ongoing review of
the loan portfolio and general market conditions.
The Bank has established a standardized process to assess the adequacy of the
allowance for loan losses and to identify the risks inherent in the loan
portfolio. The process incorporates credit reviews and gives consideration to
areas of exposure such as concentrations of credit, local economic conditions,
trends in delinquencies, collateral coverage, the composition of the performing
and nonperforming loan portfolios, and other risks inherent in the loan
portfolio.
Specific allocations of the allowance for loan losses are identified by
individual loan based upon a detailed credit review of each such loan. General
loan loss allowances are allocated to pools of loans categorized by type and
assigned allowance percentages which take into effect past charge-off history,
industry averages and current trends and risks. Finally, an unallocated portion
of the allowance is maintained to account for the general inherent risk in the
loan portfolio, known circumstances which are not addressed in the allocated
portion of the allowance (such as the increased dependence on outside mortgage
brokers for originations), and the necessary imprecision in the determination of
the allocation portion of the allowance.
The allowance for loan losses includes specific, general and unallocated
allowances of $605,000, $724,000 and $534,000, respectively, at March 31, 1998,
as compared to $550,000, $563,000 and $501,000, respectively, at March 31, 1997.
The increase in the specific allowance primarily reflects the continuing
resolution of loans related to a large condominium project which has been in
default since 1993 and is presently subject to bankruptcy proceedings and a
lawsuit. See also, "Management's Discussion and Analysis of Financial Condition-
Litigation." The uncertainty in regard to these credits is also accounted for in
the unallocated allowance in amounts which decrease as the ability to clearly
quantify the specific losses increases. Another factor included in the
unallocated allowance at March 31, 1998 is the large volume of loan originations
generated for the Bank by outside mortgage brokers since April 1997 as compared
to no such loans previously. The Company believes the use of outside brokers
increases the inherent risk in the loan portfolio.
NON-INTEREST INCOME. Non-interest income increased $26,000 or 22.8% to
$140,000 during the three months ended March 31, 1998 from $114,000 during the
same 1997 period. The increase resulted from increased fees and service
charges.
NON-INTEREST EXPENSES. Non-interest expenses increased by $286,000 or 21.2%
to $1.64 million during the three months ended March 31, 1998 when compared with
$1.35 million during the same 1997 period. Salaries and employee benefits, net
occupancy expense, equipment, advertising, and miscellaneous expense increased
in the aggregate by $270,000, or 23.2%, to $1.44 million during the three months
ended March 31, 1998 from $1.17 million during the same prior year period due
primarily to the purchase of three branches from Summit. Such purchase in
October 1997 increased the Bank's number of office locations from 5 to 8 and
resulted in increases in the aforementioned expenses. Included in miscellaneous
expenses, among other things, are legal fees, accounting and auditing fees,
director fees, FHLB demand deposit charges, insurance costs, telephone expenses
and stationary and supplies expenses. Loss on REO decreased $133,000 to $24,000
during the three months ended March 31, 1998 from $157,000 during the same prior
year period due primarily to a $148,000 reduction in loss provisions recorded
during the two periods. During the three month period ended March 31, 1998,
amortization expense of $148,000 was recorded in connection with the acquisition
of deposits from Summit in October 1997. No comparable expense was recorded
during the same 1997 period.
INCOME TAXES. Income tax expense totalled $260,000, or 33.7% of income before
income taxes, during the three months ended March 31, 1998 as compared to
$284,000, or 35.2% of income before income taxes, during the comparable 1997
period.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET INCOME. Net income for 1997 was $737,000, a decrease of $919,000 from
$1.7 million in 1996. The primary factors in the decrease of net income were a
$1.74 million amortization expense, which primarily related to a $1.6 million
impairment loss, on the excess of the cost over assets acquired in connection
with the purchase of deposits from Summit in 1997, the $1.1 million one-time
special assessment in 1996 to recapitalize the SAIF, and a $380,000 loss on REO
in 1997 versus income of $21,000 on REO in 1996. The combined effect of these
three factors was to decrease income before income taxes and net income by $1.05
million and $670,000, respectively. The remaining $249,000 decrease in net
income was the result of increases in provisions for loan losses and non-
interest expense, along with a decrease in non-interest income, which more than
offset an increase in net interest income and a decrease in income taxes.
INTEREST INCOME. Total interest income increased 10.0% to $18.1 million for
1997 as compared to $16.5 million for 1996. The increase was due to a $27.7
million or 12.7% increase in average interest-earning assets during 1997, which
more than offset a drop of 18 basis points in the yield earned thereon to 7.36%
in 1997 from 7.54% in 1996. Increased average balances and decreased yield were
experienced in all categories of interest-earning assets. The increased average
balances of earning assets were the result of increased loan originations and
securities purchases funded by the Summit deposit purchase and increased FHLB
borrowings.
Interest income on loans during 1997 increased by $640,000, or 8.8%, to $7.9
million when compared to $7.3 million during 1996. During the years ended
December 31, 1997 and 1996, the yield
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earned on the loan portfolio was 8.13% and 8.45%, respectively. The average
balance of loans outstanding during the years ended December 31, 1997 and 1996,
totalled $97.2 million and $86.0 million, respectively. The decreased yield is
the result of the lower market interest rates prevailing during 1997. The
increased average balance during 1997 is the result of increased loan
origination efforts, including the use of outside mortgage brokers. Originations
rose to $47.1 million in 1997 from $15.1 million in 1996.
Interest on mortgage-backed securities, all of which are held to maturity,
increased $926,000 or 13.3%, during 1997 to $7.9 million compared to $7.0
million for 1996. During the year ended December 31, 1997, the average balance
of mortgage-backed securities outstanding increased $13.8 million, or 13.6%, to
$115.0 million when compared to $101.2 million for 1996. The yield earned on
the mortgage-backed securities portfolio decreased marginally to 6.88% in 1997
from 6.90% in 1996. The increase in the average balance of mortgage-backed
securities during 1997 resulted primarily from purchases of mortgage-backed
securities which more than offset principal repayments.
Interest earned on investment securities, including both available for sale
and held to maturity issues, increased by $196,000, or 11.5%, to $1.9 million
for 1997, when compared to $1.7 million for 1996. The increase resulted from an
increase of $3.7 million, or 16.2%, in the average balance of the investment
securities portfolio, which more than offset a decrease of 29 basis points in
the yield earned on the investment securities portfolio to 7.09% in 1997 from
7.38% in 1996. The increased average balance and decreased yield were both the
result of the purchase during 1997 of $7.0 million in U.S. Government
securities available for sale yielding 6.08%.
Interest on other interest-earning assets totalled $401,000 and $515,000
during 1997 and 1996, respectively. The yield earned on other interest-earning
assets decreased to 5.71% in 1997 from 6.33% in 1996, which augmented a decrease
of $1.1 million, or 13.7%, in the average balance of other interest-earning
assets outstanding.
INTEREST EXPENSE. Interest expense on deposits increased $940,000, or 13.1%
to $8.1 million during 1997 compared to $7.1 million for 1996. The increase
during 1997 was attributable to an increase of ten basis points in the Bank's
average cost of interest-bearing deposits to 4.28% for 1997 from 4.18% for 1996,
along with an increase of $17.8 million, or 10.4%, in the average balance of
interest-bearing deposits outstanding. The increased cost reflects a seven basis
point increase in the cost of certificates of deposit as well as the increase of
such certificates to 63.2% of average interest-bearing deposits in 1997 from
61.5% during 1996. The increased average balance of interest-bearing deposits
primarily reflects the purchase of deposits from Summit during 1997.
Interest expense on borrowed money increased $415,000, or 36.1%, to $1.6
million during 1997 compared to $1.2 million for 1996. The increase during 1997
was attributable to an increase of $8.1 million in the average balance of
borrowings outstanding, partially offset by a decrease of 39 basis points in the
Bank's cost of borrowings to 5.97% for 1997 from 6.36% for 1996. The increased
average balance reflects management's increased use of borrowed funds to
leverage the balance sheet. The decreased interest rate on borrowings resulted
from the paydown of older debt having higher interest rates as well as the lower
interest rates available on new borrowings obtained in 1997.
NET INTEREST INCOME. Net interest income for 1997 increased $293,000, or
3.6%, to $8.5 million in 1997 from $8.2 million in 1996. The Bank's net
interest rate spread decreased to 2.87% in 1997 from 3.15% in 1996 and its
interest rate margin decreased to 3.44% in 1997 from 3.74% in 1996. These
decreases primarily resulted from an 18 basis point decrease in the yield earned
on interest earning assets to 7.36% in
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1997 from 7.54% in 1996 coupled with a ten basis point increase in the cost of
average interest-bearing liabilities to 4.49% in 1997 from 4.39% in 1996.
Despite the decreases in interest rate spread and margin, the Bank was able to
improve net income by increasing net interest-earning assets by $1.7 million and
by leveraging the balance sheet through a deposit purchase and increased
borrowings.
PROVISION FOR LOAN LOSSES. During 1997 and 1996, the Bank provided $487,000
and $232,000, respectively, for loan losses. The increased provision was
primarily due to the growth in the loan portfolio, which increased $31.6 million
during 1997 as compared to a $2.8 million decline during 1996. In addition, an
unexpected recovery of $132,000 related to a loan charged off in 1995 was
received. The crediting of this amount to the allowance reduced the level of
provisions for loss needed in 1996. At December 31, 1997 and 1996, the Bank's
loan portfolio included loans totalling $2.5 million and $2.9 million,
respectively, which were delinquent ninety days or more. The Bank maintains an
allowance for loan losses based on management's evaluation of the risks inherent
in its loan portfolio which gives due consideration to changes in general market
conditions and in the nature and volume of the Bank's loan activity. The
allowance for loan losses amounted to $1.9 million at December 31, 1997,
representing 1.62% of total loans and 75.7% of loans delinquent ninety days or
more compared to an allowance of $1.6 million at December 31, 1996, representing
1.85% of total loans and 54.5% of loans delinquent ninety days or more. During
1997, the Bank charged off loans aggregating $166,000. During 1996, no loans
were charged off. The Bank monitors its loan portfolio and intends to continue
to provide for loan losses based on its ongoing periodic review of the loan
portfolio and general market conditions.
The Bank has established a standardized process to assess the adequacy of the
allowance for loan losses and to identify the risks inherent in the loan
portfolio. The process incorporates credit reviews and gives consideration to
areas of exposure such as concentrations of credit, local economic conditions,
trends in delinquencies, collateral coverage, the composition of the performing
and nonperforming loan portfolios, and other risks inherent in the loan
portfolio.
Specific allocations of the allowance for loan losses are identified by
individual loan based upon a detailed credit review of each such loan. General
loan loss allowances are allocated to pools of loans categorized by type and
assigned allowance percentages which take into effect past charge-off history,
industry averages and current trends and risks. Finally, an unallocated portion
of the allowance is maintained to account for the general inherent risk in the
loan portfolio, known circumstances which are not addressed in the allocated
portion of the allowance (such as the increased dependence on outside mortgage
brokers for originations), and the necessary imprecision in the determination of
the allocation portion of the allowance.
The allowance for loan losses includes specific, general and unallocated
allowances of $605,000, $761,000 and $518,000, respectively, at December 31,
1997, as compared to $555,000, $493,000 and $516,000, respectively, at December
31,1996. The increase in the specific allowance primarily reflects the
continuing resolution of loans related to a large condominium project which has
been in default since 1993 and is presently subject to bankruptcy proceedings
and a lawsuit. The uncertainty in regard to these credits is also accounted for
in the unallocated allowance in amounts which decrease as the ability to clearly
quantify the specific losses increases. Another factor included in the
unallocated allowance at December 31, 1997 is the large volume of loan
originations generated for the Bank by outside mortgage brokers during 1997 as
compared to no such loans in prior years. The use of outside brokers increases
the inherent risk in the loan portfolio. The general allowance increased
primarily due to the $31.6 million increase in the loan portfolio.
NON-INTEREST INCOME. Non-interest income decreased by 103,000, or 21.6%,
$373,000 during 1997 as compared to $476,000 for 1996. The decrease in non-
interest income during 1997 resulted primarily from a $20,000 loss on sales of
securities available for sale during 1997 as compared to a $103,000 gain in
1996, $21,000 in income on REO recorded in 1996 compared to none in 1997, and a
decrease in miscellaneous income of $22,000, which was partially offset by
increases in fees and service charges of $63,000. The increase during the 1997
period in the fees and service charges resulted from a revised service fee
schedule on various depository services.
NON-INTEREST EXPENSES. Non-interest expenses increased $1.3 million, or
21.2%, to $7.2 million during 1997 compared to $5.9 million for 1996. During
1997, in conjunction with the purchase of three branches and related deposit
liabilities from Summit, the Bank recorded $7.6 million in excess of cost over
assets acquired. Amortization expense of $1.7 million, including an impairment
loss of $1.6 million, as previously noted, was recorded during 1997 on this
asset. Additionally, on September 30, 1996, legislation was enacted which,
among other things, imposed a one-time special assessment on SAIF member
institutions, including the Bank. The special assessment levied amounted to
65.7 basis points on SAIF assessable deposits held as of March 31, 1995. The
Bank, during the 1996 period, took a charge of $1.1 million as a result of such
assessment. Non-interest expenses, excluding the above-mentioned amortization
expense on excess of cost over assets acquired and the one-time SAIF assessment,
increased $610,000, or 12.7%, to $5.4 million during 1997 compared to $4.8
million for 1996.
Salaries and employee benefits increased $226,000 or 8.6%, occupancy and
equipment expenses increased $87,000 or 13.2% and miscellaneous expenses
increased $132,000 or 12.2%. The combined $445,000 increase in these areas is
largely attributable to the three branches acquired from Summit during 1997 and
the related increase in operating costs. Included in miscellaneous expenses,
among other things, are legal fees, accounting and auditing fees, director fees,
FHLB demand deposit charges, insurance costs, telephone expenses and stationary
and supplies expenses.
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Loss on REO totalled $380,000 in 1997 compared to income of $21,000 recorded
in 1996, which resulted primarily from an increase of $328,000 in loss
provisions recorded on properties in the REO portfolio, to $373,000 in 1997 from
$45,000 in 1996, and an $87,000 decrease in gain on sales of properties to
$30,000 in 1997 from $117,000 in 1996. $264,000 of the $373,000 in loss
provisions recorded in 1997 relates to one commercial property and was based
upon a market price opinion given in October 1997 by a major realtor.
Advertising expense increased to $128,000 in 1997 compared to $78,000 in 1996
as increased advertising was utilized in regard to the acquisition of the three
Summit branches, as well as to advertise the Bank's mortgage products.
Partially offsetting the increases in salaries and employee benefits,
occupancy and equipment expenses, miscellaneous expenses and loss on real estate
owned was a $265,000 decrease in federal deposit insurance premium related to
the reduction of the deposit insurance assessment rate.
INCOME TAXES. Income tax expense totalled $436,000 and $836,000 during 1997
and 1996, respectively. The increase in 1997 resulted primarily from an
increase in pre-tax income of $1.3 million and from the utilization, in 1996, of
a $103,000 capital loss carryforward. The Bank's effective income tax rate was
37.2% in 1997 and 33.5% in 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NET INCOME. Net income decreased by $616,000, or 27.1 % to $1.7 million
during 1996 compared to $2.3 million for 1995. The decrease in net income
during the 1996 period resulted primarily from a charge of $1.1 million to
recapitalize the SAIF. During the year ended December 31 1996, a one-time
special assessment was levied amounting to 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995. The after-tax effect of this charge was to
reduce net income for 1996 by $703,000. Exclusive of the effect of the one-time
special assessment, net income increased $87,000 or 3.8% as increases of $50,000
in net interest income and $143,000 in non-interest income, along a $278,000
decrease in provision for loan losses more than offset increases of $374,000 in
noninterest expenses and $10,000 in income taxes.
INTEREST INCOME. Total interest income increased 4.7% to $16.5 million for
1996 as compared to $15.7 million in 1995. The increase was due to an $11.9
million or 5.8% increase in average interest-earning assets, which more than
offset an 8 basis point decline in the yield earned on such assets to 7.54% in
1996 from 7.62% in 1995.
Interest income on loans during 1996 decreased $335,000, or 4.4%, to $7.3
million when compared to $7.6 million during 1995, primarily due to a decrease
in yield. During the years ended December 31, 1996 and 1995, the yield earned
on the loan portfolio was 8.45% and 8.80%, respectively. The 35 basis point
yield decline reflects lower interest rates on originated loans as well as
downward rate adjustments on adjustable rate loans. The average balance of
loans outstanding, during the years ended December 31, 1996 and 1995, totalled
$86.0 million and $86.4 million, respectively.
Interest on mortgage-backed securities, all of which were held to maturity,
increased $424,000, or 6.5%, during 1996 to $7.0 million compared to $6.6
million for 1995. During the year ended December 31, 1996, the average balance
of mortgage-backed securities outstanding increased $4.3 million, or 4.5%. The
yield earned on the mortgage-backed securities portfolio increased 13 basis
points to 6.90% in 1996 from 6.77% in 1995. The increase in the average balance
of mortgage-backed securities during 1996 resulted primarily from purchases of
mortgage-backed securities exceeding repayments thereon.
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Interest earned on investment securities, both available for sale and held to
maturity, increased by $513,000, or 43.2%, to $1.7 million for 1996, when
compared to $1.2 million for 1995. The increase resulted primarily from an
increase of $7.1 million or 44.6%, in the average balance of the investment
securities portfolio, which primarily included U.S. Government and agencies
obligations, which more than offset an 8 basis point decrease in the yield
earned on the investment securities portfolio to 7.38% in 1996 from 7.46% in
1995. The increase in average balance reflects purchases of investment
securities exceeding maturities.
Interest on other interest-earning assets increased $130,000, or 33.8%, to
$515,000 during 1996, compared to $385,000 for 1995. Such increase was
attributable to increases of 102 basis points in the yield earned on other
interest-earning assets to 6.33% in 1996 from 5.31 % in 1995, along with an
increase of $829,000 or 12.1%, in the average balance of other interest-earning
assets outstanding. Such increase in the average balance of other interest-
earning assets outstanding was primarily a result of increased levels of
interest-earning deposits in other banks.
INTEREST EXPENSE. Interest on deposits increased $598,000, or 9.1% to $7.15
million during 1996 compared to $6.55 million for 1995. The increase during
1996 was attributable to an increase of 15 basis points in the Bank's average
cost of interest-bearing deposits to 4.18% for 1996 from 4.03% for 1995, along
with an increase of $8.6 million, or 5.3%, in the average balance of interest-
bearing deposits outstanding. The increase in the Bank's cost of interest-
bearing deposits reflected both higher interest rates paid on certificates of
deposit, which averaged 5.33% in 1996, up from 5.21% in 1995, and a trend toward
higher-cost certificates of deposit, which represented 61.5% of average
interest-bearing deposits in 1996, up from 57.2% in 1995.
Interest on borrowed money increased $84,000, or 7.9%, to $1.2 million during
1996 compared to $1.1 million for 1995. The increase during 1996 was
attributable to an increase of $2.5 million or 15.9% in the average balance of
borrowings outstanding, partially offset by a decrease of 47 basis points in the
Bank's cost of borrowings to 6.36% for 1996 from 6.83% for 1995. The increased
average balance and decreased cost in 1996 were both due to an increased use of
short-term, lower cost FHLB advances.
NET INTEREST INCOME. Net interest income for 1996 increased $50,000 or 0.6%
to $8.2 million for 1996 from $8.1 million for 1995. The Bank's net interest
rate spread decreased to 3.15% in 1996 from 3.34% in 1995 and its interest rate
margin decreased to 3.74% in 1996 from 3.93% in 1995. These decreases primarily
resulted from an eleven basis point increase in the cost of average interest-
bearing liabilities to 4.39% in 1996 from 4.28% in 1995, along with an eight
basis point decrease in the yield on interest-earning assets to 7.54% in 1996
from 7.62% in 1995. Despite the decreases in interest rate spread and margin,
the Bank was able to increase net interest income by increasing net interest-
earning assets by $848,000 and by leveraging the balance sheet through increased
deposits and borrowings.
PROVISION FOR LOAN LOSSES. During 1996 and 1995, the Bank provided $232,000
and $510,000, respectively, for loan losses. At December 31, 1996 and 1995, the
Bank's loan portfolio included loans totalling $2.9 million and $2.2 million,
respectively, which were delinquent ninety days or more. The Bank maintains an
allowance for loan losses based on management's evaluation of the risks inherent
in its loan portfolio which gives due consideration to changes in general market
conditions and in the nature and volume of the Bank's loan activity. The
allowance for loan losses amounted to $1.6 million at December 31, 1996,
representing 1.85% of total loans and 54.5% of loans
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delinquent ninety days or more compared to an allowance of $1.2 million at
December 31, 1995, representing 1.37% of total loans and 55.0% of loans
delinquent ninety days or more. During the years ended December 31, 1996 and
1995, the Bank charged off loans aggregating $ - 0 - and $546,000,
respectively.
The Bank has established a standardized process to assess the adequacy of the
allowance for loan losses and to identify the risks inherent in the loan
portfolio. The process incorporates credit reviews and gives consideration to
areas of exposure such as concentrations of credit, local economic conditions,
trends in delinquencies, collateral coverage, the composition of the performing
and nonperforming loan portfolios, and other risks inherent in the loan
portfolio.
Specific allocations of the allowance for loan losses are identified by
individual loan based upon a detailed credit review of each such loan. General
loan loss allowances are allocated to pools of loans categorized by type and
assigned allowance percentages which take into effect past charge-off history,
industry averages and current trends and risks. Finally, an unallocated portion
of the allowance is maintained to account for the general inherent risk in the
loan portfolio, known circumstances which are not addressed in the allocated
portion of the allowance (such as the increased dependence on outside mortgage
brokers for originations), and the necessary imprecision in the determination of
the allocation portion of the allowance.
The allowance for loan losses includes specific, general and unallocated
allowances of $555,000, $493,000 and $516,000, respectively, at December 31,
1996, as compared to $232,000, $519,000 and $449,000 respectively, at December
31, 1995. The increase in the specific allowance primarily reflects the
continuing resolution of loans related to a large condominium project which has
been in default since 1993 and is presently subject to bankruptcy proceedings
and a lawsuit. The uncertainty in regard to these credits is also accounted for
in the unallocated allowance in amounts which decrease as the ability to clearly
quantify the specific losses increases.
NON-INTEREST INCOME. Non-interest income increased by $144,000, or 43.4%, to
$476,000 during 1996 as compared to $332,000 for 1995. The increase in non-
interest income during 1996 resulted primarily from a $103,000 gain on sale of
securities available for sale in 1996 as compared to a $22,000 loss in 1995.
NON-INTEREST EXPENSES. Non-interest expenses increased $1.5 million, or
33.1%, to $5.9 million during 1996 compared to $4.4 million for 1995. The
increase during 1996 was primarily attributable to the one-time SAIF assessment
of $1.1 million. Non-interest expenses other than the one-time SAIF assessment
increased $374,000, or 8.4%, in 1996 over 1995 levels. Salaries and employee
benefits, the major component of non-interest expenses, increased $183,000, or
7.5%, during 1996. The remaining elements of non-interest expenses, exclusive
of the one-time SAIF assessment, increased $192,000 or 9.6% to $2.2 million in
1996 from $2.0 million in 1995. The increases, exclusive of the one-time SAIF
assessment, are indicative of the growth of the Bank as well as general price
increases.
INCOME TAXES. Income tax expense totalled $836,000 and $1.2 million during
1996 and 1995, respectively. The decrease in 1996 resulted primarily from a
decrease in pre-tax income of $1.0 million. The Bank's effective income tax
rate was 33.5% in 1996 and 35.0% in 1995. The 1996 effective tax rate reflects
a 1.5% reduction related to the utilization of a capital loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds on a long-term and short-term basis are
deposits, principal and interest payments on loans, mortgage-backed and
investment securities and FHLB borrowings. The Bank uses the funds generated
to support its lending and investment activities as well as any other demands
for liquidity such as deposit outflows. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows, mortgage
prepayments and the exercise of call features are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4.0%. At March 31, 1998 and December 31, 1997, 1996, 1995, 1994, and
1993, the Bank's regulatory liquidity ratios were 9.44%, 9.44%, 10.96%, 13.04%,
11.89% and 24.81%, respectively.
At March 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $24.0 million, or 7.84%, of total
adjusted assets, which is above the required level of $4.6 million, or 1.5%;
core capital of $24.0 million, or 7.84%, of total adjusted assets, which is
above the required level of $12.3 million, or 4%; and risk-based capital of
$25.3 million, or 19.95%, of risk-weighted assets, which is above the required
level of $10.1 million, or 8%. See "Regulatory Capital Compliance."
The Bank's most liquid assets are cash and cash equivalents and its investment
securities available for sale. The levels of these assets are dependent on the
Bank's operating, financing, lending and investing activities during any given
period. At March 31, 1998, cash and cash equivalents and investment securities
available for sale totalled $24.4 million, or 7.8% of total assets.
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The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB borrowings. At March 31, 1998, the Bank had $42.3 million in
borrowings outstanding from the FHLB. Depending on market conditions, the
pricing of deposit products and FHLB borrowings, the Bank may continue to rely
on FHLB borrowing to fund asset growth.
During the three months ended March 31, 1998, net cash provided by operating
activities totalled $530,000, of which $511,000 represented net income. During
the three-year period ended December 31, 1997, net cash provided by operating
activities totalled $6.8 million, of which $4.7 million represented net
income.
During the three months ended March 31, 1998, financing activities provided
net cash of $13.0 million, of which $12.0 million resulted from increased
borrowings from the FHLB. During the three-year period ended December 31, 1997,
financing activities provided $85.3 million in net cash, including $20.3 million
in increased borrowings from the FHLB, $42.0 million from the Summit branch
acquisition transaction and $23.0 million from increased deposits.
The net cash provided by operating and financing activities has been utilized
to increase cash and cash equivalents to $17.3 million at March 31, 1998 from
$8.3 million at December 31, 1994 and to increase the Bank's portfolios of loans
and mortgage-backed and investment securities, which have increased $29.7
million, $33.3 million and $26.5 million, respectively, during the same
period.
At March 31, 1998, the Bank had commitments to originate and purchase loans
and fund unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totaling $19.3 million. The Bank anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. Certificate accounts, including Individual Retirement Account
("IRA") accounts, which are scheduled to mature in less than one year from March
31, 1998, totalled $115.2 million. The Bank expects that substantially all of
the maturing certificate accounts will be retained by the Bank at maturity.
The initial impact of the Reorganization and the Offering on the liquidity and
capital resources of Bancorp will be significant as it will substantially
increase the liquid assets of Bancorp and the capital base on which Bancorp
operates. Additionally, Bancorp expects the substantial majority of the
Offering proceeds will initially be invested in readily marketable investment
grade securities which, if liquidity needs developed, could be sold by Bancorp
to provide additional liquidity. Further, the additional capital resulting from
the offerings is expected to increase the capital base of Bancorp. At March 31,
1998, the Bank had total equity, determined in accordance with GAAP, of $29.8
million, or 9.5% of total assets. The Bank's regulatory tangible capital at
that date, which excludes intangible assets of $5.7 million and unrealized
securities gains of $80,000, was 7.8%. An institution with a ratio of tangible
capital to total assets of greater than or equal to 5.0% is considered to be
"well-capitalized" pursuant to OTS regulations. Assuming that Bancorp uses 50%
of the net proceeds at the maximum of the Offering Range to purchase the stock
of the Bank, the Bank's GAAP capital will increase to $37.0 million or a ratio
of GAAP capital to adjusted assets, on a pro forma basis, of 11.59% after the
Offering. The investment of the net proceeds from the sale of the Common Stock
is expected to provide the Bank with additional income to increase further its
capital position. The additional capital may also assist the Bank in offering
new programs and expanded services to its customers. See "Use of
Proceeds."
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YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged regarding
how existing application software programs and operating systems can accommodate
this date value. Many existing application software products were designed to
accommodate only two-digits. For example, "98" is stored on the system and
represents 1998. Bancorp has been identifying potential problems associated
with the "Year 2000" issue and has implemented a plan designated to ensure that
all software used in connection with Bancorp's business will manage and
manipulate data involving the transition with data from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
data. The Bank has prepared a critical issues schedule with a timeline and
assigned responsibilities. In addition, the Bank recognizes that its ability to
be Year 2000 compliant is dependent upon the cooperation of its vendors. The
Bank is requiring its computer systems and software vendors to represent that
the products provided are or will be Year 2000 compliant and has planned a
program of testing for compliance. The Bank has received representations from
its primary third party vendors that they will have resolved any Year 2000
problems in their software by December 31, 1998 and anticipates that all of its
vendors also will have resolved any Year 2000 problems in their software by that
same date. All Year 2000 issues for the Bank, including testing, are expected
to be addressed by December 31, 1998 and any problems would be remedied by March
31, 1999. The Bank will also prepare contingency plans in the event there are
any system interruptions. The Bank believes that its costs related to Year 2000
will be approximately $135,000. There can be no assurances, however, that such
plan or the performance by the Bank's vendors will be effective to remedy all
potential problems. To the extent Bancorp's systems are not fully Year 2000
compliant, there can be no assurance that potential systems interruptions or the
cost necessary to update software would not have a materially adverse effect on
Bancorp's business, financial condition, results of operations and business
prospects. Further, any Year 2000 failure on the part of the Bank's customers
could result in additional expense or loss to the Bank. The Bank plans also to
work with its customers to address any potential Year 2000 problems. As a
related matter, the Bank would carefully consider whether a potential commercial
loan applicant were Year 2000 compliant as part of its underwritng criteria.
See "Business of the Bank -- Lending Activities."
LEGAL PROCEEDINGS
The Bank is a party to various litigation which arises primarily in the
ordinary course of business. Included in such litigation is a case before the
Superior Court of New Jersey related to a condominium construction project. See
"West Essex Bank and Subsidiary Consolidated Financial Statement--Note 15."
Currently, the plaintiffs have four loans with the Bank totaling $403,833 in the
aggregate, three of which are delinquent. Another plaintiff defaulted on his
loan, and the property has been foreclosed on by the Bank and is currently held
as REO. In the opinion of management the ultimate disposition of such litigation
should not have a material effect on the consolidated financial position or
operations of the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results generally in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike industrial companies, nearly
all of the assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR EARNINGS PER SHARE. In February 1997, the FASB issued SFAS No.
128, "Earnings Per Share. This statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly-held
common stock or potential common stock. This statement simplifies the standards
for computing earnings per share previously found in APB Opinion 15, "Earnings
per Share," and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
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income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted.
REPORTING COMPREHENSIVE INCOME. In September 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The statement does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The Bank implemented SFAS No. 130 in conjunction with the
presentation of its consolidated financial statements at and as of the three
months ended March 31, 1998 and has made the appropriate disclosures in the
applicable consolidated financial statements, as required. The implementation
of SFAS No. 130 had no impact on consolidated financial conditions or
operations.
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes 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 establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No.
131 is effective for financial statements for periods beginning after December
15, 1997. Management has determined that this statement does not currently have
any impact on the Bank's information reporting.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement supersedes the
disclosure requirements in FASB statements No. 87, "Employers' Accounting for
Pensions," No. 88, "Employers' accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement addresses disclosures only. It does not address measurement or
recognition and, as such, will not have any impact on consolidated financial
condition or operations. The disclosure requirements of SFAS No. 132 are
effective for fiscal years beginning after December 15, 1997.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In addition,
certain provisions of this statement will permit, at the date of initial
adoption of this Statement, the transfer of any held-to-maturity security into
either the available for sale or trading category and the transfer of any
available for sale security in the trading category. Transfers from the held-
to-maturity portfolio at the date of initial adoption will not call into
question the entity's intent to hold other debt securities to maturity in the
future. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and is not expected to have a material impact on
Bancorp.
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BUSINESS OF BANCORP
Bancorp will be reorganized, at the direction of the Board of Directors of the
Bank and subject to the approval of the OTS, for the purpose of becoming a stock
holding company to own all of the outstanding capital stock of the Bank. Upon
consummation of the Reorganization, the Bank will be a wholly owned subsidiary
of Bancorp, the majority of whose shares will be held by the Mutual Company.
Bancorp is currently not an operating company. Following the Reorganization,
in addition to directing, planning and coordinating the business activities of
the Bank, Bancorp will initially invest net proceeds it retains from the
Offering primarily in mortgage-backed and mortgage-related securities and other
investment-grade marketable securities. In addition, Bancorp intends to fund
the loan to the ESOP to enable the ESOP to subscribe for 8% of the Common Stock
issued in the Offering, including shares issued to the Foundation; however, a
third-party lender may be utilized to lend funds to the ESOP. See "Use of
Proceeds." In the future, Bancorp may acquire or organize other operating
subsidiaries, including other financial institutions and financial services
companies. The Mutual Company will not be an operating company. In connection
with the Reorganization, the Mutual Company will have initial capitalization of
$100,000 Immediately after consummation of the Reorganization, it is expected
that the Mutual Company will not engage in any business activity other than to
hold a majority of the Common Stock of Bancorp and to invest the funds retained
at the Mutual Company level. There can be no assurance that the Mutual Company
will not convert to stock form in the future.
Presently, there are no agreements or understandings for an expansion of
Bancorp's operations. Bancorp is not expected to own or lease real or personal
property initially, but will instead use the premises, equipment and furniture
of the Bank. At the present time, Bancorp does not intend to employ any persons
other than certain officers of the Bank, but will utilize the support staff of
the Bank from time to time. Additional employees may be hired as appropriate to
the extent Bancorp expands its business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank was originally organized in 1915 as a New Jersey chartered building
and loan association and, in 1995, became a federally chartered savings bank.
The Bank conducts business from its administrative/branch office located in
Caldwell, New Jersey and its seven other full service banking branch offices
located in the municipalities of West Orange, Franklin Lakes, River Vale, Pine
Brook, Old Tappan and Northvale, New Jersey, all of which are located in the
Northern New Jersey Counties of Bergen, Essex and Morris. See " -- Market Area
and Competition." At March 31, 1998, the Bank had total assets of $312.5
million, total deposit accounts of $239.1 million and retained earnings of $29.8
million. The Bank's deposits are insured up to the maximum allowable amount by
FDIC.
The Bank is a community-oriented savings institution whose business primarily
consists of accepting deposits from customers and investing those funds
primarily in mortgage-backed securities and mortgage loans secured by one- to
four-family residences located in the Bank's primary market area. To a
significantly lesser extent, the Bank invests in commercial real estate loans,
multi-family loans, construction and land development loans and home equity
loans as well as consumer loans and obligations of the federal government and
federal agencies as well as states and municipalities. The Bank generally
retains for its portfolio all one- to four-family mortgage loans which it
originates. At March 31, 1998 the Bank's securities portfolio totalled $158.5
million, or 50.7% of total assets, and its gross loan portfolio totalled $118.2
million,
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or 37.8% of total assets, of which $89.5 million were one- to four family
mortgage loans, $10.3 million were commercial real estate loans, $8.4 million
were home equity loans and lines of credit, $7.1 million were construction and
development loans, $2.1 million were multi-family mortgage loans, and $801,000
were consumer loans. Of the Bank's total mortgage-backed securities portfolio,
36.1% are secured by fixed-rate loans and 63.9% are secured by adjustable-rate
loans. Of the Bank's total loan portfolio, 47.6% carry adjustable rates of
interest and 52.4% carry fixed-rates of interest. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-- Management
Strategy."
The Bank's investment activities primarily consist of investments in mortgage-
backed securities and various federal government and agency obligations as well
as obligations of certain states and municipal subdivisions. At March 31, 1998,
the Bank had $122.6 million in mortgage-backed and mortgage-related securities,
or 39.2% of total assets substantially all of which were issued and guaranteed
by the following governmental-sponsored agencies: Fannie Mae ("FNMA"), Freddie
Mac ("FHLMC") and Ginnie Mae ("GNMA"). All of the Bank's mortgage-backed
securities are classified as held-to-maturity. The debt obligations owned by
the Bank generally consist of U.S. Government and agency obligations and
obligations of states and municipalities consisting of $7.1 million classified
as available-for-sale and $28.8 million classified as held-to-maturity. At
March 31, 1998, the Bank's deposit accounts totalled $239.1 million, or 84.6% of
total liabilities, of which $95.9 million, or 40.3%, were core deposits. From
time to time, the Bank has utilized borrowings from the FHLB-NY as a source of
funds, and may utilize such borrowings to a greater extent in the future. At
March 31, 1998, such borrowings totalled $42.3 million, or 15.0% of total
liabilities. See "Business of the Bank."
The Bank has experienced an increase in its net interest income for each of
the last five fiscal years notwithstanding the decreasing trend in its net
income over the same period. The decrease in net income was the result of
various factors that occurred in each year. Specifically, in 1993, there was an
increase in net income of $1.1 million due solely to the cumulative effect of a
change in accounting for income taxes. In 1994, the Bank experienced a decrease
in non-interest income of $367,000 and an increase in non-interest expense of
$156,000. Notwithstanding those changes, net income in 1994 was actually
$400,000 greater than net income in 1993 before the cumulative effect of a
change in accounting for income taxes. In 1995, the Bank's provision for loan
losses was $510,000 compared to a recovery of $247,000 the prior year, which was
the primary reason net income was down in 1995 by approximately $500,000. In
1996, the Bank incurred the one-time SAIF assessment of $1.1 million, which was
the primary reason for the decrease in 1996. But for the net effect of the SAIF
assessment, net income for 1996 would have been greater than 1995. In 1997, the
net income was adversely affected by the cost of acquiring the Summit branches.
Without regard to the $1.7 million amortization expenses related to the Summit
branches incurred in 1997, net income in 1997 would have exceeded 1996 net
income even disregarding the impact of the SAIF assessment.
The Bank's executive offices are located at 417 Bloomfield Avenue, Caldwell,
New Jersey 07006 and its telephone number is (973) 226-7911.
MARKET AREA AND COMPETITION
The Bank has been, and intends to continue to be, a community-oriented
financial institution, offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank conducts its business through its
administrative and branch office located in Caldwell, New Jersey, and seven
other full service branch offices located in West Orange, Franklin Lakes, River
Vale, Pine Brook, Old Tappan and Northvale, all of which are located in the
Northern New Jersey counties of Essex, Morris and Bergen. The Bank's deposit
gathering base is concentrated in the communities surrounding its offices.
While its lending area extends throughout New Jersey, most of the Bank's
mortgage loans are secured by properties located in Essex, Morris and Bergen
Counties in Northern New Jersey. West Essex, at December 31, 1997, had a total
market share of deposits in its markets (for purposes of this analysis, its
markets represent a one mile radius around each branch) of 16.95% at its
Caldwell office, 22.55% at its Franklin Lakes office, 14.58% at its Northvale
office, 35.93% at its Old Tappan Office, 24.95% at its Montville Office, 14.30%
at its River Vale office and 4.38% at its West Orange office (Main Street) and
15.52% at its West Orange office (Pleasant Avenue).
The economy in the Bank's primary market area is based upon a mixture of
service and retail trade. Other employment is provided by a variety of
wholesale trade, manufacturing, federal, state and local government, hospitals
and utilities. The area is also home to commuters working in the greater New
York City metropolitan area. Certain communities in Bergen, Essex and Morris
Counties are among the highest per capita income in the country. Essex County
contains many older residential commuter towns which function partially as
business and service centers. Morris County was once predominantly a rural
farming area. It has experienced rapid growth in the residential, commercial
and industrial sectors. Bergen County
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has benefitted from its geographical proximity to New York City. Originally an
agricultural region, the county shifted toward manufacturing and service
industries and many foreign firms have set up their American headquarters in
this County.
The Bank faces significant competition both in making loans and in attracting
deposits. The State of New Jersey has a high density of financial institutions,
many of which are branches of significantly larger institutions which have
greater financial resources than the Bank, all of which are competitors of the
Bank to varying degrees. The Bank's competition for loans comes principally
from commercial banks, savings banks, savings and loan associations, credit
unions, mortgage banking companies and insurance companies. These companies
compete aggressively through advertising and by cutting interest rates on loans.
The Bank has sought to compete for loans by advertising in local papers,
developing contacts with local real estate brokers, and providing cash
incentives to its mortgage origination staff to attract loans to the Bank. In
addition, the Bank is affiliated with several mortgage brokers, who, for a fee,
provide the Bank with loans. The Bank does not attempt to compete by offering
interest rates below those offered by its competitors, but does endeavor to keep
its interest rates competitive in that the Bank's rates are neither higher nor
lower than rates generally available from the Bank's competitors in its market
area. Its most direct competition for deposits has historically come from
commercial banks, savings banks, savings and loan associations and credit
unions. The Bank faces additional competition for deposits from short-term money
market funds, common stock, other corporate and government securities funds and
from other financial service institutions such as brokerage firms and insurance
companies.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists primarily of
first mortgage loans secured by one- to four-family residences. At March 31,
1998, the Bank had total loans receivable of $118.2 million, of which $89.5
million were one- to four-family, residential mortgage loans, equalling 75.7% of
the Bank's total loans receivable. At such date, the remainder of the Bank's
loan portfolio consisted primarily of: $10.3 million of commercial real estate
loans or 8.7% of total loans receivable; $8.4 million of home equity loans and
lines of credit, or 7.1% of total loans receivable; $2.1 million of multi-family
residential loans, or 1.7% of total loans receivable; $7.1 million of
construction and development loans, or 6.0% of total loans receivable; and
$801,000 of consumer loans, or 0.7% of total loans receivable, consisting
primarily of loans on passbook deposit accounts and automobile loans.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, and legislative tax
policies. In recent years, the Bank has aggressively sought to increase its
originations of mortgage loans and has sought to purchase loans and loan
participations. This has resulted in total loans increasing from $84.5 million
at December 31, 1996 to $116.1 million at December 31, 1997 and $118.2 million
at March 31, 1998.
68
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------ -----------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family................... $ 89,451 75.70% $ 87,489 75.34% $60,741 71.88%
Multi-family.......................... 2,050 1.73 2,004 1.73 2,068 2.45
Home equity lines(1).................. 8,355 7.07 8,554 7.37 6,653 7.87
Commercial real estate................... 10,321 8.73 10,695 9.21 12,275 14.53
Construction and
development.......................... 7,141 6.04 6,485 5.58 2,080 2.46
-------- ------ -------- ------ ------- ------
Total mortgage loans..................... 117,318 99.27 115,227 99.23 83,817 99.19
-------- ------ -------- ------ ------- ------
Commercial loans......................... 57 0.05 59 0.05 87 0.10
-------- ------ -------- ------ ------- ------
Consumer Loans:
Passbook or certificate.................. 497 0.42 550 0.47 427 0.51
Other................................. 304 0.26 291 0.25 168 0.20
-------- ------ -------- ------ ------- ------
Total consumer loans................ 801 0.68 841 0.72 595 0.71
-------- ------ -------- ------ ------- ------
Total loans receivable.................. 118,176 100.00% 116,127 100.00% 84,499 100.00%
====== ====== ======
Less:
Construction loans in process......... (2,009) (1,437) (440)
Allowance for loan losses............. (1,863) (1,885) (1,564)
Deferred loan fees, net............... (2) (70) (361)
-------- -------- -------
Loans receivable, net.................... $114,302 $112,735 $82,134
======== ======== =======
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family................... $65,002 74.50% $61,747 70.33% $63,352 68.61%
Multi-family.......................... 1,115 1.28 1,400 1.59 1,865 2.02
Home equity lines(1).................. 4,388 5.03 5,014 5.71 5,467 5.92
Commercial real estate................... 12,707 14.56 13,815 15.74 14,462 15.66
Construction and
development.......................... 3,032 3.47 5,079 5.78 6,503 7.04
------- ------ ------- ------ ------- ------
Total mortgage loans..................... 86,244 98.84 87,055 99.15 91,649 99.25
------- ------ ------- ------ ------- ------
Commercial loans......................... 234 0.27 259 0.29 335 0.36
------- ------ ------- ------ ------- ------
Consumer Loans:
Passbook or certificate.................. 543 0.62 398 0.46 309 0.34
Other................................. 234 0.27 90 0.10 46 0.05
------- ------ ------- ------ ------- ------
Total consumer loans................ 777 0.89 488 0.56 355 0.39
------- ------ ------- ------ ------- ------
Total loans receivable.................. 87,255 100.00% 87,802 100.00% 92,339 100.00%
====== ====== ======
Less:
Construction loans in process......... (592) (1,474) (836)
Allowance for loan losses............. (1,200) (1,236) (1,550)
Deferred loan fees, net............... (432) (481) (534)
------- ------- -------
Loans receivable, net.................... $85,031 $84,611 $89,419
======= ======= =======
</TABLE>
_______________________________
(1) Includes second mortgage loans other than home equity loans of $60,000,
$63,000, $74,000, $91,000, $191,000 and $213,000 at March 31, 1998 and
December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
69
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual maturity
of the Bank's loans at March 31, 1998. The table does not include the effect of
future principal repayments or prepayments.
<TABLE>
<CAPTION>
AT MARCH
31, 1998
-------------------------------------------------------------------
ONE- TO
FOUR- MULTI-FAMILY SECOND EQUITY
FAMILY MORTGAGES LINES
-------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Amounts due:
One year or less................................... $ 178 $ -- $ -- $ --
------- ------ ------ ------
After one year:
More than one year to three years............... 1,748 98 -- 284
More than three years to five years............. 1,903 -- 60 152
More than five years to ten years............... 7,551 -- -- 2,168
More than 10 years to 20 years.................. 22,274 1,895 -- 4,516
More than 20 years.............................. 55,797 57 -- 1,175
------- ------ ------ ------
Total due after one year........................... 89,273 2,050 60 8,295
------- ------ ------ ------
Total due.......................................... 89,451 2,050 60 8,295
------- ------ ------ ------
Less:
Loans in process.................... -- -- -- --
Deferred loan fees.................. (25) -- -- --
Allowance for loan losses........... 1,085 21 -- 66
------- ------ ------ ------
1,060 21 -- 66
------- ------ ------ ------
Loans receivable, net........................... $88,391 $2,029 $60 $8,229
======= ====== ====== ======
<CAPTION>
-------------------------------------------------------------------------
CONSTRUCTION
COMMERCIAL AND TOTAL
REAL ESTATE DEVELOPMENT COMMERCIAL CONSUMER LOANS
--------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
One year or less................................ $ -- $3,943 $-- $513 $ 4,634
------- ------ --- ---- --------
After one year:
More than one year to three years............... 287 2,755 9 205 5,386
More than three years to five years............. 1,442 12 48 83 3,700
More than five years to ten years............... 366 36 -- -- 10,121
More than 10 years to 20 years.................. 7,911 395 -- -- 36,991
More than 20 years.............................. 315 -- -- -- 57,344
------- ------ --- ---- --------
Total due after one year........................... 10,321 3,198 57 288 113,542
------- ------ --- ---- --------
Total due.......................................... 10,321 7,141 57 801 118,176
------- ------ --- ---- --------
Less:
Loans in process.................... -- 2,009 -- -- 2,009
Deferred loan fees.................. -- 27 -- -- 2
Allowance for loan losses........... 107 578 -- 6 1,863
------- ------ --- ---- --------
107 2,614 -- 6 3,874
------- ------ --- ---- --------
Loans receivable, net........................... $10,214 $4,527 $57 $795 $114,302
======= ====== === ==== ========
</TABLE>
70
<PAGE>
The following table sets forth, at March 31, 1998, the dollar amount of loans
contractually due after March 31, 1999, and whether such loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1999
---------------------------------------------------------
FIXED ADJUSTABLE TOTAL
----------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family............................. $44,487 $44,786 $ 89,273
Multi-family.................................... 2,050 -- 2,050
Second mortgages................................ 60 -- 60
Equity lines.................................... 3,976 4,319 8,295
Commercial real estate.......................... 9,359 962 10,321
Construction and development.................... 48 3,150 3,198
------- ------- --------
Total mortgage loans......................... 59,980 53,217 113,197
Commercial loans................................ 57 -- 57
Consumer loans.................................. 288 -- 288
------- ------- --------
Total loans................................. $60,325 $53,217 $113,542
======= ======= ========
</TABLE>
ORIGINATION, PURCHASE AND SERVICING OF LOANS. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating in all of the
Bank's branch offices. All loans originated by the Bank, either through internal
sources or through loan brokers, are underwritten by the Bank pursuant to the
Bank's policies and procedures. The Bank's underwriting policies, guidelines
and procedures are modeled after those of FNMA and FHLMC. The Bank originates
both adjustable-rate and fixed-rate loans. The Bank's ability to originate
fixed- or adjustable-rate loans is dependent upon the relative customer demand
for such loans, which is affected by the current and expected future level of
interest rates. It is the general policy of the Bank to retain all loans
originated in its portfolio. The Bank currently retains the servicing for all
loans originated in its portfolio. The Bank has faced significant competition
for loans in its market area. Until 1996, the Bank had relied solely upon its
own mortgage staff to originate loans and depended primarily upon getting loans
from the Bank's customer base. The Bank did not aggressively advertise, nor did
it pay brokers to introduce loans to the Bank. Since 1996, the Bank has sought
to compete more aggressively for loans. To that end, the Bank began paying its
loan origination staff bonuses based upon loan originations and has
significantly increased its advertising in its local market area. The Bank has
also begun working with mortgage brokers and paying them fees in return for
referring loan applicants to the Bank. The Bank's efforts have enabled it to
substantially increase loan originations since 1996. Specifically, in 1997, the
Bank originated $46.4 million in mortgage loans, up from $14.4 million in 1996.
Loan originations for the three months ended March 31, 1998 totalled $9.0
million compared to $4.0 million for the three months ended March 31, 1997.
Although the Bank expects that it will be able to continue to increase mortgage
loan originations, there can be no assurance that the Bank will be able to
continue to increase its mortgage loan originations above current levels or that
it will invest the proceeds obtained through the Offering in mortgage loans.
During the years ended December 31, 1997 and December 31, 1996, the Bank
originated $39.3 million and $11.3 million of one- to four-family loans,
respectively, including home equity loans and lines
71
<PAGE>
of credit. Based upon the Bank's investment needs and market opportunities, the
Bank has, on occasion, purchased loans, primarily one- to four-family loans, or
participated in loans, primarily multi-family loans through the Thrift
Institutions Community Investment Corporation of New Jersey ("TICIC"). At March
31, 1998, the Bank had four loan participations through TICIC totalling $1.7
million. The Bank has in its loan portfolio loans generated by third-party
mortgage companies which were underwritten pursuant to the Bank's policies, and
closed in the name of the Bank.
The following table sets forth the Bank's loan originations, purchases, and
principal repayments for the periods indicated. The Bank sold no loans during
the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS FOR THE YEARS ENDED DECEMBER
ENDED MARCH 31, 31,
------------------------------- ---------------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance............................ $116,127 $84,499 $ 84,499 $ 87,255 $ 87,802
-------- ------- -------- -------- --------
Purchases - Multi-family mortgage loans.... 61 -- -- 1,621 --
-------- ------- -------- -------- --------
Loans originated:
Mortgage loans:
One- to four-family.................... 6,539 3,436 35,017 6,546 10,369
Multi-family........................... -- -- -- -- --
Home equity lines...................... 920 503 4,330 4,726 1,715
Commercial real estate................. -- 85 1,436 2,090 425
Construction and land development...... 1,550 -- 5,610 1,015 2,570
-------- ------- -------- -------- --------
Total mortgage loans.............. 9,009 4,024 46,393 14,377 15,079
-------- ------- -------- -------- --------
Consumer loans:
Passbook loans......................... 61 107 477 660 426
Automobile............................. 46 52 222 65 241
Credit lines(1)........................ 28 -- 28 -- --
Other.................................. -- -- -- -- 5
-------- ------- -------- -------- --------
Total consumer loans.............. 135 159 727 725 672
-------- ------- -------- -------- --------
Loans made to facilitate the sale of
real estate owned....................... -- -- -- -- 73
-------- ------- -------- -------- --------
Total originations................ 9,144 4,183 47,120 15,102 15,824
-------- ------- -------- -------- --------
Loans transferred (to) from real
estate owned............................. -- (157) (680) (377) 83
-------- ------- -------- -------- --------
Principal repayments and
other, net........................... (7,156) (3,520) (14,812) (19,102) (16,454)
-------- ------- -------- -------- --------
Ending balance............................... $118,176 $85,005 $116,127 $ 84,499 $ 87,255
======== ======= ======== ======== ========
</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Bank offers both fixed-rate and
adjustable-rate mortgage loans ("ARM") secured by one- to four-family residences
with maturities of up to 30 years. In
72
<PAGE>
excess of ____%, such loans are secured by property located in the Bank's
primary market area. Loan originations are generally obtained from the Bank's
in-house loan representatives located at all of the Bank's branch offices, local
real estate agents, from wholesale brokers and their contacts in the Bank's
local real estate industry, from existing or past customers, through referrals
from members of the local communities and advertising. One- to four-family
mortgage loans are generally underwritten in accordance with FHLMC/FNMA
standards. At March 31, 1998, one- to four-family mortgage loans totalled $89.5
million, or 75.7% of the Bank's total loans receivable. Of the Bank's mortgage
loans secured by one- to four-family residences, $44.6 million, or 49.8%, were
fixed-rate loans and $44.9 million or 50.2% were ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms from ten to 30
years. The Bank generally retains for its portfolio all loans it originates.
The Bank also offers ARM loan programs made for terms from one to 30 years and
with interest rates, which adjust every 12 months or any other term according to
the loan note. The Bank's ARM loans generally provide for periodic (not more
than 2.0% over the existing interest rate) and overall (not more than 6.0%) caps
on the increase or decrease in the interest rate at any adjustment date and over
the life of the loan. The interest rate adjustment on these loans is indexed to
the one-year U.S. Treasury CMT Index with a repricing margin of 2.75% above the
index.
The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the credit risk associated with the Bank's adjustable-rate loans
but also limit the interest rate sensitivity of its adjustable-rate mortgage
loans.
The Bank's policy generally is to originate one- to four-family residential
mortgage loans in amounts up to 90% of the lower of the appraised value or the
selling price of the property securing the loan, but generally requires private
mortgage insurance if the loan is in an amount in excess of 80% of the lower of
the appraised value or selling price, with the exception of certain loans
secured by condominium units, which require a 70% loan-to-value ("LTV") ratio.
Mortgage loans originated by the Bank include due-on-sale clauses which provide
the Bank with the contractual right to deem the loan immediately due and payable
in the event the borrower transfers ownership of the property without the Bank's
consent. Due-on-sale clauses are an important means of adjusting the rates on
the Bank's fixed-rate mortgage loan portfolio and the Bank has generally
exercised its rights under these clauses. The Bank requires fire, casualty,
title and, in certain cases, flood insurance on all properties securing real
estate loans made by the Bank.
In an effort to provide financing for first-time home buyers, the Bank offers
its first-time home buyers program. This program offers single-family
residential mortgage loans to qualified individuals. These loans are originated
using the Bank's standard underwriting guidelines with reduced interest rates.
With respect to loans originated under this program, the Bank typically charges
a lower rate of interest, as compared to other residential mortgage loans and
originates these loans in amounts up to 95% of the lower of the appraised value
or selling price of the property securing the loan. In addition, the Bank also
participates in the First Home Club Program through the FHLB-NY, which benefits
low income first time homebuyers.
HOME EQUITY LOANS. The Bank offers fixed rate home equity loans and floating
rate home equity lines of credit in amounts of up to $100,000. Home equity
loans have fixed rates of interest with terms of up to 20 years. Interest rates
on such loans will vary depending on the amortization period chosen by the
borrowers. Home equity lines of credit have adjustable-rates of interest, which
adjust on a monthly basis.
73
<PAGE>
The adjustable-rate of interest charged on such loans is indexed to the prime
rate as published in The Wall Street Journal. Currently, home equity lines of
credit originated at this time bear a maximum lifetime interest rate cap of
14.0%. The maximum combined LTV ratio on home equity loans and equity lines of
credit is 70%. At March 31, 1998, the Bank had in its loan portfolio an
aggregate of $12.6 million of home equity loans and equity lines of credit, of
which $4.0 million were fixed-rate home equity loans and $8.6 million were
equity lines of credit. Of the $8.6 million equity lines of credit, $4.3 million
was drawn upon such loans at March 31, 1998. The underwriting standards employed
by the Bank for home equity loans and lines of credit include a determination of
the applicant's credit history and an assessment of the applicant's ability to
meet existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration. The Bank's home
equity loans and lines of credit are secured by first or second liens on one- to
four-family residences located in the Bank's primary market area.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING. The Bank also originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small shopping centers located in Northern New Jersey. The Bank's multi-
family and commercial real estate underwriting policy provides that such real
estate loans may be made in amounts up to 65% of the appraised value of the
property; however, this policy provides that management has the discretion to
make such real estate loans in excess of 65% of the appraised value of the
property. The Bank's multi-family and commercial real estate lending is limited
by the regulatory loans-to-one borrower limit which at March 31, 1998 was $3.6
million. The Bank currently originates multi-family and commercial real estate
loans, generally with terms of up to 15 years and has developed a variety of
programs, primarily balloon type mortgages, indexed to the FHLB advance rate,
the Prime Rate and the U.S. Treasury Bill rate. The Bank's multi-family and
commercial real estate loans have fixed or adjustable rates of interest that
adjust periodically and are indexed to either the prime rate as published in The
Wall Street Journal or the U.S. Treasury Bill. In reaching its decision on
whether to make a multi-family or commercial real estate loan, the Bank
considers the net operating income of the property, the borrower's expertise,
credit history and profitability and the value of the underlying property. The
Bank has generally required that the properties securing these real estate loans
have debt service coverage ratios (the ratio of earnings before debt service to
debt service) of at least 1.15x. In addition, environmental impact surveys may
be required for multi-family and commercial real estate loans. Generally,
multi-family and commercial real estate loans made to corporations, partnerships
and other business entities require personal guarantees by the principals. On
an exception basis, the Bank may not require a personal guarantee on such loans
depending on the creditworthiness of the borrower and the amount of the
downpayment and other mitigating circumstances. The Bank's multi-family real
estate loan portfolio at March 31, 1998 was $2.1 million, or 1.7%, of total
loans receivable and the Bank's commercial real estate loan portfolio at such
date was $10.3 million, or 8.7%, of total loans receivable. The largest
commercial real estate loan in the Bank's portfolio at March 31, 1998 was a
$1.12 million loan secured by a commercial warehouse located in Fairfield, New
Jersey.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
and commercial real estate properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to the then prevailing conditions in the real estate
market or the economy. The Bank seeks to minimize these risks through its
underwriting standards.
74
<PAGE>
CONSTRUCTION AND DEVELOPMENT LENDING. The Bank originates construction and
development loans exclusively for the development of one- to four-family
residences. Such loans are made principally to licensed and experienced
developers known to the Bank in its primary market area for the construction of
single-family developments. The Bank generally does not originate loans secured
by undeveloped land. Construction loans are originated in amounts up to 70% of
the lesser of the appraised value of the property, as improved, or the sales
price. Such loans are offered with one year terms and adjustable interest rates
which adjust monthly and float at margins which are generally 1% to 2% above the
Prime Rate of interest as reported in The Wall Street Journal. Proceeds of
construction loans are dispersed as phases of the construction are completed.
Generally, if the borrower is a corporation, partnership or other business
entity, personal guarantees by the principals are required. The Bank's largest
construction loan at March 31,1998 was a $1.6 million performing loan with a
carrying balance, net of loans in process, of $854,000 secured by a 4.54 acre,
six lot residential development tract located in Millburn, New Jersey. At March
31, 1998, the Bank had $7.1 million of construction loans which amounted to 6.0%
of the Bank's total loans receivable.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction or development compared to the estimated cost (including
interest) of construction and other assumptions, including the estimated time to
sell residential properties. If the estimate of value proves to be inaccurate,
the Bank may be confronted with a project, when completed, having a value which
is insufficient to assure full repayment.
CONSUMER LENDING. Consumer loans at March 31, 1998 amounted to $801,000, or
0.7% of the Bank's total loans receivable, and consisted primarily of $497,000
in loans secured by deposit accounts and $274,000 in automobile loans. Such
loans are generally originated in the Bank's primary market area. These loans
are generally shorter term and have higher interest rates than one- to four-
family mortgage loans.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family mortgage loans. In such
cases, repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
COMMERCIAL LENDING. At March 31, 1998, the Bank had $57,000 in commercial
loans, which the Bank originated through a FHLB program over ten years ago. The
Bank does not currently anticipate that commercial lending activity will
increase in the immediate future.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. All loans originated
by the Bank with principal amounts in excess of $1.0 million require the
approval of the Board of Directors. All loans originated by the Bank with
principal amounts between $350,000 and $1.0 million require the approval of the
Lending Committee. All other loans may be approved by the Bank's Chief Lending
Officer. Pursuant to OTS regulations, loans to one borrower cannot exceed 15%
of the Bank's unimpaired capital and surplus. The Bank will not make loans to
one borrower that are in excess of the regulatory limits.
75
<PAGE>
UNDERWRITING. With respect to all loans originated by the Bank, it is the
general policy of the Bank to retain all such loans in its portfolio. The Bank
has a policy of underwriting its loans in conformance with FNMA or FHLMC
guidelines. While the Bank generally does not consider whether a borrower is in
compliance with any requirements regarding Year 2000 issues, the Bank does
consider such compliance in connection with any commerical loans it may
originate. Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered and certain other information is verified
by an independent credit agency. If necessary, additional financial information
may be required. An appraisal of real estate intended to secure a proposed loan
generally is required to be performed by outside appraisers approved by the
Bank. The Board annually approves independent appraisers used by the Bank and
approves the Bank's appraisal policy. The Bank's policy is to obtain title and
hazard insurance on all mortgage loans and flood insurance when necessary and
the Bank generally requires borrowers to make payments to a mortgage escrow
account for the payment of property taxes. No title or flood insurance is
required, however, for home equity loans.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
DELINQUENCIES AND CLASSIFIED ASSETS. Reports listing all delinquent accounts
are generated and reviewed by management at least twice a month and the Board of
Directors performs a monthly review of all loans or lending relationships
delinquent 60 days or more and all real estate owned ("REO"). The procedures
taken by the Bank with respect to delinquencies vary depending on the nature of
the loan, period and cause of delinquency and whether the borrower is habitually
delinquent. When a borrower fails to make a required payment on a loan, the
Bank takes a number of steps to have the borrower cure the delinquency and
restore the loan to current status. The Bank generally sends the borrower a
written notice of non-payment after the loan is first past due. The Bank's
guidelines provide that telephone, written correspondence and/or face-to-face
contact will be attempted to ascertain the reasons for delinquency and the
prospects of repayment. When contact is made with the borrower at any time
prior to foreclosure, the Bank will attempt to obtain full payment, offer to
work out a repayment schedule with the borrower to avoid foreclosure or, in some
instances, accept a deed in lieu of foreclosure. In the event payment is not
then received or the loan not otherwise satisfied, additional letters and
telephone calls generally are made. If the loan is still not brought current or
satisfied and it becomes necessary for the Bank to take legal action, which
typically occurs after a loan is 90 days or more delinquent, the Bank will
commence foreclosure proceedings against any real property that secures the
loan. If a foreclosure action is instituted and the loan is not brought
current, paid in full, or refinanced before the foreclosure sale, the property
securing the loan generally is sold at foreclosure and, if purchased by the
Bank, becomes real estate owned.
Federal regulations and the Bank's Asset Classification Policy require that
the Bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank has incorporated the OTS
internal asset classifications as a part of its credit monitoring system. The
Bank currently classifies problem and potential problem assets 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 insured 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.
76
<PAGE>
Management of the Bank, in determining the allowance for loan losses,
considers the risks inherent in its loan portfolio and changes in the nature and
volume of its loan activities, along with the general economic and real estate
market conditions. The Bank utilizes a two tier approach: (i) identification of
impaired loans and the establishment of specific loss allowances on such loans;
and (2) establishment of general valuation allowances on the remainder of its
loan portfolio. The Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of potential
impaired loans. Such system takes into consideration, among other things,
delinquency status, size of loans, type and estimated fair value of collateral
and financial condition of the borrowers. Specific loan loss allowances are
established for identified loans based on a review of such information. General
loan loss allowances are based upon a combination of factors including, but not
limited to, actual loan loss experience, composition of the loan portfolio,
current economic conditions and management's judgment. Although management
believes that adequate loan loss allowances are established, actual losses are
dependent upon future events and, as such, further additions to the level of the
allowance for loan losses may be necessary.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS which
can order the establishment of additional general or specific loss allowances.
The OTS, in conjunction with the other federal banking agencies, has adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
The Board reviews classified assets reports prepared by management and
classifies its assets on a quarterly basis. The Bank classifies assets in
accordance with the management guidelines described above. At March 31, 1998,
the Bank had $3.1 million, or 0.99% of total assets, of assets designated as
"Substandard," consisting of thirteen one- to four-family mortgage loans,
totalling $1.5 million, two construction loans totalling $718,000 and real
estate owned totalling $911,000. At March 31, 1998, the largest loan designated
as "Substandard" had a carrying balance of $684,000, and was a construction loan
secured by a partially completed condominium project. At March 31, 1998, no
assets were designated as "Doubtful" or "Loss."
77
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio as
of the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-----------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------- ------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
---------- ---------- ----------- ----------
Loans: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential Mortgage...... 13 $878 16 $1,544
Commercial Mortgage....... 1 116 -- --
Construction and land
development............ -- -- 2 718
---- ---- ---- ------
Total loans............ 14 $994 18 $2,262
==== ==== ==== ======
Delinquent loans to total
loans.................. 1.03% 0.84% 1.32% 1.93%
==== ==== ==== ====
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------- ------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
---------- ---------- ----------- ----------
Loans: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential Mortgage...... 10 $528 19 $1,652
Commercial Mortgage....... -- -- 1 119
Construction and land
development............ -- -- 2 718
---- ---- ---- ------
Total loans............ 10 $528 22 $2,489
==== ==== ==== ======
Delinquent loans to total
loans.................. 0.72% 0.45% 1.59% 2.14%
==== ==== ==== ====
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------- ------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
---------- ---------- ----------- ----------
Loans: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential Mortgage...... 14 $904 14 $1,733
Commercial Mortgage....... -- -- 2 431
Construction and land
development............ -- -- 2 705
---- ---- ---- ------
Total loans............ 14 $904 18 $2,869
==== ==== ==== ======
Delinquent loans to total
loans.................. 1.15% 1.07% 1.48% 3.40%
==== ==== ==== ====
<CAPTION>
AT DECEMBER 31, 1995
-----------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------- ------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
---------- ---------- ----------- ----------
Loans: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential Mortgage...... 13 $ 764 10 $1,069
Commercial Mortgage....... 4 575 2 380
Construction and land
development............ -- -- 3 734
---- ------ ---- ------
Total loans............ 17 $1,339 15 $2,183
==== ====== ==== ======
Delinquent loans to total
loans.................. 1.34% 1.53% 1.18% 2.50%
==== ==== ==== ====
</TABLE>
78
<PAGE>
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding nonaccrual loans and REO. At March 31, 1998, REO totalled
$1.1 million and consisted of nine properties. It is the policy of the Bank to
cease accruing interest on loans 90 days or more past due and to fully reserve
for all previously accrued interest. For the three months ended March 31, 1998
and the year ended December 31, 1997, the amount of additional interest income
that would have been recognized on non-accrual loans if such loans had continued
to perform in accordance with their contractual terms was $40,000 and $177,000,
respectively. On January 1, 1995, the Bank adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118. At both March
31, 1998 and December 31, 1997, total impaired loans were $1.6 million All
impaired loans are residential real estate mortgage loans which have been
measured for impairment using the fair value of the collateral method. During
the three months ended March 31, 1998, the average recorded value of impaired
loans was $1.6 million. For these loans, no interest income was recognized.
During the year ended December 31, 1997, the average recorded value of impaired
loans was $1.9 million. For these loans, no interest income was recognized.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
----------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
Residential Mortgages........................... $1,496 $1,679 $1,576 $1,733 $ 931 $1,369 $1,287
Commercial Mortgages............................ -- 352 119 431 380 263 327
Construction and land development............... 718 705 718 705 734 1,346 737
------ ------ ------ ------ ------ ------ ------
Total nonaccrual loans......................... 2,214 2,736 2,413 2,869 2,045 2,978 2,351
Restructured loans:
Residential Mortgages........................... 92 97 94 99 104 112 2,971
------ ------ ------ ------ ------ ------ ------
Total non-performing loans..................... 2,306 2,833 2,507 2,968 2,149 3,090 5,322
Real estate owned, net(1)........................ 1,120 1,095 1,215 1,394 1,352 1,864 3,251
------ ------ ------ ------ ------ ------ ------
Total non-performing assets.................... $3,426 $3,928 $3,722 $4,362 $3,501 $4,954 $8,573
====== ====== ====== ====== ====== ====== ======
Allowance for loan losses as a
percent of total loans.......................... 1.58% 1.92% 1.62% 1.85% 1.38% 1.41% 1.68%
====== ====== ====== ====== ====== ====== ======
Allowance for loan losses as a
percent of non-performing loans(2).............. 80.79% 57.15% 75.19% 52.70% 55.84% 40.00% 29.12%
====== ====== ====== ====== ====== ====== ======
Non-performing loans as a
percent of total loans(2)....................... 1.95% 3.36% 2.16% 3.51% 2.46% 3.52% 5.76%
====== ====== ====== ====== ====== ====== ======
Non-performing assets as
a percent of total assets(3).................... 1.10% 1.66% 1.24% 1.85% 1.57% 2.48% 4.38%
====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------------------
(1) REO balances are shown net of related valuation allowances. REO includes
$209,000 of property that is not considered substandard.
(2) Non-performing loans consist of all 90 days or more past due and other loans
which have been identified by the Bank as presenting uncertainty with
respect to the collectibility of interest or principal.
(3) Non-performing assets consist of non-performing loans and REO.
79
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to make
additional provisions for estimated loan losses based upon judgments different
from those of management. As of March 31, 1998 and December 31, 1997, the
Bank's allowance for loan losses was 1.58% and 1.62%, respectively, of total
loans receivable and 84.1% and 78.1%, respectively, of nonaccrual loans. The
Bank had non-accrual loans of $2.2 million and $2.4 million at March 31, 1998
and December 31, 1997, respectively. The Bank will continue to monitor and
modify its allowances for loan losses as conditions dictate. While management
believes the Bank's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Bank or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses.
The Bank has established a standardized process to assess the adequacy of
the allowance for loan losses and to identify the risks inherent in the loan
portfolio. The process incorporates credit reviews and gives consideration to
areas of exposure such as concentrations of credit, local economic conditions,
trends in delinquencies, collateral coverage, the composition of the performing
and nonperforming loan portfolios, and other risks inherent in the loan
portfolio.
Specific allocations of the allowance for loan losses are identified by
individual loan based upon a detailed credit review of each such loan. General
loan loss allowances are allocated to pools of loans categorized by type and
assigned allowance percentages which take into effect past charge-off history,
industry averages and current trends and risks. Finally, an unallocated portion
of the allowance is maintained to account for the general inherent risk in the
loan portfolio, known circumstances, which are not addressed in the allocated
portion of the allowance (such as the increased dependence on outside mortgage
brokers for originations), and the necessary imprecision in the determination of
the allocation portion of the allowance.
Among the more significant situations and circumstances which are
considered within the unallocated portion of the allowance is that the Bank
began aggressively competing in the market for loan originations in early 1997
via various means not previously utilized, such as the use of outside mortgage
brokers and paying bonuses to inside loan origination personnel. In addition,
the Bank increased its advertising efforts and expanded its product line to
include product types with more risk, such as a first-time homeowner loan which
allows for higher than normal loan to collateral ratios. The loan portfolio grew
by $31.6 million or 37.4% in 1997 due to these factors after declining in 1996,
1995 and 1994. The increased inherent risk associated with the aforementioned
circumstances are elements within the unallocated allowance. Another element
considered in unallocated allowance is the continuing resolution of loans
related to a large condominium project which has been in default since 1993. The
project is still not complete and various borrowers, including some with
mortgages with the Bank have defaulted on their loans. Accordingly, while the
loans were current and performing, the inherent risk related to these loans was
higher than that normally associated with these types of loans. Finally, the
determination of the allocated portion of the allowance is highly subjective and
requires significant reliance on estimates, assumptions and judgments. Specific
allowances are typically based upon the appraised value of the underlying
collateral, which can vary based upon the particular appraiser involved, and
management estimates of property disposal costs. General allowances are based
upon loss percentages applied to delineated loan categories. The loss
percentages are a particularly inexact science. As such, management has deemed
it prudent to recognize the inherent imprecision of the process by maintaining
what it believes to be conservative, but appropriate level of unallocated
reserves.
80
<PAGE>
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the following table.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------- ------ ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period................ $1,885 $1,564 $1,564 $ 1,200 $1,236 $1,550 $1,811
------ ------ ------ ------- ------ ------ ------
Provision for (recapture of) loan losses...... (22) 55 487 232 510 (247) (200)
------ ------ ------ ------- ------ ------ ------
Charge-offs:
Mortgage loans:
One- to four-family........................ -- -- 60 -- -- 57 36
Multi-family............................... -- -- -- -- 56 -- --
Commercial real estate....................... -- -- 106 -- -- -- 25
Construction and land development............ -- -- -- -- 490 10 --
------ ------ ------ ------- ------ ------ ------
Total mortgage loans....................... -- -- 166 -- 546 67 61
------ ------ ------ ------- ------ ------ ------
Recoveries:
Construction and land development............ -- -- -- 132 -- -- --
------ ------ ------ ------- ------ ------ ------
Balance at end of period...................... $1,863 $1,619 $1,885 $ 1,564 $1,200 $1,236 $1,550
====== ====== ====== ======= ====== ====== ======
Ratio of net charge-offs during
the period to average gross loans
during the period(1)........................ 0.00% 0.00% 0.17% (0.15)% 0.63% 0.08% 0.06%
====== ====== ====== ====== ====== ====== ======
</TABLE>
____________________
(1) Annualized for the three month periods ended March 31, 1998 and 1997.
81
<PAGE>
The following tables set forth the Bank's percent of allowance for loan losses
to total allowance for loan losses and the percent of loans to total loans in
each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------ ----------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------------------------------------------------------ ----------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential............... $ 638 34.25% 84.50% $ 496 30.64% 83.11%
Commercial real estate.... 107 5.74 8.73 194 11.98 13.81
Construction and land
development............. 578 31.03 6.04 424 26.19 2.31
------ ------ ------ ------ ------ ------
Total mortgage loans.... 1,323 71.02 99.27 1,114 68.81 99.23
Commercial loans............ -- -- 0.05 -- -- 0.08
Consumer loans.............. 6 0.32 0.68 4 0.25 0.69
------ ------ ------ ------ ------ ------
1,329 71.34 100.00% 1,118 69.06 100.00%
====== ======
Unallocated................. 534 28.66 501 30.94
------ ------ ------ ------
Total allowance
for loan losses...... $1,863 100.00% $1,619 100.00%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------------------------------- --------------------------------- ---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential.............. $ 621 32.94% 84.44% $ 511 32.67% 82.20% $ 413 34.42% 80.81%
Commercial real
estate................. 112 5.94 9.21 184 11.77 14.53 190 15.83 14.56
Construction and
land development....... 628 33.32 5.58 349 22.31 2.46 141 11.75 3.47
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage
loans............... 1,361 72.20 99.23 1,044 66.75 99.19 744 62.00 98.84
Commercial loans.......... -- -- 0.05 -- -- 0.10 1 0.08 0.27
Consumer loans............ 6 0.32 0.72 4 0.26 0.71 6 0.50 0.89
------ ------ ------ ------ ------ ------ ------ ------ ------
1,367 72.52 100.00% 1,048 67.01 100.00% 751 62.58 100.00%
====== ====== ======
Unallocated............... 518 27.48 516 32.99 449 37.42
------ ------ ------ ------ ------ ------
Total.................. $1,885 100.00% $1,564 100.00% $1,200 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1994 1993
--------------------------------- ---------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------------------------------- ---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential.............. $ 383 30.99% 77.63% $ 418 26.97% 76.55%
Commercial real
estate................. 171 13.84 15.74 218 14.06 15.66
Construction and
land development....... 223 18.04 5.78 452 29.16 7.04
------ ------ ------ ------ ------ ------
Total mortgage
loans............... 777 62.87 99.15 1,088 70.19 99.25
Commercial loans.......... 1 0.08 0.29 2 0.13 0.36
Consumer loans............ 2 0.16 0.56 1 0.07 0.39
------ ------ ------ ------ ------ ------
780 63.11 100.00% 1,091 70.39 100.00%
====== ======
Unallocated............... 456 36.89 459 29.61
------ ------ ------ ------
Total.................. $1,236 100.00% $1,550 100.00%
====== ====== ====== ======
</TABLE>
82
<PAGE>
REAL ESTATE OWNED. At March 31, 1998, the Bank had $1.1 million of real
estate owned consisting of nine properties, eight of which were acquired through
foreclosure. When the Bank acquires property through foreclosure or deed in
lieu of foreclosure, it is initially recorded at the lower of the recorded
investment in the corresponding loan or the fair value of the related assets at
the date of foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Bank provides for a specific valuation allowance and
charges operations for the diminution in value. It is the policy of the Bank to
have obtained an appraisal on all real estate subject to foreclosure proceedings
prior to the time of foreclosure. It is the Bank's policy to require appraisals
on a periodic basis on foreclosed properties and conduct inspections on
foreclosed properties.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations. See
"Regulation and Supervision--Federal Savings Institution Regulation--Liquidity."
Historically, the Bank has maintained liquid assets above the minimum OTS
requirements and at a level considered to be adequate to meet its normal daily
activities.
The Bank's current policies generally limit securities investments to U.S.
Government and agency securities, municipal bonds and corporate debt obligations
and corporate equities. In addition, the Bank's policies permit investments in
mortgage-backed securities, including securities issued and guaranteed by FNMA,
FHLMC and GNMA. The Bank's current securities investment strategy is to
continue to emphasize the purchase of mortgage-backed securities and U.S.
Government and agency obligations as well as state and municipal obligations for
purposes of interest rate risk management.
At March 31, 1998, the Bank had $158.5 million in securities, consisting
primarily of mortgage-backed securities, U.S. Government and agency obligations
and one municipal obligation. SFAS No. 115 requires the Bank to designate its
securities as held-to-maturity, available-for-sale or trading depending on the
Bank's intent regarding its investments. The Bank does not currently maintain a
trading portfolio of securities. At March 31, 1998, all of the Bank's mortgage-
backed securities were classified as held-to-maturity. Also at that date, 19.8%
of the Bank's investment securities were classified as available-for-sale and
80.2% were classified as held-to-maturity. Of the Bank's total investment
securities and mortgage-backed securities portfolio, the Bank's securities
classified as held to maturity had an aggregate market value of $153.5 million
and an amortized cost of $151.4 million. The Bank's securities classified as
available-for-sale had an aggregate market value of $7.1 million and an
amortized cost of $7.0 million at March 31, 1998.
MORTGAGE-BACKED SECURITIES. The Bank purchases mortgage-backed securities in
order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) reduce its credit risk as a result of the guarantee
provided by FHLMC, FNMA and GNMA; (iii) utilize these securities as collateral
for borrowings; and (iv) increase the liquidity of the Bank. The Bank has
primarily invested in mortgage-backed securities issued or sponsored by FNMA,
FHLMC and GNMA and private issuers. At March 31, 1998, mortgage-backed
securities totalled $122.6 million, or 39.2% of total assets and 41.2% of total
interest earning assets, and all were classified as held-to-maturity. At March
31, 1998, 63.9% of the mortgage-
83
<PAGE>
backed securities were adjustable-rate and 36.1% were fixed-rate. The mortgage-
backed securities portfolio had coupon rates ranging from 5.41% to 15.00% and
had a weighted average yield of 6.75% at March 31, 1998. The estimated fair
value of the Bank's mortgage-backed securities held to maturity at March 31,
1998, was $124.4 million, which is $1.8 million more than the amortized cost of
$122.6 million.
Mortgage-backed securities are created by the pooling of mortgages and
issuance of a security with an interest rate which is less than the interest
rate on the underlying mortgage. Mortgage-backed securities typically represent
a participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage-backed securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including FNMA, FHLMC
and GNMA) pool and resell the participation interests in the form of securities
to investors such as the Bank and guarantee the payment of principal and
interest to investors. Mortgage-backed securities generally yield less than the
loans that underlie such securities because of the cost of payment guarantees
and credit enhancements. In addition, mortgage-backed securities are usually
more liquid than individual mortgage loans and may be used to collateralize
certain liabilities and obligations of the Bank. Investments in mortgage-backed
securities involve a risk that actual prepayments will differ from estimated
prepayments used in pricing the security at the time of purchase, which may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities on in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. The Bank estimates prepayments for its mortgage-
backed securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the mortgage-backed
securities at issue and current mortgage interest rates and to determine the
yield and estimated maturity of its mortgage-backed security portfolio. Of the
Bank's $122.6 million mortgage-backed securities portfolio at March 31, 1998,
$1.6 million with a weighted average yield of 7.82% had contractual maturities
within five years and $121.0 million with a weighted average yield of 6.74% had
contractual maturities over five years. However, the actual maturity of a
mortgage-backed security may be less than its stated maturity due to prepayments
of the underlying mortgages. Prepayments that are faster than anticipated may
shorten the life of the security and may result in a loss of any premiums paid
and thereby reduce the net yield on such securities. Although prepayments of
underlying mortgages depend on many factors, the difference between the interest
rates on the underlying mortgages and the prevailing mortgage interest rates
generally is the most significant determinant of the rate of prepayments.
During periods of declining mortgage interest rates, refinancing generally
increases and accelerates the prepayment of the underlying mortgages and the
related security. Under such circumstances, the Bank may be subject to
reinvestment risk because, to the extent that the Bank's mortgage-backed
securities prepay faster than anticipated, the Bank may not be able to reinvest
the proceeds of such repayments and prepayments at a comparable rate.
U.S. GOVERNMENT AND AGENCY OBLIGATIONS AND OBLIGATIONS OF STATES AND
MUNICIPALITIES. At March 31, 1998, the Bank's U.S. Government and Agency
securities portfolio totalled $35.7 million, $28.6 million of which were
classified as held-to-maturity. In addition, the Bank held one $150,000
obligation of a New Jersey municipal subdivision.
84
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------- -------------------------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
---------- ------- ---------- ------- ---------- -------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities available-for-sale (1):
U.S. Government obligations................ $ 6,981 $ 7,105 $ 6,980 $ 7,081 $ -- $ -- $ -- $ --
Obligations of states and
municipal subdivisions................... -- -- -- -- 115 120 306 319
Mutual fund................................ -- -- -- -- 1,554 1,527 1,465 1,441
Common Stock............................... -- -- -- -- -- -- 100 172
---------- ------- ---------- ------- ---------- -------- --------- -------
Total securities available-for-sale...... 6,981 7,105 6,980 7,081 1,669 1,647 1,871 1,932
---------- ------- ---------- ------- ---------- -------- --------- -------
Investment securities held-to-maturity (1):
U.S. Government and
Agency obligations....................... 28,618 28,932 22,929 23,339 22,476 22,766 18,482 19,022
Obligations of states and
municipal subdivisions................... 150 150 -- -- -- -- -- --
---------- ------- ---------- ------- ---------- -------- --------- -------
28,768 29,082 22,929 23,339 22,476 22,766 18,482 19,022
---------- ------- ---------- ------- ---------- -------- --------- -------
Federal Home Loan Bank of
New York stock (2)......................... 2,282 2,282 2,184 2,184 1,670 1,670 1,509 1,509
---------- ------- ---------- ------- ---------- -------- --------- -------
Total.................................... $38,031 $38,469 $32,093 $32,604 $25,815 $26,083 $21,862 $22,463
========== ======= ========== ======= ========== ======== ========= =======
</TABLE>
________________________
(1) Available for sale securities are carried at fair value while held-to-
maturity securities are carried at amortized cost.
(2) Investment is required by regulation. As the security is not readily
marketable, its cost approximates fair value.
85
<PAGE>
The following table sets forth the Bank's investment securities activities for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED MARCH 31, FISCAL YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------------
1995 1998 1997 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES:
Investment securities, beginning of period(1)......... $30,009 $24,124 $24,124 $20,414 $ 9,355
-------- -------- -------- -------- --------
Purchases:
Investment securities - held-to-maturity........... 5,790 2,997 10,400 10,998 12,989
Investment securities - available-for-sale......... -- 2,023 7,034 88 86
Calls:
Investment securities - held-to-maturity........... -- (2,000) (10,000) (5,000) (2,000)
Investment securities - available-for-sale......... -- -- -- -- --
Maturities:
Investment securities - held-to-maturity........... -- -- -- (2,000) --
Investment securities - available-for-sale......... -- (105) (105) (192) (94)
Sales of securities available for sale................ -- -- (1,608) (100) (50)
Increase (decrease) in net premium.................... 51 (10) 42 (2) 2
Increase (decrease) in unrealized gains............... 24 (5) 122 (82) 126
-------- -------- -------- -------- --------
Net increase in investment securities.............. 5,865 2,900 5,885 3,710 11,059
-------- -------- -------- -------- --------
Investment securities, end of period.................. $35,874 $27,024 $30,009 $24,124 $20,414
======== ======== ======== ======== ========
</TABLE>
________________________
(1) Includes investment securities available-for-sale.
86
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed securities, all of which are
held to maturity, at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, 1998 AT DECEMBER 31,
------------------------------- -------------------------------
1998 1997
------------------------------- --------------------------------
PERCENT PERCENT
AMORTIZED OF FAIR AMORTIZED OF FAIR
COST TOTAL(1) VALUE COST TOTAL(1) VALUE
--------- --------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
By Issuer:
GNMA..................................... $ 73,748 60.14% $ 74,943 $ 78,657 60.42% $ 79,775
FHLMC.................................... 25,389 20.70 25,721 26,551 20.40 26,749
FNMA..................................... 23,489 19.15 23,728 24,959 19.17 25,150
Other.................................... 7 0.01 7 7 0.01 7
--------- --------- -------- --------- --------- ----------
Total mortgage-backed securities (1)... $122,633 100.00% $124,399 $130,174 100.00% $131,681
========= ========= ======== ========= ========= ==========
By Coupon Type:
Adjustable-rate.......................... $ 78,330 63.87% $ 79,181 $ 82,938 63.71% $ 83,740
Fixed-rate............................... 44,303 36.13 45,218 47,236 36.29 47,941
--------- --------- -------- --------- --------- ----------
Total mortgage-backed securities (1)... $122,633 100.00% $124,399 $130,174 100.00% $131,681
========= ========= ======== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
PERCENT PERCENT
AMORTIZED OF FAIR AMORTIZED OF FAIR
COST TOTAL(1) VALUE COST TOTAL(1) VALUE
--------- --------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
By Issuer:
GNMA..................................... $ 65,996 58.27% $ 67,095 $ 67,243 67.22% $ 68,790
FHLMC.................................... 32,041 28.29 32,023 23,662 23.66 23,937
FNMA..................................... 15,204 13.43 15,227 9,112 9.11 9,188
Other.................................... 13 0.01 13 15 0.01 15
--------- --------- -------- --------- --------- ----------
Total mortgage-backed securities (1)... $113,254 100.00% $114,358 $100,032 100.00% $101,930
========= ========= ======== ========= ========= ==========
By Coupon Type:
Adjustable-rate.......................... $ 62,849 55.49% $ 63,693 $ 58,615 58.60% $ 59,624
Fixed-rate............................... 50,405 44.51 50,665 41,417 41.40 42,306
--------- --------- -------- --------- --------- ----------
Total mortgage-backed securities (1)... $113,254 100.00% $114,358 $100,032 100.00% $101,930
========= ========= ======== ========= ========= ==========
</TABLE>
- -----------------------
(1) Based on amortized cost.
(2) Includes net unamortized premiums (discounts) of $236 at March 31,
1998 and $243, $193 and $(26) at December 31, 1997, 1996 and 1995,
respectively.
The following table sets forth the Bank's mortgage-backed securities
activities for the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED MARCH 31, ENDED DECEMBER 31,
-------------------------- ----------------------------------------------
1998 1997 1997 1996 1995
----------- ------------ --------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance................................. $130,174 $113,254 $113,254 $100,031 $ 89,300
Purchases...................................... -- 5,244 37,026 30,570 22,443
Principal repayments........................... (7,534) (5,774) (20,084) (17,384) (11,751)
Net amortization and accretion of discounts
and premiums................................. (7) (1) (22) 37 40
-------- -------- -------- -------- --------
Ending balance.................................... $122,633 $112,723 $130,174 $113,254 $100,032
======== ======== ======== ======== ========
</TABLE>
87
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's investment
securities available for sale and held to maturity and mortgage-backed
securities held to maturity as of March 31, 1998.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
--------------------- ---------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury obligations............... $ -- --% $7,105 6.08% $ -- --%
====== ====== =======
Investment securities held to maturity:
U.S. Government agency obligations...... $2,000 7.13% $4,000 7.38% $17,000 7.05%
Municipal obligations................... 150 3.55 -- -- -- --
------ ------ -------
Total investment securities held
to maturity.......................... $2,150 6.88% $4,000 7.38% $17,000 7.05%
====== ====== =======
Mortgage-backed securities held to maturity:
Adjustable-rate:
GNMA.................................. $ -- --% $ -- --% $ -- --%
FHLMC................................. -- -- -- -- -- --
FNMA.................................. -- -- -- -- -- --
------ ------ -------
Total............................. -- -- -- -- -- --
------ ------ ------- ------
Fixed-rate:
GNMA.................................. 6 12.00 15 10.46 2,929 7.81
FHLMC................................. -- -- 1,108 8.13 2,652 6.74
FNMA.................................. -- -- 507 7.00 916 7.00
Other................................. -- -- -- -- -- --
------ ------ -------
Total............................. 6 12.00 1,630 7.80 6,497 7.26
------ ------ -------
Total mortgage-backed securities
held to maturity........................ $ 6 12.00% $1,630 7.80% $ 6,497 7.26%
====== ====== =======
<CAPTION>
AT MARCH 31, 1998
--------------------------------------------------------
MORE THAN TEN YEARS TOTAL
-------------------------- ---------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
--------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. Treasury obligations............... $ -- --% $ 7,105 6.08%
======== ========
Investment securities held to maturity:
U.S. Government agency obligations...... $ 5,618 7.66% $ 28,618 7.22%
Municipal obligations................... -- -- 150 3.55
-------- --------
Total investment securities held
to maturity.......................... $ 5,618 7.66% $ 28,768 7.20%
======== ========
Mortgage-backed securities held to maturity:
Adjustable-rate:
GNMA.................................. $ 61,245 6.50% $ 61,245 6.50%
FHLMC................................. 2,878 7.75 2,878 7.75
FNMA.................................. 14,207 6.34 14,207 6.34
-------- --------
Total............................. 78,330 6.52 78,330 6.52
-------- --------
Fixed-rate:
GNMA.................................. 9,553 7.40 12,503 7.50
FHLMC................................. 18,751 7.02 22,511 7.04
FNMA.................................. 7,859 7.01 9,282 7.01
Other................................. 7 11.00 7 11.00
-------- --------
Total............................. 36,170 7.12 44,303 7.17
-------- --------
Total mortgage-backed securities
held to maturity........................ $114,500 6.71% $122,633 6.75%
======== ========
</TABLE>
88
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, security maturities, cash
flows generated from operations and FHLB borrowings are the primary sources of
the Bank's funds for use in lending, investing and for other general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of savings, checking
accounts, NOW accounts, money market club accounts, certificate of deposit
accounts and Individual Retirement Accounts. For the three months ended March
31, 1998, average core deposits represented 40.2% of total average deposits.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Bank's deposits are obtained predominantly from the areas in which its branch
offices are located. The Bank has historically relied primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Bank's ability to attract and
retain deposits. The Bank uses traditional means of advertising its deposit
products through print media and generally does not solicit deposits from
outside its market area. The Bank does not actively solicit certificate
accounts in excess of $100,000 or use brokers to obtain deposits. At March 31,
1998, 80.2% of the Bank's certificate of deposit accounts had terms of less than
twelve months.
The following table presents the deposit activity of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance........................... $238,192 $179,946 $179,946 $178,392 $164,181
-------- -------- -------- -------- --------
Purchase of deposits from another
institution........................... -- -- 51,007 -- --
Net deposits (withdrawals)............... (1,505) (337) (850) (5,595) 7,660
Interest credited........................ 2,433 1,809 8,089 7,149 6,551
-------- -------- -------- -------- --------
Increase in deposit accounts................ 928 1,472 58,246 1,554 14,211
-------- -------- -------- -------- --------
Ending balance.............................. $239,120 $181,418 $238,192 $179,946 $178,392
======== ======== ======== ======== ========
</TABLE>
At March 31, 1998, the Bank had $17.6 million in certificate accounts in
amounts of $100,000 or more maturing as follows.
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------------------------------------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less......................... $ 5,076 5.40%
Over 3 through 6 months...................... 3,878 5.80
Over 6 through 12 months..................... 5,877 5.66
Over 12 months............................... 2,765 6.43
-------
Total........................................ $17,596 5.74%
=======
</TABLE>
89
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented. Averages for the periods presented utilize
month-end balances.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------------------------- --------------------------------
1998 1997
------------------------------- --------------------------------
PERCENTAGE PERCENTAGE
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts..................... $ 33,031 13.84% 1.14% $ 24,863 12.60% 1.18%
Savings and Club accounts........... 62,849 26.34 2.59 53,221 26.97 2.50
Certificates of deposit............. 142,728 59.82 5.41 119,272 60.43 5.42
-------- ---------- -------- ----------
Total....................... $238,608 100.00% 4.08% $197,356 100.00% 4.10%
======== ========== ======== ==========
Certificate accounts (1):
Less than six months.............. $ 66,315 46.19% 5.26% $ 70,186 49.32% 5.24%
Over six through 12 months........ 48,853 34.02 5.56 44,047 30.95 5.59
Over 12 months through 36 months.. 25,387 17.68 5.92 25,309 17.78 5.96
Over 36 months.................... 3,036 2.11 5.83 2,782 1.95 6.96
-------- ---------- -------- ----------
Total certificate accounts.. $143,591 100.00% 5.49% $142,324 100.00% 5.51%
======== ========== ======== ==========
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
PERCENTAGE PERCENTAGE
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts..................... $ 21,679 12.18% 1.24% $ 21,538 12.64% 1.45%
Savings and Club accounts........... 51,138 28.74 2.50 55,888 32.81 2.50
Certificates of deposit............. 105,141 59.08 5.33 92,938 54.55 5.21
-------- ---------- -------- ----------
Total....................... $177,958 100.00% 4.02% $170,364 100.00% 3.85%
======== ========== ======== ==========
Certificate accounts (1):
Less than six months.............. $ 51,854 48.17% 5.08% $ 44,548 43.27% 5.07%
Over six through 12 months........ 34,720 32.25 5.45 34,100 33.13 5.54
Over 12 months through 36 months.. 16,417 15.25 5.54 18,793 18.26 5.71
Over 36 months.................... 4,656 4.33 6.48 5,497 5.34 6.33
-------- ---------- -------- ----------
Total certificate accounts.. $107,647 100.00% 5.33% $102,938 100.00% 5.41%
======== ========== ======== ==========
</TABLE>
________________________________________
(1) Based on remaining maturity of certificates calculated as of the end of
the period.
90
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 1998.
<TABLE>
<CAPTION>
AT
PERIOD TO AT MATURITY FROM MARCH 31, 1998 MARCH 31, AT DECEMBER 31,
-------------------------------------------------------------------- ------------- ----------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO AFTER
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS FIVE YEARS 1998 1997 1996 1995
-------- --------- ----------- ---------- ---------- ---------- ------- ------ --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%............ $ 2,018 $ 4 $ -- $ -- $ -- $ -- $ 2,022 $ 2,538 $ 11,101 $ 11,846
4.01 to 5.00%......... 30,316 2,594 138 -- -- -- 33,048 33,593 21,836 20,049
5.01 to 6.00%......... 77,081 11,679 1,504 621 1,271 497 92,653 88,877 60,352 41,260
6.01 to 7.00%......... 5,473 4,016 3,367 418 229 -- 13,503 14,451 11,851 26,627
7.01 to 8.00%......... 20 1,859 226 -- -- -- 2,105 2,069 1,486 2,255
Over 9.00%............ -- -- -- -- -- -- -- 536 847 749
-------- ------- ------ ------ ------ ---- -------- -------- -------- --------
$114,908 $20,152 $5,235 $1,039 $1,500 $497 143,331 142,064 107,473 102,786
======== ======= ====== ====== ====== ==== ======== ======== ======== ========
Accrued interest payable...................................................................... 260 260 174 152
-------- -------- -------- --------
Total....................................................................................... $143,591 $142,324 $107,647 $102,938
======== ======== ======== ========
</TABLE>
91
<PAGE>
BORROWINGS. The Bank utilizes borrowings from the FHLB as an alternative to
retail deposits to fund its operations as part of its operating strategy. These
FHLB borrowings are collateralized primarily by certain of the Bank's mortgage-
related securities and secondarily by the Bank's investment in capital stock of
the FHLB. FHLB borrowings are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, fluctuates from time to time in accordance with the policies of the FHLB.
See "Regulation and Supervision -- Federal Home Loan Bank System." At March 31,
1998, the Bank had $42.3 million in outstanding FHLB borrowings, compared to
$21.7 million at March 31, 1997.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE YEARS
MARCH 31, ENDED DECEMBER 31,
------------------------ -------------------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average balance outstanding.............. $30,144 $22,650 $26,223 $18,092 $15,615
Maximum amount outstanding at
any month-end during
the period............................ 42,300 23,650 43,675 23,650 19,000
Balance outstanding at
end of period......................... 42,300 21,650 30,300 23,650 17,000
Weighted average interest rate
during the period..................... 5.80% 6.06% 5.97% 6.36% 6.83%
Weighted average interest rate at
end of period......................... 5.86% 6.28% 6.08% 6.20% 6.58%
</TABLE>
Subsidiary Activities
The Bank is the parent corporation of three wholly-owned subsidiary
corporations, West Essex Insurance Agency ("WEIA"), Wessex Service Corporation
("WSC") and First Reserve Corporation ("FRC"). WEIA was formed in December 1982
to offer insurance products and tax-deferred annuities through an agent.
Originally, these products were sold at one of the Bank's branches. Commencing
in 1993, customers have been referred to Anthony R. Davis Agency at an off-site
location. WEIA receives a fee for each customer referral resulting in the
purchase of an insurance and/or annuity product. Sales of annuity products
totalled $74,000 and $226,000 for the three months ended March 31, 1998 and for
the year ended December 31, 1997, respectively. WEIA's earnings are at a
nominal level since management decided in early 1994 to de-emphasize this
activity due to the lack of demand and controversial publicity associated with
uninsured annuity products. Both WSC and FRC are building subsidiaries and have
been inactive since October 1989 and June 1987, respectively.
92
<PAGE>
PROPERTIES
The Bank currently conducts its business through an administrative and full
service branch office located in Caldwell, New Jersey and seven other full
service branch offices located in West Orange, Franklin Lakes, River Vale, Pine
Brook, Old Tappan and Northvale, New Jersey. Management believes that the
Bank's facilities are adequate to meet the present and immediately foreseeable
needs of the Bank and the Holding Company.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED LEASEHOLD
OR OR IMPROVEMENTS AT
LOCATION OWNED ACQUIRED MARCH 31, 1998
- ------------------------------ -------------- -------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C>
ADMINISTRATIVE/CORPORATE/
BRANCH OFFICE:
417 Bloomfield Avenue Owned 1962 $401
Caldwell, NJ 07006
BRANCH OFFICES:
216 Main Street Owned 1987 150
West Orange, NJ 07052
487 Pleasant Valley Way Owned 1987 241
West Orange, NJ 07052
574 Franklin Avenue Leased 1978 2
Franklin Lakes, NJ 07417
653 Westwood Avenue Owned 1997 484
River Vale, NJ 07675
267 Changebridge Road Owned 1974 252
Pine Brook, NJ 07058
207 Old Tappan Road Owned 1997 494
Old Tappan, NJ 07675
119 Paris Avenue Owned 1997 326
Northvale, NJ 07647
</TABLE>
PERSONNEL
As of March 31, 1998, the Bank had 53 full-time employees and 5 part-time
employees. The employees are not represented by a collective bargaining unit
and the Bank considers its relationship with its employees to be good. See
"Management of the Bank--Benefits" for a description of certain compensation and
benefit programs offered to the Bank's employees.
93
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Bank, Bancorp and the Mutual Company will report their income on
a calendar year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank, Bancorp and the Mutual Company. The Bank was last
audited by the IRS in 1995 and has not been audited by the New Jersey Department
of Revenue ("DOR") in the past five years.
BAD DEBT RESERVE. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
In August 1996, the provisions repealing the above thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996. For this purpose, only home purchase and home improvement loans
are included and the institution can elect to have the tax years with the
highest and lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to a provision of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend distributions"
to Bancorp that are considered as made (i) from the reserve for losses on
qualifying real property loans, to the extent the reserve for such losses
exceeds the amount that would have been allowed under the experience method, or
(ii) from the supplemental reserve for losses on loans ("Excess Distributions"),
then an amount based on the amount distributed will be included in the Bank's
taxable income. Non-dividend distributions include distributions in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's bad debt reserve. Thus, any
dividends to Bancorp that would reduce amounts appropriated to the Bank's bad
debt reserve and deducted for federal income tax purposes would create a tax
liability for the Bank. The amount of additional taxable income
94
<PAGE>
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers. AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses).
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. Bancorp may exclude from its
income 80% of dividends received from the Bank as long as it maintains ownership
in the Bank of at least 20%.
STATE AND LOCAL TAXATION
STATE OF NEW JERSEY. The Bank files New Jersey income tax returns. For New
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including addition
of interest income on state and municipal obligations). Bancorp and the Mutual
Company will be required to file a New Jersey income tax return because they
will be doing business in New Jersey. For New Jersey tax purposes, regular
corporations are presently taxed at a rate equal to 9% of taxable income.
REGULATION AND SUPERVISION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. 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 financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution 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. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on
Bancorp, the Mutual Company and the Bank and their operations. The Mutual
Company, as a federal mutual holding company and Bancorp, as a federal
corporation, will also be required to file certain reports with, and otherwise
comply with the rules and regulations of the OTS.
The following summary of the regulation and supervision of savings
associations and their holding companies does not purport to be a complete
description of the applicable statutes and regulations and is qualified in its
entirety by reference to such statutes and regulations.
95
<PAGE>
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the HOLA and, in certain respects, the Federal Deposit Insurance Act
(the "FDI Act") and the regulations issued by the agencies to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal associations may engage. In particular, many types
of lending authority for federal associations, e.g., commercial, non-residential
real property loans and consumer loans, are limited to a specified percentage of
the institution's capital or assets.
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. At March 31, 1998, the Bank's regulatory limit on loans-to-one
borrower was $3.6 million. At March 31, 1998, the Bank's largest aggregate
amount of loans-to-one borrower consisted of a $1.6 million construction loan
secured by six lots and with one house currently under construction.
QTL TEST. The HOLA requires savings institutions to meet a qualified thrift
lender ("QTL") test. Under the QTL test, a savings association is required to
qualify as a "domestic building and loan association" as that term is defined in
the Code or maintain at least 65% of its "portfolio assets" (total assets less:
(i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least nine months out of each 12 month period. A savings association that
fails the QTL test must either convert to a bank charter or operate under
certain restrictions. As of March 31, 1998, the Bank maintained 82.53% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered as "qualified
thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations upon
all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its 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 on 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 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% 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% 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 capital requirements
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.
The OTS has proposed amendments to its capital distribution regulations which
could conform OTS regulations to the existing requirements of other banking
agencies, as well as simplify the existing OTS regulations. These proposed
rules would eliminate the requirement of notifying the OTS when cash dividends
of a certain amount will be paid for institutions that will remain at least
adequately capitalized. However, applications for capital distributions will be
required for all distributions over a specified amount. Notices will still be
required for
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distributions that would reduce the amount of or retire common or preferred
stock, or debt instruments included in the capital and for all capital
distributions by savings associations in a holding company structure.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus short-
term borrowings. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Bank's average liquidity ratio for the month ended
March 31, 1998 was 9.44%, which exceeded the applicable requirements. The Bank
has never been subject to monetary penalties for failure to meet its liquidity
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the
year ended December 31, 1997 totalled $65,000.
BRANCHING. OTS regulations permit federally chartered savings associations to
branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations. For
a discussion of the impact of possible legislation, see "Special Considerations
- -- Financial Institution Regulation and Possible Legislation."
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and any non-savings institution subsidiaries that the Holding Company
may establish) is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A restricts the aggregate amount of covered transactions
with any individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B generally requires
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. A savings association also is prohibited from extending credit to
any affiliate engaged in activities not permitted for a bank holding company and
may not purchase the securities of an affiliate (other than a subsidiary).
Section 22(h) of the Federal Reserve Act restricts a savings association with
respect to loans to directors, executive officers, and principal stockholders.
Under Section 22(h), loans to directors, executive officers and stockholders who
control, directly or indirectly, 10% or more of voting securities of a savings
association, and certain related interests of any of the foregoing, may not
exceed, together with all other outstanding loans to such persons and affiliated
entities, the savings association's total capital and surplus. Section 22(h)
also prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers, and shareholders who directly or
indirectly control 10% or more of voting securities of a stock savings
association, and their respective related interests, unless such loan is
approved in advance by a majority of the board of directors of the savings
association. Any "interested" director may not participate in the voting. The
loan amount (which includes all other outstanding loans to such person) as to
which such prior board of director approval is required, is the greater of
$25,000 or 5% of capital and surplus or any loans over $500,000. Further,
pursuant to Section 22(h), loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
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comparable transactions to other persons except for extensions of credit made
pursuant to a benefit or compensation program that is widely available to the
institution's employees and does not give preference to insiders over other
employees. Section 22(g) of the FRA places additional limitations on loans to
executive officers.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1.0 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal banking
agency to prescribe for all insured depository institutions standards relating
to, among other things, internal controls, information systems and audit
systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, and compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. The federal banking
agencies have adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness ("Guidelines") to implement these safety and
soundness standards. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
Guidelines address internal controls and information systems; internal audit
system; credit underwriting; loan documentation; interest rate risk exposure;
asset growth; asset quality; earnings; and compensation, fees and benefits. If
the appropriate federal banking agency determines that an institution fails to
meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final regulations establish
deadlines for the submission and review of such safety and soundness compliance
plans.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Prompt
Corrective Regulatory Action." The OTS has proposed to amend its capital
regulation so that the leverage requirement is identical to the above prompt
corrective standard to avoid "undercapitalized" status.
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%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage 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, within specified
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limits, the allowance for loan and lease losses. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-weighting
for certain mortgage derivative securities. Under the rule, savings
associations with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk is measured by
the decline in the net portfolio value of its assets (i.e., the difference
between incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts) that would result from a hypothetical 200-basis
point increase or decrease in market interest rates divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. A savings association whose measured interest
rate risk exposure exceeds 2% must deduct an interest rate component in
calculating its total capital under the risk-based capital rule. The interest
rate risk component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted from
an association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two quarter lag between the
reporting date of an institution's financial data and the effective date for the
new capital requirement based on that data. A savings association with assets
of less than $300 million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. The rule also provides that the Director of the OTS may waive or
defer an association's interest rate risk component on a case-by-case basis.
The OTS has postponed indefinitely the date that the component will first be
deducted from an institution's total capital.
At March 31, 1998, the Bank met each of its capital requirements, in each case
on a fully phased-in basis. See "Regulatory Capital Compliance" for a table
which sets forth in terms of dollars and percentages the OTS tangible, leverage
and risk-based capital requirements, the Bank's historical amounts and
percentages at March 31, 1998, and pro forma amounts and percentages based upon
the issuance of the shares within the Offering Range and assuming that a portion
of the net proceeds are retained by the Holding Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8% or a leverage ratio or a Tier 1 capital ratio that is less than 4% is
considered to be undercapitalized. A savings institution that has a total risk-
based capital less than 6%, a Tier 1 risk-based capital ratio of less than 3% or
a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and the
BIF are statutorily required to be recapitalized to a 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and BIF were
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paying average deposit insurance premiums of between 24 and 25 basis points. The
BIF met the required reserve in 1995, whereas the SAIF was not expected to meet
or exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted a
new assessment rate schedule of from 0 to 27 basis points under which 92% of BIF
members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it could have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and is generally tax deductible. The SAIF Special Assessment
recorded by the Bank amounted to $1.1 million on a pre-tax basis and $703,000 on
an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
were assessed for FICO payment at a rate of 1.3 basis points, while SAIF
deposits paid 6.48 basis points. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF
will be merged on January 1, 1999, provided no savings associations remain as of
that time.
As a result of the Funds Act, the FDIC voted to lower SAIF assessments to 0 to
27 basis points as of January 1, 1997, a range comparable to that of BIF members
and recently voted to maintain the same rate range for the second half of 1998.
However, SAIF members will continue to make the FICO payments described above.
Management cannot predict the level of FDIC insurance assessments on an on-going
basis, whether the savings association charter will be eliminated or whether the
BIF and SAIF will eventually be merged.
The Bank's assessment of assessable deposits rate for the years ended December
31, 1997, 1996 and 1995 was 0.06%, 0.19% and 0.23%, respectively, and the
premium paid for these periods was $115,000, $380,000 and $381,000 (including
the SAIF Special Assessment), respectively. The FDIC has authority to have
assessment rates under certain circumstances and a material increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged 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 the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
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Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act, as amended ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The FIRREA amended the CRA to require the OTS to provide a
written evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system, which replaced the five-tiered numerical rating
system. The Bank's latest CRA rating received from the OTS was "Satisfactory."
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional FHLBs.
The FHLB provides a central credit facility primarily for member institutions.
The Bank, as a member of the FHLB of New York, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at March 31, 1998 of $2.3 million.
FHLB borrowings must be secured by specified types of collateral and all long-
term borrowings may only be obtained for the purpose of providing funds for
residential housing finance. At March 31, 1998, the Bank had $42.3 million in
FHLB borrowings.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1997, 1996 and
1995, dividends from the FHLB to the Bank amounted to approximately $126,000,
$107,000 and $113,000, respectively. If dividends were reduced, the Bank's net
interest income would likely also be reduced. Further, there can be no
assurance that the impact of recent or future legislation on the FHLBs will not
also cause a decrease in the value of FHLB stock held by the Bank, if any.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts. The Federal
Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $47.8
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $47.8 million, the reserve
requirement is $1.4 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $47.8 million. The first $4.7 million of otherwise
reservable balances (subject to adjustment by the Federal Reserve Board) are
exempted from the reserve requirements. The Bank is in compliance with the
foregoing requirements. Because required reserves must be maintained in the
form of either vault cash, a non-interest-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. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
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HOLDING COMPANY REGULATION
GENERAL. Upon completion of the Reorganization, Bancorp will become a federal
savings and loan holding company within the meaning of the HOLA. As such,
Bancorp will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over Bancorp and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to Bancorp.
RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. Pursuant to Section
10(o) of the HOLA and the Regulations, a mutual holding company, such as the
Mutual Company, may engage in the following activities: (i) investing in the
stock of a savings association; (ii) acquiring a mutual association through the
merger of such association into a savings association subsidiary of such holding
company or an interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act (the "BHC Act"),
unless the Director, by regulation, prohibits or limits any such activity for
savings and loan holding companies; or (B) in which multiple savings and loan
holding companies were authorized (by regulation) to directly engage on March 5,
1987; and (x) purchasing, holding, or disposing of stock acquired in connection
with a qualified stock issuance if the purchase of such stock by such savings
and loan holding company is approved by the Director. See "Risk Factors --
Considerations Resulting from Mutual Holding Company Structure."
If a mutual holding company acquires or merges with another holding company,
the holding company acquired or the holding company resulting from such merger
or acquisition may only invest in assets and engage in activities listed in (i)
through (x) above, and it has a period of two years to cease any non-conforming
activities and divest of any nonconforming investments.
The HOLA prohibits a savings and loan holding company, including a federal
mutual holding company, directly or indirectly, or through one or more
subsidiaries, from acquiring more than 5% of the voting stock of another savings
institution, or holding company thereof, without prior written approval of the
OTS; from acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary holding company or savings association. The HOLA also prohibits
a savings and loan holding company from acquiring more than 5% of a company
engaged in activities other than those authorized for savings and loan holding
companies by the HOLA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
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If the savings institution subsidiary of a savings and loan holding company
fails to meet the QTL test set forth in Section 10(m) of the HOLA and the
regulations of the OTS, the holding company must register with the Federal
Reserve Board as a Bank Holding Company within one year of the savings
institution's failure to so qualify. See " -- Federal Savings Institution
Regulation -- QTL Test."
For a description of certain restrictions on transactions between the Bank and
its affiliates, including, without limitation, Bancorp and the Mutual Company,
see " -- Federal Savings Institution Regulation -- Transactions with Related
Parties."
STOCK HOLDING COMPANY SUBSIDIARY REGULATION. The OTS recently adopted new
regulations governing the two-tier mutual holding company form of organization
and mid-tier stock holding companies that are controlled by mutual holding
companies. Under these new rules, the stock holding company subsidiary will
hold all the shares of the mutual holding company's savings association
subsidiary and will issue the majority of its own shares to the mutual holding
company parent. In addition, the stock holding company subsidiary is permitted
to engage in activities that are permitted for its mutual holding company parent
and to have the same indemnification and employment contract restrictions
imposed that are on the mutual holding company parent. See "--Restrictions
Applicable to Mutual Holding Companies." Finally, OTS regulations maintain that
the stock holding company subsidiary must be federally chartered for supervisory
controls.
THRIFT RECHARTERING
The Funds Act provides that the BIF and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in the current Congress that would eliminate the federal
thrift charter and the OTS. A bill originally reported by the House Banking
Committee would have regained federal thrifts to become national banks or state
banks within two years of enactment or they would have become national banks by
operation of law. OTS would have been abolished and its functions transferred
to the bank regulatory agencies. The bill as passed by the House of
Representatives, however, did not provide for the elimination of the federal
thrift charter or OTS, but did provide that unitary stock savings and loan
holding companies existing or applied for after March 31, 1998 would not have
the ability to engage in unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. Unitary stock holding companies existing or applied for before 1998
would be grandfathered and could continue to engage in unlimited activities and
could transfer the grandfather rights to acquirors of the holding company. The
Bank is unable to predict whether the legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect its business. The Bank is also unable to predict whether the SAIF and
BIF will eventually be merged or the federal thrift charter eliminated, and what
effect, if any, such legislation would have on the Bank
Certain of the regulatory requirements applicable to the Bank, Bancorp and to
the Mutual Company are referred to below or elsewhere herein. The description
of statutory provisions and regulations applicable to savings associations set
forth in this Offering Circular do not purport to be complete descriptions of
such statutes and regulations and their effects on the Bank, Bancorp and the
Mutual Company and is qualified in its entirety by reference to such statutes
and regulations.
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MANAGEMENT OF BANCORP
The Board of Directors of Bancorp will consist of six members each of whom is
also a director of the Bank. The Board of Directors is divided into three
classes, each of which contains one-third of the Board. The directors shall be
elected by the stockholders of Bancorp for staggered three year terms, or until
their successors are elected and qualified. One class of directors, consisting
of Messrs. Brandley and Leonard, has a term of office expiring at the first
annual meeting of stockholders, a second class, consisting of Messrs. Foody and
Montanaro, has a term of office expiring at the second annual meeting of
stockholders, and a third class, consisting of Messrs. Vreeland and Burke, has a
term of office expiring at the third annual meeting of stockholders. Their
names and biographical information are set forth under "Management of the Bank -
- - Directors."
The following individuals are the executive officers of Bancorp and hold the
offices set forth below opposite their names:
<TABLE>
<CAPTION>
Executive Position(s) Held with Bancorp
- ---------------------------------- ----------------------------------------------------------
<S> <C>
Leopold W. Montanaro.............. President and Chief Executive Officer
Dennis A. Petrello................ Executive Vice President and Chief Financial Officer
Charles E. Filippo................ Executive Vice President
Craig L. Montanaro................ Senior Vice President, Corporate Secretary and Treasurer
</TABLE>
The executive officers of Bancorp are elected annually and hold office until
their respective successors have been elected or qualified or until death,
resignation or removal at the discretion of the Board of Directors.
None of the executive officers, directors or other personnel has received
remuneration from Bancorp. Information concerning the principal occupations,
employment and other information concerning the directors and officers of
Bancorp during the past five years is set forth under "Management of the Bank --
Biographical Information."
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<PAGE>
MANAGEMENT OF THE BANK
The following tables set forth information with respect to the directors and
executive officers of the Bank, all of whom will continue to serve as directors
and/or executive officers of the Bank after the Reorganization.
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- --------------------------- ------- -------------------------------------------- -------- -------
<S> <C> <C> <C> <C>
William J. Foody 70 Chairman of the Board 1983 1999
Leopold W. Montanaro 58 Director, President and Chief Executive 1972 1999
Officer
David F. Brandley 71 Director 1959 1998
Everett N. Leonard 84 Director 1969 1998
James P. Vreeland 86 Director 1977 2000
John J. Burke 51 Director 1992 2000
</TABLE>
- ---------------
(1) As of March 31, 1998.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK
- -------------------------- ------ -----------------------------------------------------
<S> <C> <C>
Dennis A. Petrello 47 Executive Vice President and Chief Financial Officer
Charles E. Filippo 57 Executive Vice President and Chief Lending Officer
Craig L. Montanaro 31 Senior Vice President, Secretary and Treasurer
</TABLE>
- ---------------
(1) As of March 31, 1998.
Each of the executive officers of the Bank will retain his office in the
reorganized Bank until their re-election at the annual meeting of the Board of
Directors of the Bank, and until their successors are elected and qualified or
until they are removed or replaced. Officers are subject to re-election by the
Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
William J. Foody has served as Chairman of the Board of the Bank since 1993
and has been a director since 1983. He has over 42 years of experience as a
real estate developer and broker. Currently, he is the managing partner in the
real estate firm of Crow Family Holdings, New Jersey.
105
<PAGE>
Leopold W. Montanaro has served as President, Chief Executive Officer and
Director of West Essex Bank since 1972. He has over 38 years experience in the
banking field with various institutions. He is a former member of the Board of
Directors of the Federal Home Loan Bank of New York and is a former chairman of
the New Jersey Savings & Community Bankers. Mr. Montanaro is an active member
of the American Community Bankers, serving on the Mutual Institutions Committee,
the Community Bank Committee, and the State Regulations & Legislative Committee.
Leopold W. Montanaro is the father of Craig L. Montanaro.
David F. Brandley is a partner in the law firm of Brandley & Kleppe and
specializes in banking and real estate law, among other areas. Mr. Brandley was
elected to the Board of Directors in 1959.
Everett N. Leonard was elected to the Board of Directors in 1969 and serves
as Vice Chairman of the Board. He is a former manager of Beckers Dairy in
Roseland and is a retired Borough Administrator of Roseland and Verona, New
Jersey.
James P. Vreeland is a retired New Jersey State Senator. Mr. Vreeland spent
30 years in politics serving as committeeman in the Township of Montville,
Morris Co., serving on the Board of Freeholders and serving for one year in the
New Jersey State Assembly before being elected State Senator. Mr. Vreeland was
elected to the Board of Directors in 1977.
John J. Burke is the President of J.J. Burke & Associates, Inc., a financial
services, insurance consulting firm and has served in that capacity since 1981.
Mr. Burke was elected to the Board of Directors in 1992.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Dennis A. Petrello has served as Executive Vice President and Chief Financial
Officer of the Bank since 1984 and has been employed by the Bank since 1978,
serving in various capacities from Controller to Operations Officer. He is an
active member of the Financial Manager Society, New York - New Jersey Chapter
and the West Essex Chamber of Commerce.
Charles E. Filippo has served as Executive Vice President and Chief Lending
Officer since 1994 and has been employed by the Bank since 1985. Prior to
joining the Bank, Mr. Filippo was President of Central Corporation, a service
corporation for financial institutions, for 17 years. Mr. Filippo serves on the
Residential Lending-Affordable Housing Committee of the New Jersey League and on
the Affordable Housing Committee of the Mortgage Bankers Association of New
Jersey.
Craig L. Montanaro has served as Senior Vice President and Corporate
Secretary since April 1997 and has been employed by the Bank since 1988. He is
a graduate of Syracuse University with a B.S. in Finance and Marketing and holds
a graduate degree from the National School of Banking at Fairfield University.
Mr. Montanaro is a member of the Financial Manager Society, New York - New
Jersey Chapter and serves on various committees on the New Jersey Savings and
Community Bankers. Craig L. Montanaro is the son of Leopold W. Montanaro.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK
The Bank's Board of Directors meets on a monthly basis and may have
additional special meetings called in the manner specified in the Bylaws.
During 1997, no current Director attended less than 75% of the aggregate of the
total number of Board meetings which were held. The Board of Directors has
established a number of committees. The Salary and Pension Committee consists
of Messrs. Foody, Montanaro, Brandley, Leonard, Vreeland and Burke. This
committee meets on an as needed basis. The Audit Committee consists of Messrs.
Foody, Brandley Vreeland and Burke. This committee generally meets on a
quarterly basis. The Strategic Planning Committee meets as needed and consists
of Messrs. Foody, Montanaro and Burke. The Nominating Committee meets at least
once
106
<PAGE>
a year and consists of Messrs. Foody, Montanaro and Burke. The Interest Rate
Risk and Investment Committee meets as needed and consists of Messrs. Foody,
Montanaro and Burke.
BOARD OF DIRECTORS AND COMMITTEES OF BANCORP AFTER THE REORGANIZATION
Following the Reorganization, the Board of Directors of Bancorp is expected
to meet quarterly, or more often as may be necessary. The Board of Directors
initially is expected to have a standing Executive Committee, Audit Committee
and Compensation Committee. The Board, by resolution, may designate one or more
additional committees.
The Executive Committee initially will consist of the following directors:
Messrs. Foody, Montanaro and Burke. The Executive Committee is expected to meet
when necessary when the Board is not in session to exercise general control and
supervision in all matters pertaining to the interests of Bancorp.
The Audit Committee initially will consist of the following directors:
Messrs. Foody, Brandley, Leonard, Vreeland and Burke. The Audit Committee is
expected to meet at least quarterly to examine and approve the audit report
prepared by the independent auditors of the Bank, to review and recommend the
internal auditors to be engaged by Bancorp, to review the internal audit
function and internal accounting policies of Bancorp and review and approve such
policies.
The Compensation Committee initially will consist of the following directors:
Messrs. Foody, Montanaro, Brandley, Leonard, Vreeland and Burke. The
Compensation Committee is expected to meet on an as needed basis to evaluate the
compensation and benefits of the directors, officers and employees, recovered
charges and monitor and evaluate employee performances.
DIRECTOR COMPENSATION
Non-employee directors of the Bank, other than the Chairman of the Board,
currently receive a quarterly retainer fee of $3,500, paid at the first regular
board meeting of each quarter, and $500 for each remaining regular board meeting
in each quarter. The Chairman receives a quarterly retainer fee of $4,375, paid
at the first regular board meeting of each quarter, and $625 for each remaining
regular board meeting in each quarter. Directors do not receive any fees for
special board meetings or committee meetings. In addition, all directors,
including retired directors, receive medical and dental benefits. At this time,
only one retired director is receiving such benefits in addition to the active
directors. Directors of Bancorp will not receive compensation for service as
directors of Bancorp.
107
<PAGE>
EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth the cash compensation paid
by the Bank for services rendered in all capacities during the year ended
December 31, 1997, to the chief executive officer and to executive officers of
the Bank who received cash compensation in excess of $100,000 ("Named Executive
Officers").
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
-------------------------------------- -------------------------- ---------
Other Securities
Annual Restricted Underlying LTIP All Other
Name and Principal Fiscal Compensation Stock Awards Options/SARs Payouts Compensation
Positions Year Salary($) Bonus($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leopold W. Montanaro.......... 1997 $275,000 $75,000 -- -- -- -- $68,993
President and Chief
Executive Officer
Dennis A. Petrello............ 1997 140,000 35,000 -- -- -- -- --
Executive Vice President
and Chief Financial
Officer
Charles E. Filippo............ 1997 140,000 35,000 -- -- -- -- 25,697
Executive Vice President
and Chief Lending Officer
</TABLE>
- --------------------------
(1) Under Annual Compensation, the column titled "Salary" includes base
salary and amounts deferred by the Named Executive Officer under the
Bank's 401(k) plan. See "401(k) Plan."
(2) For 1997, there were no: (a) perquisites over the lesser of $50,000
or 10% of the individual's total salary and bonus for the year; (b)
payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock.
(3) Does not include restricted stock awards pursuant to a stock-based
incentive plan, which may be granted in conjunction with a meeting of
stockholders of the Bank, subject to OTS and stockholder approval, as
such awards were not earned, vested or granted in 1997. For a
discussion of the terms of the Stock-Based Incentive Plan, see "--
Benefits-- Stock-Based Incentive Plans." For 1997, the Bank had no
restricted stock plans in existence.
(4) Does not include options, which may be granted in conjunction with a
meeting of stockholders of the Bank, subject to OTS and stockholder
approval. For a discussion of stock options, see "-- Benefits--
Stock-Based Incentive Plans." For 1997, the Bank had no stock option
plans in existence.
(5) For 1997 there were no payouts or awards under any long-term incentive
plan.
(6) Includes employer contributions pursuant to the Bank's supplemental
income agreements. These payments are made to pay premiums on split-
dollar life insurance policies the Bank has purchased on the lives of
Messrs. Montanaro and Filippo in connection with the supplemental
income agreements. Upon the death of Messrs. Montanaro and Filippo,
the Bank expects to retain proceeds from the insurance policies
sufficient to cover all prior contributions made to the supplemental
income agreements. See "-- Benefits-- Supplemental Income
Agreements."
108
<PAGE>
EMPLOYMENT AGREEMENTS
The Bank currently has an employment agreement (the "Employment
Agreement")with Mr. Montanaro. The Employment Agreement provides for a three-
year term. The Employment Agreement also provides that, commencing on the first
anniversary date and continuing each anniversary date thereafter, the Board of
Directors may extend the Employment Agreement for an additional year so that the
remaining term shall be three years, unless written notice of non-renewal is
given by the Board of Directors after conducting a performance evaluation of the
Executive. In addition to the base salary, the Employment Agreement provides
for, among other things, participation in benefit plans and other fringe
benefits applicable to similarly situated executive personnel, including any
such arrangement made available to senior executive officers in the future. The
Employment Agreement provides for termination by the Bank for "cause," as
described in the Employment Agreement, at any time. In the event the Bank
chooses to terminate the Executive's employment for reasons other than for
cause, or in the event of the Executive's resignation from the Bank upon: (i)
failure to re-elect or appoint the Executive to his current offices including
his board seat; (ii) a material change in the Executive's functions, duties or
responsibilities that would make them of lesser responsibility, importance or
scope (unless consented to by the Executive); (iii) a relocation of the
Executive's principal place of employment by more than 50 miles (unless
consented to by the Executive); (iv) material reduction in benefits or
perquisites (unless consented to by the Executive); (v) liquidation or
dissolution of the Bank; or (vi) a breach of the Employment Agreement by the
Bank, the Executive or, in the event of his death, the Executive's beneficiary
would be entitled to receive an amount equal to the remaining base salary
payments due to the Executive and the contributions that would have been made on
the Executive's behalf to any employee benefit plans of the Bank during the
remaining term of the employment agreement, the average of the amount of any
bonus and other compensation paid to the Executive during the term of the
Employment Agreement times the remaining number of years of the unexpired term
of the Employment Agreement, and an amount equal to the average of the annual
contributions that were made on Executive's behalf to any employee benefit plans
during the term of the agreement times the remaining term of the agreement. The
Bank would also continue and pay for the Executive's life, health and disability
coverage for the remaining term of the Employment Agreement. Upon any
termination of the Executive, the Executive is subject to a covenant not to
compete with the Bank for one year.
Under the Employment Agreement, if the Executive's voluntary or involuntary
termination follows a change in control of the Bank, the Executive or, in the
event of his death, the Executive's beneficiary would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining term of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank would also continue the
Executive's life, health, and disability coverage for thirty-six months.
All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreement shall be paid by the Bank if the Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement. The Employment
Agreement also provides that the Bank shall indemnify the Executive to the
fullest extent allowable under federal law. In the event the Bank terminates
Mr. Montanaro, the total payments due under the Employment Agreement based on
three times 1997 annual salary and bonus paid to Mr. Montanaro as set forth in
the Cash Compensation Table included herein, and excluding any other amounts
that would be included in "annual compensation" as defined in the Employment
Agreement, would be approximately $1.0 million, in addition to other cash and
noncash compensation.
109
<PAGE>
Upon consummation of the Reorganization, Bancorp and the Bank intend to enter
into employment agreements (collectively, the "Employment Agreements") with
Messrs. _______________________, (individually, the "Executive"). The
Employment Agreements are subject to the review and approval of the OTS and may
be amended as a result of such OTS review. The Employment Agreements are
intended to ensure that Bancorp and the Bank will be able to maintain a stable
and competent management base after the Reorganization. The continued success
of Bancorp and the Bank depends to a significant degree on the skills and
competence of Messrs. _______________________. Upon execution of the new
Employment Agreements between Mr. Montanaro and each of Bancorp and the Bank,
the current agreement between the Bank and Mr. Montanaro will be null and void.
The Employment Agreements will provide for a three-year term for each of
Messrs. _____________. The Employment Agreements also provide that, commencing
on the first anniversary date and continuing each anniversary date thereafter,
the Board of Directors may extend the Employment Agreements for an additional
year so that the remaining term shall be three years, unless written notice of
non-renewal is given by the Board of Directors after conducting a performance
evaluation of the Executive. In addition to the base salary, the Employment
Agreements will provide for, among other things, participation in stock benefit
plans and other fringe benefits applicable to similarly situated executive
personnel. The Employment Agreements will provide for termination by the Bank
for "cause," as described in the Employment Agreements, at any time. In the
event Bancorp or the Bank chooses to terminate the Executive's employment for
reasons other than for cause, or in the event of the Executive's resignation
from Bancorp or the Bank upon: (i) failure to re-elect or appoint the Executive
to his current offices; (ii) a material change in the Executive's functions,
duties or responsibilities; (iii) a relocation of the Executive's principal
place of employment by more than 50 miles; (iv) liquidation or dissolution of
the Bank; or (v) a breach of the Employment Agreements by Bancorp or the Bank,
the Executive or, in the event of his death, the Executive's beneficiary would
be entitled to receive an amount equal to the remaining base salary payments due
to the Executive and the contributions that would have been made on the
Executive's behalf to any employee benefit plans of the Bank during the
remaining term of the Employment Agreements. The Bank would also continue and
pay for the Executive's life, health and disability coverage for the remaining
term of the Employment Agreements. Upon any termination of the Executive, the
Executive is subject to a covenant not to compete with the Bank for one year.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank, the Executive or, in the event of his death, the
Executive's beneficiary would be entitled to a severance payment equal to the
greater of: (i) the payments due for the remaining term of the agreement; or
(ii) three times the average of the five preceding taxable years' "annual
compensation" (as defined in the agreements). The Bank would also continue the
Executive's life, health, and disability coverage for thirty-six months.
All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Agreements
shall be paid by Bancorp or the Bank if the Executive is successful on the
merits pursuant to a legal judgment, arbitration or settlement. The Employment
Agreements also provide that the Bancorp or Bank shall indemnify the Executive
to the fullest extent allowable under federal law. In the event of a change in
control of Bancorp or the Bank, the total amount of payments due under the
Employment Agreements, based solely on the 1997 annual salary and bonus paid to
Messrs. _______________________ as set forth in the Cash Compensation Table
included herein, and excluding any other amounts that would be included in
"annual compensation" as defined in the agreements, would be approximately
$_______, in addition to other cash and non-cash compensation.
110
<PAGE>
CHANGE IN CONTROL AGREEMENTS
Upon Reorganization, the Bank intends to enter into _______-year Change in
Control Agreements (the "CIC Agreements") with ____________________________.
Commencing on the first anniversary date of a CIC Agreement and continuing on
each anniversary thereafter, the Board of Directors may renew the agreement for
an additional year. Each CIC Agreement will provide that in the event voluntary
or involuntary termination follows a change in control of the Bank or Bancorp,
as the case may be, the officer covered by the agreement would receive a
severance payment equal to _____ times the officer's compensation for the twelve
months preceding his termination. The Bank would also continue and pay for the
officer's life, health and disability coverage for ____ months following
termination. In the event of a change in control of the Bank or Bancorp the
Bank estimates the total payments due under the CIC Agreements, based solely on
the 1997 annual salary and bonus paid to Messrs. ________________ as set forth
in the Cash Compensation Table included herein, and excluding the amount of
benefits under any other amounts that would be included in "compensation" as
defined in the Agreement, would equal approximately $_______, in addition to
other cash and non-cash compensation.
EMPLOYEE SEVERANCE COMPENSATION PLAN
In connection with the Reorganization, the Bank intends to establish a
severance compensation plan (the "Severance Plan") which will provide eligible
employees with severance benefits in the event of a change in control of the
Bank or Bancorp. Management personnel with Employment Agreements or CIC
Agreements are not eligible to participate in the Severance Plan. Generally,
employees are eligible to participate in the Severance Plan if they have
completed at least one year of service with the Bank. Under the Severance Plan,
in the event of a change in control of the Bank or Bancorp, eligible employees
who are terminated from or terminate their employment with the Bank (for reasons
specified under the Severance Plan) within one year of the change in control,
will be entitled to receive a severance payment. Upon such an event, the
participant will be entitled to a cash severance payment equal to one-twelfth of
his or her annual compensation for each year of service up to a maximum of 199%
of such annual compensation. Such payments may tend to discourage takeover
attempts by increasing costs to be incurred by the Bank in the event of a
takeover. In the event the provisions of the Severance Plan are triggered, the
total amount of payments that would be due thereunder, based solely upon current
salary levels, would be approximately $635,000. However, it is management's
belief that substantially all of the Bank's employees may be retained in their
current position in the event of a change in control, and that any amount
payable under the Severance Plan would be considerably less than the total
amount that could possibly be paid under the Severance Plan.
INSURANCE PLANS
All full-time employees of the Bank are covered as a group for life,
comprehensive hospitalization, including major medical, long-term disability and
dental insurance.
BENEFITS
401(K) PLAN. The Bank maintains the West Essex Bank, F.S.B. 401(k) Savings
Plan in RSI Retirement Trust (the "401(k) Plan"), a tax-qualified profit
sharing plan with a qualified cash or deferred arrangement under Section 401(k)
of the Code. The 401(k) Plan provides participants with savings and retirement
benefits based on employee elective, pre-tax deferrals of compensation.
Although the plan also provides for discretionary contributions by the Bank, the
Bank has never made such contributions and, currently, has no expectations of
making such contributions to the plan in the future. Eligible employees
111
<PAGE>
(generally, those other than employees compensated solely on a daily, fee or
retainer basis) may begin participating in the 401(k) Plan upon the completion
of a "Period of Service" (as defined in the 401(k) Plan) of 182 days and
attainment of age 21. Participants may make salary reduction contributions to
the 401(k) Plan up to the lesser of 15% of their compensation or the legally
permissible limit ($10,000 for 1998). A participant is always 100% vested in
his or her salary reduction contributions to the 401(k) Plan.
Currently, participants may invest their accounts under the 401(k) Plan in
and among seven funds. In connection with the Reorganization, the Bank intends
to amend the 401(k) Plan to add an "Employer Stock Fund," in which participants
may invest all or a portion of their accounts in Common Stock. The Bank may add
or eliminate investment options available under the 401(k) Plan in the future.
Generally, distributions from the 401(k) Plan may commence upon a
participant's separation from service, death, or disability. However,
participants may request hardship withdrawals and loans from the 401(k) Plan
under certain circumstances. Withdrawals and distributions from the 401(k) Plan
are generally subject to federal and state income taxes and distributions made
prior to a participant attaining age 59 1/2 are also generally subject to a
federal excise tax
PENSION PLAN. The Bank also maintains a tax-qualified defined benefit
pension plan for its employees (the "Pension Plan"). Eligible employees begin
participating in the Pension Plan following the completion of a six month
"Period of Service" (as defined in the Pension Plan) and attainment of the age
21. A participant in the Pension Plan generally becomes vested in his accrued
benefit under the plan upon completing five years of "Credited Service" (as
defined in the Pension Plan). The Pension Plan is funded solely through
contributions made by the Bank.
The table below reflects the annual pension benefit payable to a participant
in the Pension Plan, assuming various levels of "Average Annual Earnings" (as
defined in the Pension Plan) and years of Credited Service. As of January 1,
1998, Messrs. Montanaro, Petrello and Filippo had 25, 24 and 12 years,
respectively, of Credited Service.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
---------------------------------------------------------------------------------------------------
AVERAGE
ANNUAL
EARNINGS(1) 15 20 25 30 35 40
- -------------- --------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $11,250 $15,000 $18,750 $22,500 $ 26,250 $ 31,250
75,000 18,750 25,000 31,250 37,500 43,750 51,250
100,000 26,250 35,000 43,750 52,500 61,250 71,250
125,000 33,750 45,000 56,250 67,500 78,750 91,250
160,000 44,250 59,000 73,750 88,500 103,250 119,250
</TABLE>
_________________________
(1) Code Section 401(a)(17) limits the amount of compensation the Bank
may consider in computing benefits under the Pension Plan to
$150,000, effective with respect to the Pension Plan for plan years
beginning on or after May 23, 1994, as periodically adjusted by
statute ($160,000 for 1998).
EMPLOYEE STOCK OWNERSHIP PLAN. The Bank intends to establish a tax-
qualified employee stock ownership plan (the "ESOP") in connection with the
Reorganization. Eligible employees (generally, those
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<PAGE>
other than employees compensated solely on a daily, fee, or retainer basis),
will become participants in the ESOP upon the attainment of age 21 and the
completion of a "Period of Service" (as defined in the plan document) of 182
days (with credit for prior service). Participants will begin to vest in their
benefits under the ESOP upon the completion of two Periods of Service and will
become fully vested after completing six Periods of Service (with credit for
prior service). Participants will also become 100% vested in their benefits upon
the attainment of normal retirement age (age 65), death, disability, or upon a
change in control of the Bank or Bancorp. Benefits generally become
distributable under the ESOP upon death, retirement, disability or other
separation from service.
The Bank expects the ESOP to purchase 8% of the Common Stock issued in the
Offering, including shares issued to the Foundation. As part of the
Reorganization and in order to fund the ESOP's purchase of the Common Stock
issued in the Offering, the ESOP will borrow 100% of the aggregate purchase
price of the Common Stock from either Bancorp or a third-party lender. The
trustee of the ESOP will repay the loan principally from the Bank's
contributions to the ESOP over an expected period of 10 years. Subject to
receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since participants are
employees of the Bank or the Bank may reimburse Bancorp for contributions made
by Bancorp with respect to Bank employees. The Bank expects the initial interest
rate (which may be fixed or variable) for the loan to be at or near the prime
rate on or about the date of Reorganization.
The trustee will pledge shares of Common Stock purchased by the ESOP as
collateral for the loan and will hold the shares in a suspense account until
they are released for allocation among participants as the trustee repays the
loan. The trustee will release the pledged shares annually from the suspense
account in an amount proportional to the repayment of the ESOP loan. The trustee
will then allocate the released shares (as well as any other non-matching
contributions to the ESOP) among the accounts of eligible participants on the
basis of each participant's compensation for the year of allocation relative to
all participants' compensation for the year of allocation.
The Bank expects a committee of the Board of Directors to administer the
ESOP (the "ESOP Committee"). The Committee will appoint an unrelated corporate
trustee for the ESOP prior to the Reorganization. The ESOP Committee may
instruct the trustee regarding investment of funds contributed to the ESOP. The
ESOP trustee will vote all allocated shares held in the ESOP in accordance with
the instructions of the plan participants. The ESOP trustee, subject to its
fiduciary duties under ERISA, will vote the unallocated shares (i.e., those held
in the suspense account) and allocated shares for which it receives no proper
voting instructions in a manner calculated to most accurately reflect the
instructions it receives from participants regarding the allocated stock. In the
event no shares have been allocated under the ESOP at the time such shares are
to be voted, each participant shall be deemed to have one share allocated to his
account for voting purposes.
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In connection with the
Reorganization and implementation of the ESOP, the Bank intends to implement a
non-qualified deferred compensation arrangement known as a "Management
Supplemental Executive Retirement Plan" (the "MSERP"). The Bank intends the
MSERP to make up lost ESOP benefits to designated participants who retire or
terminate employment in connection with a change in control prior to the
complete repayment of the ESOP loan. Generally, upon the retirement of an
eligible individual (designated by the Board of Directors of the Bank or Bancorp
or upon a change in control of the Bank or Bancorp prior to complete repayment
of the ESOP Loan), the MSERP will provide the individual with a benefit
determined by first (i) projecting the number of shares that would have been
allocated to the individual under the ESOP if the individual had remained
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employed throughout the term of the ESOP loan (measured from the individual's
first date of ESOP participation) and (ii) reducing that number by the number of
shares actually allocated to the individual's account under the ESOP; and
second, by multiplying the number of shares that represent the difference
between such figures by the average fair market value of the Common Stock over
the preceding five years. The individual's benefits become payable upon the
participant's retirement or upon the change in control of the Bank or Bancorp.
The Bank may establish a grantor trust in connection with the MSERP to satisfy
the obligations of the Bank with respect to the MSERP. The assets of the grantor
trust would remain subject to the claims of the Bank's general creditors in the
event of the Bank's insolvency until paid to the individual pursuant to the
terms of the MSERP.
SUPPLEMENTAL INCOME AGREEMENTS. The Bank currently sponsors a non-
qualified supplemental executive retirement plans for Messrs. Montanaro and
Filippo. The plans generally provides benefits to the two executives otherwise
lost under the Pension Plan as a result of limitations imposed by the Code on
the amount of compensation the Bank can consider under the Pension Plan in
determining benefits. The non-qualified arrangements for Messrs. Montanaro and
Filippo are "funded" through the use of secular trusts and life insurance
policies, under which the Bank will recover the entire cost of its contribution
to the plans upon the deaths of Messrs. Montanaro and Filippo.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Bank may consider in providing benefits under its tax-qualified
retirement plans, such as the 401(k) Plan, the Pension Plan and the ESOP. The
Code further limits the amount of contributions on benefit accruals under such
plans on behalf of any employee in any year. To provide benefits to make up for
the reduction in benefits flowing from these limits in connection with the ESOP,
the Bank intends to implement a non-qualified deferred compensation arrangement
known as a "Supplemental Executive Retirement Plan" ("SERP"). The SERP will
generally provide benefits to eligible individuals (designated by the Board of
Directors of the Bank or Bancorp) that cannot be provided under the ESOP as a
result of the limitations imposed by the Code, but that would have been provided
under the ESOP but for such limitations. The Bank may establish a grantor trust
in connection with the SERP to satisfy the obligations of the Bank with respect
to the SERP. The assets of the grantor trust would remain subject to the claims
of the Bank's general creditors in the event of the Bank's insolvency until paid
to the individual pursuant to the terms of the SERP.
STOCK-BASED INCENTIVE PLAN. Following the Reorganization and Offering, the
Board of Directors of Bancorp intends to adopt the Stock-Based Incentive Plan
which will provide for the granting of options to purchase Common Stock ("Stock
Options"), Common Stock ("Stock Awards"), Limited Option Rights and Limited
Stock Rights to eligible officers, employees, and directors of Bancorp and the
Bank (see descriptions of the awards below). Bancorp may provide such stock
based benefits under the Stock-Based Incentive Plan or may establish one or more
separate plans which would provide for the benefits described herein.
In the event the Stock-Based Incentive Plan (or any separate plan(s)) is
adopted within one year after the Reorganization and Offering, OTS regulations
require such plan to be approved by a majority of Bancorp's stockholders at a
meeting of stockholders to be held no earlier than six months after the
completion of the Offering. Under the Stock-Based Incentive Plan, Bancorp
intends to grant Stock Options in an amount up to 10% of the shares of Common
Stock issued in the Offering, including shares issued to the Foundation (215,877
shares based upon the maximum of the Offering Range), and intends to grant Stock
Awards in an amount up to 4% of the shares of Common Stock issued in the
Offering, including shares issued to the Foundation (86,351 shares based upon
the maximum of the Offering Range). Any Common Stock awarded under the Stock-
Based Incentive Plan (Stock Awards) will be awarded at no cost to the
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recipients. The plan may be funded through the purchase of Common Stock by a
trust established in connection with the Stock-Based Incentive Plan (or any
separate plan(s)) or from authorized but unissued shares. The Board intends to
appoint an independent fiduciary to serve as trustee of a trust to be
established in connection with the Stock-Based Incentive Plan. In the event
that additional authorized but unissued shares are acquired by the Stock-Based
Incentive Plan after the Reorganization, the interests of existing shareholders
would be diluted. See "Pro Forma Data."
The grants of Stock Options and Stock Awards will be designed to attract
and retain qualified personnel in key positions, provide officers and key
employees with a propriety interest in Bancorp as an incentive to contribute to
the success of Bancorp and reward key employees for outstanding performance.
All employees of Bancorp and its subsidiaries, including the Bank, will be
eligible to participate in the Stock-Based Incentive Plan. It is expected that
the committee administering the plan will determine the terms of awards granted
to officers and employees. The committee will also determine whether Stock
Options will be Incentive or Non-Statutory Stock Options, as defined below, the
number of shares subject to each Stock Option and Stock Award, the exercise
price of each Non-Statutory Stock Option, whether Stock Options may be exercised
by delivering other shares of Common Stock, and when Stock Options become
exercisable or Stock Awards vest. Only employees may receive grants of
Incentive Stock Options. Therefore, under the Stock-Based Incentive Plan,
directors may receive only grants of Non-Statutory Stock Options. If such plan
is adopted within one year after the Reorganization and Offering, OTS
regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the stock options available under the Stock-Based
Incentive Plan (or any separate plan for officers and employees) and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the Stock-Based Incentive Plan
(or any separate plan for directors). OTS regulations also provide that no
individual officer or employee of the Bank may receive more than 25% of the
restricted stock awards available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the restricted
stock awards available under the Stock-Based Incentive Plan (or any separate
plan for directors).
The Stock-Based Incentive Plan will provide for the grant of: (i) Stock
Options intended to qualify as Incentive Stock Options under Section 422 of the
Code ("Incentive Stock Options"); (ii) Stock Options that do not so qualify
("Non-Statutory Stock Options"); and (iii) limited option rights ("Limited
Option Rights"). Limited Option Rights are exercisable only upon a change in
control of the Bank or Bancorp. Subject to OTS regulations, upon exercise of
Limited Option Rights, the recipient will be entitled to receive a lump sum
cash payment equal to the difference between the exercise price of any
unexercised Stock Option, whether exercisable or unexercisable at such time, and
the fair market value of the shares of Common Stock subject to the Stock Option
on the date of exercise of the right in lieu of purchasing the Common Stock
underlying the Stock Option. It is anticipated that all Stock Options granted
contemporaneously with stockholder approval of the Stock-Based Incentive Plan
will qualify as Incentive Stock Options to the extent permitted under Section
422 of the Code. Unless sooner terminated, the Stock-Based Incentive Plan will
be in effect for a period of ten years from the earlier of adoption by the Board
of Directors or approval by Bancorp's Stockholders. Subject to stockholder
approval, Bancorp intends to grant Stock Options with Limited Option Rights
under the plan at an exercise price equal to at least the fair market value of
the underlying Common Stock on the date of grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition").
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No compensation deduction will be available to Bancorp as a result of the grant
or exercise of Incentive Stock Options unless there has been a disqualifying
disposition. In the case of a Non-Statutory Stock Option and in the case of a
disqualifying disposition of an Incentive Stock Option, an individual will
realize ordinary income upon exercise of the stock option (or upon the
disqualifying disposition) in an amount equal to the amount by which the
exercise price exceeds the fair market value of the Common Stock purchased by
exercising the stock option on the date of exercise. The amount of any ordinary
income realized by an optionee upon the exercise of a Non-Statutory Stock Option
or due to a disqualifying disposition of an Incentive Stock Option will be a
deductible expense to Bancorp for tax purposes. In the case of Limited Rights,
the option holder will have to include the amount paid to him or her upon
exercise in his gross income for federal income tax purposes in the year in
which the payment is made and Bancorp will be entitled to a deduction for
federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock
Awards and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of Bancorp or the Bank as described in the
plan. Subject to OTS regulations, upon the exercise of a Limited Stock Right,
the recipient will be entitled to receive a cash payment equal to the fair
market value of all unvested Stock Awards in exchange for any rights to such
unvested Stock Awards. Grants of Stock Awards and Limited Stock Rights to
officers and employees may be made in the form of base grants and/or performance
grants (the vesting of which would be contingent upon performance goals
established by the committee administering the plan). In establishing any
performance goals, the committee may utilize the annual financial results of the
Bank, actual performance of the Bank as compared to targeted goals such as the
ratio of the Bank's net worth to total assets, the Bank's return on average
assets, or such other performance standards as determined by the committee with
the approval of the Board of Directors.
When a participant becomes vested with respect to Stock Awards, the
participant will realize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan will be
determined by the Committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after the Reorganization and Offering, awards would become
vested and exercisable subject to applicable OTS regulations, which such
regulations require that any awards begin vesting no earlier than one year from
the date of shareholder approval of the plan and, thereafter, vest at a rate of
no more than 20% per year and may not be accelerated except in the case of death
or disability. Stock Options could be exercisable for three months following
the date on which the employee or director ceases to perform services for the
Bank or Bancorp, except that in the event of death or disability, options
accelerate and become fully vested and could be exercisable for up to one year
thereafter or such longer period as determined by Bancorp. In the case of death
or disability, Stock Options may be exercised for a period of 12 months.
However, any Incentive Stock Options exercised more than three months following
the date the employee ceases to perform services as an employee would be treated
as a Non-Statutory Stock Option. In the event of retirement, if the optionee
continues to perform services as a director or consultant on behalf
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of the Bank, Bancorp or an affiliate, unvested options would continue to vest in
accordance with their original vesting schedule until the optionee ceases to
serve as a consultant or director. In the event of death, disability or normal
retirement, Bancorp, if requested by the optionee, or the optionee's
beneficiary, could elect, in exchange for vested options, to pay the optionee,
or the optionee's beneficiary in the event of death, the amount by which the
fair market value of the Common Stock exceeds the exercise price of the options
on the date of the employee's termination of employment.
Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in the
event of a change in control of Bancorp or the Bank. A change in control would
generally be considered to occur when a person or group of persons acting in
concert acquires beneficial ownership of 20% or more of any class of equity
security of Bancorp or the Bank or in the event of a tender or exchange offer,
merger or other form of business combination, sale of all or substantially all
of the assets of Bancorp or the Bank or contested election of directors which
resulted in the replacement of a majority of the Board of Directors by persons
not nominated by the directors in office prior to the contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the greater
of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors.
The Bank offers directors, officers and full-time employees of the Bank who
satisfy certain criteria and the general underwriting standards of the Bank,
loans with interest rates which are 2% over the Bank's cost of deposits, as
reported to the Board of Directors from the previous month, rounded either up or
down to the nearest 1/8th percent, the Employee Mortgage Rate ("EMR"). The EMR
is limited to owner-occupied residential mortgage loans, owner-occupied home
improvement loans, owner-occupied home equity loans and owner-occupied
construction loans. Loan application fees, including points, are waived for all
EMR loans. The EMR remains in effect as long as the officer or employee remains
at the Bank. In the event the officer or employee leaves the Bank for any
reason other than a change in control, the interest rate reverts to the contract
rate in effect at the time that the loan was originated. All other terms and
conditions contained in the original mortgage and note continue to remain in
effect. With the exception of EMR loans, the Bank currently makes loans to its
executive officers, directors and employees on the same terms and conditions
offered to the general public. Loans made by the Bank to its directors and
executive officers are made in the ordinary course of business, on substantially
the same terms (except for EMR loans), including collateral, as those prevailing
at the time for comparable transactions with other persons and do not involve
more than the normal risk of collectibility or present other unfavorable
features. As of March 31, 1998, three of the Bank's executive officers or
directors had loans with outstanding balances totalling approximately $982,000
in the aggregate. All such loans were made by the Bank in the ordinary course
of business, with no favorable terms (except for EMR loans) and such loans do
not involve more than the normal risk of collectibility or present unfavorable
features.
Bancorp intends that all transactions in the future between Bancorp and its
executive officers, directors, holders of 10% or more of the shares of any class
of its common stock and affiliates thereof, will contain terms no less favorable
to Bancorp than could have been obtained by it in arm's length negotiations
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with unaffiliated persons and will be approved by a majority of independent
outside directors of Bancorp not having any interest in the transaction.
OTHER TRANSACTIONS WITH AFFILIATES
The Bank utilizes the services of the law firm of Brandley & Kleppe, of
which Mr. Brandley, a director of the Bank, is a member, for a variety of legal
work relating to the ordinary course of the Bank's business. For each of fiscal
years 1996 and 1997, the Bank paid less than $60,000 per year to such law firm.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares of
Common Stock are issued at the minimum and maximum of the Offering Range, and
that sufficient shares will be available to satisfy their subscriptions. The
table also sets forth the total expected beneficial ownership of Common Stock as
to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE OFFERING RANGE(1) OF THE OFFERING RANGE(1)
------------------------------------- --------------------------------
AS A AS A
Percent of Percent of
Number Total Shares Number Total Shares
Name Amount of Shares Issued(2) of Shares Issued(2)
- ------------------------------ ----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
William J. Foody............... $ 700,000 70,000 1.93% 70,000 1.43%
Leopold W. Montanaro........... 700,000 70,000 1.93 70,000 1.43
David F. Brandley.............. 100,000 10,000 .28 10,000 .20
Everett N. Leonard............. 75,000 7,500 .21 7,500 .15
James P. Vreeland.............. 70,000 7,000 .19 7,000 .14
John J. Burke.................. 700,000 70,000 1.93 70,000 1.43
Dennis A. Petrello............. 200,000 20,000 .55 20,000 .41
Charles E. Filippo............. 300,000 30,000 .83 30,000 .61
Craig L. Montanaro............. 35,000 3,500 .10 3,500 .07
All Directors and
Executive Officers as a group
(9 persons).................. $2,880,000 288,000 7.95% 288,000 5.87%
========== ======= ==== ======= ====
</TABLE>
____________________
(1) Includes proposed subscriptions, if any, by associates. Also includes
funds from the Bank's 401(k) Plan which may be used to purchase shares
of Common Stock under such plan's new employer stock fund investment
option. See "--Benefits-- 401(k) Plan." Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Offering.
(2) Includes shares issued to the Mutual Company and shares issued to the
Foundation.
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THE REORGANIZATION AND STOCK OFFERING
THE BOARD OF DIRECTORS OF THE BANK HAS APPROVED THE PLAN OF REORGANIZATION
AND STOCK ISSUANCE, SUBJECT TO APPROVAL BY THE OTS AND THE MEMBERS OF THE BANK
ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS.
APPROVAL BY THE OTS DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY.
THE REORGANIZATION
On March 18, 1998 the Bank's Board of Directors unanimously adopted the
Plan, pursuant to which, subject to approval by the OTS, the Bank will, in a
series of steps, reorganize from a federal mutual savings bank into a two-tier
mutual holding company structure in which all the Mutual Company, Bancorp and
the Stock Bank will be chartered and regulated by the OTS. It is currently
intended that up to 49.9% of the outstanding capital stock of Bancorp will be
sold to the public in a minority stock offering, and the remaining shares will
be held by the Mutual Company. The Plan must be approved by the OTS, and the
Reorganization must be approved by the Bank's depositors as of the Voting Record
Date of ___________, ____. A Special Meeting of Members has been called for
this purpose to be held on ___________, 1998.
As long as the Mutual Company remains in the mutual form of organization,
the Mutual Company will be required to own at least a majority of the issued and
outstanding voting stock of Bancorp. Bancorp may issue any amount of non-voting
stock or debt to persons other than the Mutual Company.
REASONS FOR THE MUTUAL COMPANY REORGANIZATION
The Board of Directors and management of the Bank are obligated to operate
the Bank in a safe and sound manner and to maximize the financial and managerial
resources of the Bank for the benefit of its Members and the communities that it
serves. In adopting the Plan, the Board of Directors of the Bank has determined
that for the reasons set forth below, the Reorganization is advisable and in the
best interests of the Bank and its depositors, and is consistent with the Bank's
business plan to operate as an independent, community-oriented savings
institution.
The Bank, as a federally chartered mutual savings bank, does not have
stockholders and has no authority to issue capital stock. The Reorganization
will structure the Bank in the stock form of organization, which is used by
commercial banks, most major business corporations and a large number of savings
institutions. The Reorganization will permit Bancorp to issue capital stock
which will provide the Bank with greater flexibility to structure and finance
the expansion of its operations, both directly and through Bancorp, by acquiring
other financial institutions or new branch offices, diversifying into other
financial services to the extent allowable by applicable law and regulation and
otherwise improving the Bank's ability to provide services to its community.
Although there are no current arrangements, understandings or agreements
regarding any such opportunities, Bancorp will be in a position after the
Reorganization, subject to regulatory limitations and Bancorp's financial
position, to take advantage of any such opportunities that may arise. Access to
the capital markets will also make it possible for the Bank to be more
responsive to possible future changes in the regulations of the bank regulatory
agencies mandating higher capital reserves and/or capital ratios. AT THE SAME
TIME, THE MUTUAL HOLDING COMPANY STRUCTURE WILL PRESERVE THE MUTUAL FORM OF
OWNERSHIP WITHIN THE MUTUAL HOLDING COMPANY, CONSISTENT WITH THE BANK'S
COMMITMENT TO BE AN INDEPENDENT, COMMUNITY ORIENTED SAVINGS INSTITUTION. IN
THIS REGARD, SO LONG AS THE MUTUAL COMPANY
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IS IN EXISTENCE, IT WILL AT ALL TIMES OWN AT LEAST A MAJORITY INTEREST OF
BANCORP, AND THEREFORE, INDIRECTLY, THE BANK AS WELL. The Reorganization also
will enable employees, management and directors to have an equity ownership
interest in Bancorp, which management believes will enhance long-term growth and
performance of the Bank and Bancorp by enabling the Bank to attract and retain
qualified employees who have a more direct interest in the financial success of
the Bank.
In addition, the Reorganization will provide the Bank with a more flexible
operating structure which will enhance its ability to compete with other
financial institutions in New Jersey, with other financial institutions based in
other Northeast and Mid-Atlantic states to the extent such institutions or their
affiliates conduct operations in New Jersey, and with nondepository financial
institutions operating within the Bank's market area. Finally, the
Reorganization may ease any transition to a uniform financial institution
charter should such a charter be required in the future.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure, which include:
(i) the inability to sell Common Stock in excess of 49.9% of Bancorp's total
issued and outstanding voting stock so long as the Mutual Company remains in
existence; (ii) the more limited liquidity of the Common Stock, as compared to a
standard conversion; (iii) the inability of stockholders other than the Mutual
Company to obtain majority ownership of Bancorp and the Bank which may result in
the perpetuation of the existing management and Board of Directors of Bancorp
and the Bank; (iv) the higher cost of dividends associated with a minority
ownership interest; and (v) the added expense of conducting more than one stock
offering should the Mutual Company convert to the stock form at some future
date. A majority of the voting stock of Bancorp will be owned by the Mutual
Company, which is a mutual institution that will be controlled by the existing
Board of Directors of the Bank. While this structure will permit management to
focus on Bancorp's and the Bank's long-term business strategy` for growth and
capital redeployment without undue pressure from stockholders, it will also
serve to perpetuate the existing management and directors of the Bank. The
Mutual Holding Company will be able to elect all members of the Board of
Directors of Bancorp, and, except for certain matters, will be able to control
the outcome of all matters presented to the stockholders of Bancorp for
resolution by vote. No assurance can be given that the Mutual Company will not
take action adverse to the interests of the Minority Stockholders. For example,
the Mutual Company could revise its dividend waiver policy, prevent the sale of
control of Bancorp, or defeat a candidate for the Board of Directors of Bancorp
or other proposals put forth by the Minority Stockholders.
The Reorganization does not preclude the conversion of the Mutual Company
from the mutual to stock form of organization following the Reorganization. NO
ASSURANCE CAN BE GIVEN THAT THE MUTUAL COMPANY WILL EVER CONVERT TO STOCK FORM
OR WHAT CONDITIONS THE OTS MAY IMPOSE ON SUCH A TRANSACTION. See "Conversion of
Mutual Holding Company to Stock Form."
DESCRIPTION OF THE REORGANIZATION
Following receipt of all required regulatory approvals and approval of the
Plan by the Members, the Bank will reorganize into a two-tier mutual holding
company structure. The two-tier mutual holding company structure will consist
of: (1) a federally chartered mutual holding company (the Mutual Company); (2) a
federally chartered stock holding company (Bancorp) that will offer up to 49.9%
of its Common Stock in the Offering with the remaining shares of its Common
Stock owned by the Mutual Company; and (3) a federally chartered stock savings
bank (the Stock Bank) which will be the successor to the Bank in its current
mutual form and which will be wholly-owned by Bancorp.
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The Reorganization will be effected as follows, or in any manner approved
by the OTS that is consistent with the purposes of the Plan and applicable laws
and regulations. Under the two-tier mutual holding company structure: (i) the
Bank will organize an interim federal stock savings bank as a wholly-owned
subsidiary ("Interim I"); (ii) Interim I will organize a stock corporation
as a wholly-owned subsidiary (the Company); (iii) Interim I will organize an
interim federal stock savings bank as a wholly-owned subsidiary ("Interim II");
(iv) the Bank will convert its charter to a federal stock savings bank charter
to become the Stock Bank and Interim I will exchange its charter for a federal
mutual holding company charter to become the Mutual Company; (v) sequentially
with step (iv), Interim II will merge with and into Stock Bank with the Stock
Bank as the resulting institution; (vi) 100% of the issued Common Stock of the
Stock Bank will be transferred to the Mutual Company in exchange for membership
interests in the Savings Bank, in its mutual form, which are conveyed to the
Mutual Company; and (vii) the Mutual Company will transfer 100% of the issued
Common Stock of the Stock Bank to Bancorp in a capital distribution. The Plan
provides that, concurrently with the Reorganization, Bancorp will sell up to
49.9% of its outstanding capital stock in a minority stock offering and that the
remaining shares will be held by the Mutual Company.
Upon consummation of the Reorganization, the legal existence of the Bank
will not terminate, but the converted Stock Bank will be a continuation of the
Bank, and all property of the Bank, including its right, title and interest in
and to all property of whatsoever kind and nature, interest and asset of every
conceivable value or benefit then existing or pertaining to the Bank, or which
would inure to the Bank immediately by operation of law and without the
necessity of any conveyance or transfer and without any further act or deed,
will vest in the Stock Bank. The Stock Bank will have, hold, and enjoy the same
in its right and fully to the same extent as the same was possessed, held, and
enjoyed by the Bank. The Stock Bank will continue to have, succeed to, and be
responsible for all the rights, liabilities and obligations of the Bank and will
maintain its headquarters operations at the Bank's present location.
In connection with Reorganization, Bancorp will apply to the OTS to retain
up to 50% of the net proceeds of the Offering, and the Mutual Company would be
capitalized with $100,000. The Bank believes that capitalization of the Mutual
Company and Bancorp, at this level will provide the Mutual Company and Bancorp
with economic strength separate and apart from the Bank and could facilitate
future activities by the Mutual Company and Bancorp.
The description of the two-tier mutual holding company structure is
qualified in its entirety by reference to the Plan and the charter and bylaws of
the Stock Bank, Bancorp and the Mutual Company to be effective upon consummation
of the Reorganization.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Bank's long-standing commitment to its
local community, the Bank's Plan provides for the establishment of a charitable
foundation in connection with the Bank's Reorganization. The Plan provides that
the Bank, Bancorp and the Mutual Company will establish the Foundation, which
will be incorporated under Delaware law as a non-stock corporation, and will
fund the Foundation with Common Stock of Bancorp and cash, as further described
below. The Bank believes that the funding of the Foundation with Common Stock
of Bancorp is a means of establishing a common bond between the Bank and the
communities in which the Bank operates and thereby enables such communities to
share in the potential growth and success of the Mutual Company, Bancorp and the
Bank over the long term. By further enhancing the Bank's visibility and
reputation in the communities in which it operates, the Bank believes that the
Foundation will enhance the long-term value of the Bank's community banking
franchise.
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The Foundation would be dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support housing assistance, not-for-profit
medical facilities, community groups and other types of organizations or
projects. Establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The Foundation will be considered as a separate
matter from approval of the Plan. If the Bank's members approve the Plan, but
not the Foundation, the Bank intends to complete the Reorganization and Offering
without the establishment of the Foundation. Failure to approve the
establishment of the Foundation may materially affect the pro forma market value
of the Common Stock. In such an event, the Bank may establish a new Estimated
Price Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing and Number of Shares Issued."
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the Bank
operates. The Bank has long emphasized community lending and community
development activities and currently has a "satisfactory" CRA rating. The
Foundation is being formed as a complement to the Bank's existing community
activities, not as a replacement for such activities. Indeed, the Bank intends
to continue to emphasize community lending and community development activities
following the Reorganization. However, such activities are not the Bank's sole
corporate purpose. The Foundation, conversely, will be completely dedicated to
community activities and the promotion of charitable causes, and may be able to
support such activities in ways that are not presently available to the Bank.
Since the Bank already engages in community development activities, the Bank
believes that the Foundation will enable the Mutual Company, Bancorp and the
Bank to assist their local community in areas beyond community development and
lending. In this regard, the Board of Directors believes the establishment of a
charitable foundation is consistent with the Bank's commitment to community
service. The Board of Directors of the Bank also believe that the funding of the
Foundation with both Common Stock of Bancorp and cash is a means of enabling the
communities in which the Bank operates to share in the potential growth and
success of Bancorp long after completion of the Reorganization. The Foundation
accomplishes that goal by providing for continued ties between the Foundation
and Bank, thereby forming a partnership with the Bank's community. The
establishment of the Foundation would also enable the Mutual Company, Bancorp
and the Bank to develop a unified charitable donation strategy and would
centralize the responsibility for administration and allocation of corporate
charitable funds. The Bank, however, does not expect the contribution to the
Foundation to take the place of the Bank's traditional community lending and
charitable activities. The Bank expects in future periods to continue making
charitable contributions within its communities.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will be comprised of three members, all of
whom must be members of the Board of Directors of, or officers of the Bancorp or
the Bank. The initial board of directors of the Foundation will be comprised of
Mr. Leopold Montanaro, Mr. Burke and Mr. Craig Montanaro. Messrs. Leopold
Montanaro, Burke and Craig Montanaro intend to purchase 70,000, 70,000 and 3,500
shares of Common Stock in the offering, respectively. At the maximum of the
Estimated Price Range, such purchases equal 1.43%, 1.43% and .07%, respectively,
or 2.93% in the aggregate, of the total number of shares to be issued in the
Offering and Reorganization. On an on-going basis, a Nominating Committee of the
board of directors of the Foundation, will nominate individuals eligible for
election to the board of directors of the Foundation. The members of the
Foundation,
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who are comprised of its board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee.
Only persons serving as directors of the Foundation qualify as members of the
Foundation with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms. The certificate of
incorporation of the Foundation will provide that the Foundation is organized
exclusively for charitable purposes as set forth in Section 501(c)(3) of the
Code. The Foundation's certificate of incorporation further will provide that
no part of the net earnings of the Foundation will inure to the benefit of, or
be distributable to, its directors, officers or members. A person who is a
director, officer or employee of the Bank, or has the power to direct its
management or policies, or otherwise owes a fiduciary duty to the Bank, and who
will also serve as a director or employee of the Foundation would be subject to
the requirements of OTS Conflicts of Interest Regulations.
The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation is established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
Bancorp's Common Stock on all proposals considered by stockholders of Bancorp;
provided, however, that the OTS will waive this voting restriction under certain
circumstances if compliance with the restriction would: (i) cause a violation of
the law of the State of Delaware and the OTS determines that federal law would
not preempt the application of the laws of the State of Delaware to the
Foundation; (ii) would cause the Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Foundation; or
(iii) would cause the Foundation to be subject to an excise tax under Section
4941 of the Code. In order for the OTS to waive such voting restriction,
Bancorp's or the Foundation's legal counsel must render an opinion satisfactory
to OTS that compliance with the voting restriction would have the effect
described in clauses (i), (ii) or (iii) above. Under those circumstances, the
OTS will grant a waiver of the voting restriction upon submission of such legal
opinion(s) by Bancorp or the Foundation. In the event that the OTS waived the
voting restriction, the directors would direct the voting of the Common Stock
held by the Foundation. However, a condition to the OTS approval of the
Reorganization provides that in the event such voting restriction is waived or
becomes unenforceable, the Director of the OTS, or his designees, at that time
may impose conditions on the composition of the board of directors of the
Foundation or such other conditions or restrictions relating to the control of
the Common Stock held by the Foundation, any of which could limit the ability of
the board of directors of the Foundation to control the voting of the Common
Stock held by the Foundation. There will be no agreements or understandings
with directors of the Foundation regarding the exercise of control, directly or
indirectly, over the management or policies of the Mutual Company, Bancorp or
the Bank, including agreements related to voting, acquisition or disposition of
Bancorp's stock. As directors of a nonprofit corporation, directors of the
Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purpose for which the Foundation
is established.
The Mutual Company or Bancorp will provide office space and administrative
support services to the Foundation. Initially, the Foundation is expected to
have no employees. The board of directors of the Foundation will appoint such
officers as may be necessary to manage the operations of the Foundation. Any
transaction between the Bank and the Foundation will comply with the affiliate
transaction restrictions set forth in Sections 23A and 23B of the FRA, as
amended.
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Bancorp proposes to capitalize the Foundation with Company Common Stock in
an amount equal to 4.19% of the total amount of Common Stock to be sold in
connection with the Offering and $100,000. At the minimum, midpoint and maximum
of the Offering Range, the stock contribution to the Foundation would equal
64,168, 75,491 and 86,815 shares, which would have a market value of $641,680,
$754,910 and $868,150, respectively, based on the Purchase Price. Such
contribution, once made, will not be recoverable by Bancorp or the Bank. The
Mutual Company, Bancorp and the Bank determined to fund the Foundation with
Common Stock and cash to provide the Foundation with a potentially larger
endowment than if Bancorp contributed only cash to the Foundation since, as a
shareholder, the Foundation will share in the potential growth and success of
Bancorp. As such, the contribution of stock and cash to the Foundation has the
potential to provide a self-sustaining funding mechanism which reduces the
amount of cash that Bancorp, if it were not making the stock contribution as
well, would have to contribute to the Foundation in future years in order to
maintain a level amount of charitable grants and donations.
The Foundation would receive working capital from earnings on the cash
contribution, any dividends that may be paid on the Common Stock in the future,
and subject to applicable federal and state laws, loans collateralized by the
Common Stock or from the proceeds of the sale of any of the Common Stock in the
open market from time to time as may be permitted to provide the Foundation with
additional liquidity. As a private foundation under Section 501(c)(3) of the
Code, the Foundation will be required to distribute annually in grants or
donations, a minimum of 5% of the average fair market value of its net
investment assets. One of the conditions imposed on the gift of Common Stock
by Bancorp is that the amount of Common Stock that may be sold by the Foundation
in any one year shall not exceed 5% of the average market value of the assets
held by the Foundation, except where the board of directors of the Foundation
determines that the failure to sell an amount of common stock greater than such
amount would result in a long-term reduction of the value of the Foundation's
assets or would otherwise jeopardize the Foundation's capacity to carry out its
charitable purposes. While there may be a greater risk associated with a one-
stock portfolio in comparison to a diversified portfolio, Bancorp believes any
such risk is mitigated by the ability of the Foundation's directors to sell more
than 5% of its stock in such circumstances. Upon completion of the
Reorganization and Offering and the contribution of shares to the Foundation
immediately following the Reorganization and Offering, Bancorp would have
3,625,607, 4,265,420 and 4,905,233 shares outstanding at the minimum, midpoint
and maximum, respectively, of the Estimated Price Range. Because Bancorp will
have an increased number of shares outstanding, the voting and ownership
interests of the shareholders of Bancorp's common stock (including the Mutual
Company) would be diluted by 1.77% as compared to their interests in Bancorp if
the Foundation was not established. For additional discussion of the dilutive
effect, see "Comparison of Valuation and Pro Forma Information with No
Foundation" and "Pro Forma Data."
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. Bancorp proposes to capitalize the
Foundation with Common Stock in an amount equal to 4.19% of the total amount of
Common Stock sold in connection with the Reorganization and Offering and
$100,000. At the minimum, midpoint, maximum and 15% above the maximum of the
Offering Range, the contribution to the Foundation would equal 64,168, 75,491,
86,815 and 99,837 shares, respectively, which would have a market value of
$641,680, $754,910, $868,150 and $998,370, respectively, based on the Purchase
Price. As a result of the establishment of the Foundation, the Offering Range,
as estimated by FinPro, has decreased and the amount of stock available for sale
in the Offerings has also correspondingly decreased. The amount of the decrease
is 62,135, 73,100, 84,065 and 96,675, or $621,350, $731,000, $840,650 and
$966,750 at the minimum, midpoint, maximum and 15% above the maximum of the
Offering Range, respectively. See "Pro Forma Data" and "Comparison of Valuation
and Pro Forma Data Information with No Foundation."
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TAX CONSIDERATIONS. The Mutual Company, Bancorp and the Bank have been
advised by their independent accountants that an organization created for the
above purposes will qualify as a 501(c)(3) exempt organization under the Code,
and will be classified as a private foundation rather than a public charity. A
private foundation typically receives its support from one person or one
corporation whereas a public charity receives its support from the public.
Under the Code, the Foundation may not own more than 2% of the outstanding
shares of common stock of Bancorp due to the mutual holding company owning a
majority of the outstanding shares of common stock of Bancorp. The Foundation
will submit a request to the IRS to be recognized as an exempt organization
after approval of the Foundation by the Bank's members at the Special Meeting
being held to consider the Reorganization. As long as the Foundation files its
application for tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective date
of the Foundation's status as a Section 501(c)(3) organization will be the date
of its organization. Bancorp's independent accountants, however, have not
rendered any advice on the condition of the gift which requires that all shares
of Common Stock of Bancorp held by the Foundation must be voted in the same
ratio as all other shares of Bancorp's Common Stock, on all proposals considered
by stockholders of Bancorp. In the event that Bancorp or the Foundation
receives an opinion of their tax counsel satisfactory to the OTS that compliance
with the voting restriction would cause the Foundation to lose its tax-exempt
status, otherwise have a material adverse tax consequence on the Foundation or
subject the Foundation to an excise tax under Section 4941 of the Code, the OTS
will waive such condition upon submission of such opinion(s) by Bancorp or the
Foundation. See "--Regulatory Conditions Imposed on the Foundation."
A legal opinion of the OTS which addresses the establishment of charitable
foundations by savings associations opines that as a general rule funds
contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
Under the Code, Bancorp may deduct up to 10% of its taxable income in any one
year and any contributions made by Bancorp in excess of the deductible amount
will be deductible for federal tax purposes over each of the five succeeding
taxable years. The Mutual Holding Company, Bancorp and the Bank believe that
the Reorganization presents a unique opportunity to establish and fund a
charitable foundation given the substantial amount of additional capital being
raised in the Reorganization. In making such a determination, the Mutual
Company, Bancorp and the Bank considered the dilutive impact of the Foundation
on the amount of Common Stock available to be offered for sale in the Offering.
See "Comparison of Valuation and Pro Forma Information with No Foundation."
Based on such consideration, Bancorp and the Bank believe that the contribution
to the Foundation in excess of the 10% annual limitation is justified given the
Bank's capital position and its earnings, the substantial additional capital
being raised in the Offering and the potential benefits of the Foundation to the
Bank's community. In this regard, assuming the sale of the Common Stock at the
midpoint of the Offering Range, the Bank would have pro forma consolidated
capital of $40.3 million, or 12.5% of consolidated assets and the Bank's pro
forma tangible, core and risk-based capital ratios would be 10.87%, 10.87% and
27.07%, respectively. See "Regulatory Capital Compliance," "Capitalization,"
and "Comparison of Valuation and Pro Forma Information with No Foundation."
Thus, the amount of the cash and stock contribution will not adversely impact
the financial condition of Bancorp and the Bank and Bancorp and the Bank
therefore believe that the amount of the charitable contribution is reasonable
given Bancorp and the Bank's pro forma capital positions. As such, Bancorp and
the Bank believe that the contribution does not raise safety and soundness
concerns.
Bancorp and the Bank have received an opinion of their independent
accountants that Bancorp's contribution of its own stock to the Foundation will
not constitute an act of self-dealing, and that Bancorp will be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
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contribution less the nominal par value that the Foundation is required to pay
to Bancorp for such stock plus the amount of cash contributed to the Foundation
at the time of the Reorganization, subject to a limitation based on 10% of
Bancorp's annual taxable income. Bancorp, however, would be able to carry
forward any unused portion of the deduction for five years following the year in
which the contribution is made for federal tax purposes. Thus, while Bancorp
expects, based on the maximum of the Offering Range, to be able to utilize for
federal income tax purposes a charitable contribution deduction of approximately
$346,000 in fiscal year 1998, Bancorp is permitted under the Code to carryover
the excess of the total contribution over such 1998 deduction over a five-year
period for federal income tax purposes. For New Jersey state income tax
purposes, Bancorp also would be able to deduct its contribution to the
Foundation and to carry forward any unused portion over a five-year period,
subject to the limitation based on 10% of Bancorp's unconsolidated annual
taxable income, and provided Bancorp generates sufficient state taxable income
on an unconsolidated basis. Assuming the close of the Offerings at the midpoint
of the Offering Range, Bancorp estimates that all of the federal tax deduction
should be deductible over the six-year period. However, no assurances can be
made that Bancorp will have sufficient pre-tax income over the five year period
following the year in which the contribution was made to fully utilize the
carryover related to the excess contribution. Neither the Mutual Company,
Bancorp nor the Bank expects to make any further contributions to the Foundation
within the first five years following the initial contribution. After that
time, the Mutual Company, Bancorp and the Bank may consider future contributions
to the Foundation. Any such decisions would be based on an assessment of, among
other factors, the financial condition of the Mutual Company, Bancorp and the
Bank at that time, the interests of shareholders and depositors of the Mutual
Company, Bancorp and the Bank, and the financial condition and operations of the
Foundation.
Although the Mutual Company, Bancorp and the Bank have received an opinion
of their independent accountants that Bancorp is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, Bancorp's contribution to the Foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the IRS makes such a determination. The Bank has agreed to a
limitation on the liability of its independent accountants to it solely as a
result of, and to indemnify its independent accountants solely in connection
with, certain claims or liabilities relating to the above-discussed federal
income tax opinion, except to the extent determined to have resulted from
professional negligence or intentional or deliberate misconduct. See "Risk
Factors--Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts or failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. Under the Code, a
private foundation is also subject to a tax on excess business holdings in a
corporation. In addition, the Foundation's Certificate of Incorporation
prohibits it from retaining any excess business holdings
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in a corporation. The Code provides, however, that a private foundation shall
not be treated as having excess business holdings in a corporation in which it
owns less than two (2) percent of the voting stock. Thus, as a result of the
mutual holding company structure, the Foundation would have excess business
holdings if it owned more than 2% of Bancorp's outstanding common stock. The
Foundation will be required to make an annual filing with the IRS within four
and one-half months after the close of the Foundation's fiscal year to maintain
its tax-exempt status. The Foundation will be required to publish a notice that
the annual information return will be available for public inspection for a
period of 180 days after the date of such public notice. The information return
for a private foundation must include, among other things, an itemized list of
all grants made or approved, showing the amount of each grant, the recipient,
any relationship between a grant recipient and the Foundation's managers and a
concise statement of the purpose of each grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) the Foundation will not engage in self-dealing and will
comply with all laws necessary to maintain its tax-exempt status; (vi) any
purchases of Common Stock by the Foundation following that Reorganization will
be subject to OTS regulations on stock repurchases; and (vii) any shares of
Common Stock of Bancorp held by the Foundation must be voted in the same ratio
as all other shares of Bancorp's Common Stock on all proposals considered by
stockholders of Bancorp; provided, however, that the OTS will waive this voting
restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware
and the OTS determines the federal law does not preempt the application of the
laws of the State of Delaware to the Foundation; (b) cause the Foundation to
lose its tax-exempt status or otherwise have a material and adverse tax
consequence on the Foundation; or (c) cause the Foundation to be subject to an
excise tax under Section 4941 of the Code. In order for the OTS to waive such
voting restriction, Bancorp's or the Foundation's legal counsel must render an
opinion satisfactory to OTS that compliance with the voting restriction would
have the effect described in clauses (a), (b) or (c) above. Under those
circumstances, the OTS will grant a waiver of the voting restriction upon
submission of such opinion(s) by Bancorp or the Foundation. There can be no
assurances that either a legal or tax opinion addressing these issues will be
rendered, or if rendered, that the OTS will grant an unconditional waiver of the
voting restriction. In this regard, a condition to the OTS approval of the
Conversion provides that in the event such voting restriction is waived or
becomes unenforceable, the Director of the OTS, or his designees, at that time
may impose conditions on the composition of the board of directors of the
Foundation or such other conditions or restrictions relating to the control of
the Common Stock held by the Foundation, any of which could limit the ability of
the board of directors of the Foundation to control the voting of Common Stock
held by the Foundation. In no event will the voting restriction survive the
sale of shares of the Common Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval of
a majority of the total outstanding votes of the Bank's members eligible to be
cast at the special meeting being held to consider the Reorganization. The
Foundation will be considered as a separate matter from approval of the Plan.
If the Bank's members approve the Plan, but not the Foundation, the Bank intends
to complete the Reorganization without the establishment of the Foundation.
Failure to approve the Foundation may materially increase the pro forma market
value of the Common Stock being offered for sale in the Offering. See
"Comparison of Valuation and Pro Forma Information With No Foundation."
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EFFECTS OF THE REORGANIZATION
GENERAL. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution or in the
event the institution declares a capital distribution to depositors, subject to
applicable OTS regulations. However, this ownership interest is tied to the
depositor's account and has no tangible market value separate from such deposit
account. Any depositor who opens a deposit account obtains a pro rata ownership
interest in the net worth of the institution without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his account
receives a portion or all of the balance in the account but nothing for his
ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings institution is liquidated or in
the event the institution declares a capital distribution to depositors, subject
to applicable OTS regulations. In such event, the depositors of record at that
time, as owners, would share pro rata in any residual surplus and reserves after
other claims, including claims of depositors to the amounts of their deposits,
are paid.
Following the Reorganization, Bancorp and Minority Stockholders will
possess all voting rights in the Stock Bank and the affairs of the Stock Bank
will be directed by its board of directors.
CONTINUITY. While the Reorganization is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
OTS. After the Reorganization, the Bank will continue to provide services for
depositors and borrowers under current policies by its present management and
staff.
The Directors serving the Bank at the time of Reorganization will serve as
Directors of the Stock Bank after the Reorganization. The Directors of Bancorp
and the Mutual Company will consist of individuals currently serving on the
Board of Directors of the Bank. All officers of the Bank at the time of
Reorganization will retain their positions after Reorganization. Certain senior
management persons of the Bank will assume similar positions with Bancorp and
the Mutual Company.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank at
the time of Reorganization will automatically become a depositor in the Stock
Bank after the Reorganization, and each such deposit account will remain the
same with respect to deposit balance, interest rate and other terms. Each such
account with the Stock Bank will be insured by the FDIC to the same extent as
with the Bank before the Reorganization. Depositors will continue to hold their
existing certificates, passbooks and other evidences of their accounts.
EFFECT ON LOANS. All loans and other borrowings from the Bank shall retain
the same status with the Stock Bank after the Reorganization as they had with
the Bank immediately prior to the Reorganization. The amount, interest rate,
maturity and security for each loan will remain as they were contractually fixed
prior to the Reorganization.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors of the Bank
are members of, and have voting rights in, the Bank as to all matters requiring
membership action. Upon Reorganization, all
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depositors who currently have voting rights in the Bank will cease to be members
of the Bank and will no longer be entitled to vote at meetings of the Bank. Upon
Reorganization, all depositors who had membership rights entitling them to
voting rights or liquidation rights with respect to the Bank as of the effective
date of the Reorganization will continue to have such rights solely with respect
to the Mutual Company as long as they continue to hold deposit accounts in the
Bank. In addition, all persons who become depositors of the Stock Bank
subsequent to the Reorganization will have such membership and liquidation
rights with respect to the Mutual Company.
EFFECT ON LIQUIDATION RIGHTS. Following the Reorganization, all persons
who had membership or liquidation rights with respect to the Bank as of the date
of the Reorganization will continue to have such rights solely with respect to
the Mutual Company. In addition, all persons who become depositors in the Stock
Bank subsequent to the Reorganization will have membership and liquidation
rights with respect to the Mutual Company. In each case, no person who ceases
to be a depositor with the Stock Bank shall have any membership or liquidation
rights with respect to the Mutual Company.
AMENDMENT OR TERMINATION OF PLAN OF REORGANIZATION. If deemed necessary or
desirable, the Plan may be substantively amended at any time prior to
solicitation of proxies from Members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors, and at any time thereafter by such vote of such
Board of Directors with the concurrence of the OTS. Any amendment to the Plan
made after approval by the Members with the approval of the OTS shall not
necessitate further approval by the Members unless otherwise required by the
OTS. The Plan may be terminated by majority vote of the Bank's Board of
Directors at any time prior to the Special Meeting to vote on the Plan, and at
any time thereafter with the concurrence of the OTS.
By adoption of the Plan, the Members of the Bank authorize the Board of
Directors to amend or terminate the Plan under the circumstances set forth in
this Section.
TAX ASPECTS OF REORGANIZATION
Pursuant to the Plan, consummation of the Reorganization is conditioned
upon, among other things, the prior receipt by the Bank of either a private
letter ruling from the IRS and from the New Jersey Department of Revenue or an
opinion of the Bank's tax advisor as to the federal and New Jersey tax
consequences of the Reorganization to the effect that consummation of the
Reorganization will not be a taxable event to the Mutual Company, Bancorp, the
Stock Bank or the Bank's members. No private letter ruling will be received
from the IRS with respect to the proposed Reorganization. Instead, Muldoon,
Murphy & Faucette has issued an opinion to the effect that for federal income
tax purposes: (1) the Bank's exchange of its charter to stock form (the "Bank
Conversion") will qualify as a tax-free reorganization under Internal Revenue
Code of 1986, as amended (the "Code"), Section 368(a)(1)(F); (2) the conversion
of the Bank's wholly owned subsidiary ("Interim I") into the Mutual Company will
qualify as a tax-free reorganization under Code 368(a)(1)(F); (3) the merger of
the wholly owned subsidiary of Interim I ("Interim II") into the Stock Bank with
the Stock Bank as the survivor will qualify as a tax-free reorganization under
Code Section 368(a)(1)(A); (4) no gain or loss will be recognized by the Bank in
the Bank Conversion; (5) neither the Stock Bank nor the Mutual Company will
recognize gain or loss upon the receipt by the Stock Bank of substantially all
of the assets of the Bank in exchange for equity interests in the
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Mutual Company and the Stock Bank's assumption of the Bank's liabilities; (6)
the Mutual Company's basis in the stock of the Stock Bank will increase by an
amount equal to the Bank's net basis in the property transferred to the Stock
Bank; (7) the Stock Bank's basis in the property received from the Bank will be
the same as the basis of such property in the hands of the Bank immediately
prior to the Reorganization and Offering; (8) the Stock Bank's holding period
for the property received from the Bank will include the period during which
such property received from the Bank was held by the Bank; (9) subject to the
conditions and limitations set forth in Code Sections 381, 382, 383 and 384 and
the Treasury Regulations promulgated thereunder, the Stock Bank will succeed to
and take into account the items of the Bank described in Code Section 381(c);
(10) no gain or loss will be recognized by the depositors of the Bank on the
receipt of equity interests with respect to the Mutual Company in exchange for
their equity interests surrendered therefor; (11) the exchange of stock by
depositors in exchange for equity interests in the Mutual Company will
constitute a tax-free exchange of property solely for voting "stock" pursuant to
Code Section 351; (12) each Bank depositor's aggregate basis, if any, in the
Mutual Company equity interest received in the exchange will equal the aggregate
basis, if any, of each depositor's equity interest in the Bank; (13) the holding
period of the Mutual Company equity interests received by the depositors of Bank
will include the period during which the Bank equity interest surrendered in
exchange therefor were held; (14) the Mutual Company will recognize no gain or
loss upon the transfer of the Stock Bank stock to Bancorp in exchange for Common
Stock pursuant to Code Section 351; (15) Bancorp will recognize no gain or loss
upon its receipt of Stock Bank stock from the Mutual Company in exchange for
Common Stock; (16) the Mutual Company will increase its basis in its shares of
the common Stock by the Mutual Company's basis in its Stock Bank stock; (17)
Bancorp will recognize no gain or loss upon the receipt of money in exchange for
shares of Common Stock; (18) no gain or loss will be recognized by the Bank's
account holders upon the issuance to them of accounts in the Stock Bank in stock
form immediately after the Reorganization and Offering, in the same dollar
amounts and on the same terms and conditions as their accounts at the Bank
immediately prior to the Reorganization and Offering; (19) the tax basis of the
Common Stock purchased in the Reorganization and Offering will be equal to the
amount paid therefor increased, in the case of the Common Stock acquired to the
exercise of Subscription Rights, by the fair market value, if any, of the
Subscription Rights exercised; (20) the holding period for the Common Stock
purchased in the Reorganization and Offering will commence upon the exercise of
such holder's Subscription Rights and otherwise on the day following the date of
such purchase; (21) gain or loss will be recognized to account holders upon the
receipt or exercise of Subscription Rights in the Reorganization and Offering,
but only to the extent such Subscription Rights are deemed to have value, as
discussed below. Fontanella and Babitts has opined that the Reorganization will
not be a taxable transaction to the Mutual Company, Bancorp, the Bank, Eligible
Account Holders or Supplemental Eligible Account Holders for New Jersey income
tax purposes. Certain portions of both the federal and the state income tax
opinions are based upon the assumption that the subscription rights issued in
connection with the Reorganization and Offering will have no value.
Unlike private rulings of the IRS, an opinion of a tax advisor is not
binding on the IRS and the IRS could disagree with conclusions reached therein.
In the event of such disagreement, there can be no assurance that the IRS would
not prevail in a judicial or administrative proceeding. The Bank has agreed to
a limitation on the liability of Fontanella and Babitts to it solely as a result
of, and to indemnify Fontanella and Babitts solely in connection with, certain
claims or liabilities relating to its New Jersey income tax opinion, except to
the extent determined to have resulted from professional negligence or
intentional or deliberate misconduct.
FinPro has issued an opinion stating that, pursuant to its Independent
Valuation, FinPro is of the opinion that the subscription rights do not have any
value, based on the fact that such rights are acquired by the recipients without
cost, are nontransferable and of short duration, and afford the recipients the
right only
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to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such Independent Valuation is not
binding on the IRS. If the subscription rights granted to Eligible Account
Holders or Supplemental Eligible Account Holders are deemed to have an
ascertainable value, receipt of such rights could be taxable to those Eligible
Account Holders or Supplemental Eligible Account Holders who receive and/or
exercise the subscription rights in an amount equal to such value and the Bank
could recognize gain on such distribution. Eligible Account Holders and
Supplemental Eligible Account Holders are encouraged to consult with their own
tax advisor as to the tax consequences in the event that such subscription
rights are deemed to have an ascertainable value.
THE OFFERING
The Plan authorizes Bancorp to offer common stock in the Offering up to a
maximum of 49.9% of the issued and outstanding shares of Bancorp's Common Stock.
Bancorp is offering between $15.3 million and $20.7 million (or up to $23.8
million in the event the number of shares are increased) of Common Stock, which
represents a Minority Ownership Interest of 43%, based upon the Independent
Valuation. The Offering is being made concurrently with the Reorganization,
subject to the approval of the Members at the Special Meeting to be held on
___________, ____. The Common Stock will be offered on a priority basis to:
(1) Eligible Account Holders; (2) the ESOP; (3) Supplemental Eligible Account
Holders; and (4) Other Members. Subject to the prior rights of holders of
subscription rights, Common Stock not subscribed for in the Subscription
Offering is being concurrently offered in the Community Offering to certain
members of the general public, with preference given to natural persons residing
in Bergen, Essex and Morris Counties, New Jersey. Bancorp and Sandler O'Neill
may also agree to utilize a Syndicated Community Offering in connection with the
sale of shares of Common Stock not subscribed for in the Subscription and
Community Offering. The Bank reserves the right, in its absolute discretion, to
reject or accept, in whole or in part, any orders in the Community Offering,
either at the time of receipt of an order or as soon as practicable following
the Expiration Date. If an order is rejected, the funds submitted with such
order will be returned promptly. Subscription rights will expire if not
exercised by 12:00 noon, New Jersey time, on ___________, ____, unless extended
by Bancorp, with the approval of the OTS. Following the Offering, assuming that
2,071,955 shares are sold in the Offering and that the Foundation is established
as part of the Reorganization and Offering, it is expected that the Mutual
Company will own 2,746,463 or 56.0%, of the total issued and outstanding shares
of voting Common Stock of Bancorp.
STOCK PRICING AND NUMBER OF SHARES ISSUED
The Plan requires that the aggregate purchase price of the Common Stock
must be based on the estimated pro forma market value of the Common Stock, as
determined by an independent valuation. The Bank has retained FinPro to make
such valuation. All shares of Common Stock sold in the Offering will be sold at
the Purchase Price. The Purchase Price was determined by the Board of Directors
of the Bank, based on the Independent Valuation. For its services, FinPro will
receive a fee of $14,000 plus reasonable expenses not to exceed $2,500. The
Bank has also agreed to pay FinPro an additional $17,000 for assisting the Bank
in the preparation of a business plan. The Bank has agreed to indemnify FinPro
and its employees and affiliates under certain circumstances against certain
losses (including any losses in connection with claims under federal securities
laws) arising out of its services as an appraiser, except where FinPro's
liability results from its negligence, willful misconduct or bad faith.
The Independent Valuation made by FinPro relied upon the information
contained in this Offering Circular, including the Financial Statements of the
Bank and Notes thereto. FinPro has advised the Bank that it also has considered
the effect of the Minority Ownership Interest represented by the Common Stock in
the
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Offering in terms of liquidity of the Common Stock in the after market,
marketability of the Common Stock, the possibility of conversion of the Mutual
Company to stock form, and other factors considered relevant. In addition,
FinPro has advised the Bank that it has considered and will consider the effect
of the additional capital raised by the sale of the Common Stock in the Offering
on the estimated aggregate pro forma market value of such shares. FinPro also
considered the following factors, among others: the present and projected
operating results and financial condition of the Bank and the economic and
demographic conditions in the Bank's existing market area; certain historical,
financial and other information relating to the Bank; a comparative evaluation
of the operating and financial statistics of the Bank with those of other
publically traded subsidiaries of mutual holding companies located in the Bank's
primary market area and the Mid-Atlantic area of the United States; the
aggregate size of the Offering of the Common Stock; the impact of the minority
stock offering on the Bank's net worth and earnings potential; the transfer of
$100,000 from the Bank to the Mutual Company; the proposed dividend policy of
Bancorp; the majority ownership of the Common Stock by the Mutual Company; and
the trading market for securities of comparable institutions and general
conditions in the market for such securities.
On the basis of the foregoing, FinPro advised Bancorp and the Bank that, in
its Independent Valuation, dated June 12, 1998, the estimated pro forma market
value of the Common Stock ranged from a minimum of $35.6 million to a maximum of
$48.2 million, with a midpoint of $41.9 million (the "Estimated Price Range").
Based on the estimated Price Range and the Purchase Price, the number of
shares of Common Stock that Bancorp will issue to the Minority Stockholders and
the Mutual Company will range from between 3,561,439 shares to 4,818,418 shares,
with a midpoint of 4,189,929 shares. The Board determined to offer 43% of such
shares, or between 1,531,445 shares and 2,071,955 shares with a midpoint of
1,801,700 shares (the "Offering Range") to depositors and the public pursuant to
this Prospectus. In addition, up to 86,815 shares (up to 99,837 at the adjusted
maximum of the Estimated Price Range) are being issued to the Foundation from
authorized and issued shares as part of the Reorganization, which will result in
Minority Stockholders owning 42.2% of the shares of the Common Stock outstanding
at the conclusion of the Reorganization and Offering. The 56.0% of the shares of
Bancorp's Common Stock that are not sold in the Offering or contributed to the
Foundation will be issued to the Mutual Company. As a result of the
establishment of the Foundation, the interests of the Minority Stockholders and
the interests of the Mutual Company are both diluted by 1.77%. Such dilution
results in the Mutual Company owning a 1.01% less interest in Bancorp and the
Minority Stockholders owning a 0.76% less interest in Bancorp as compared to
their interests in Bancorp if the Foundation was not established.
The Board of Directors of the Bank have reviewed the Independent Valuation
of FinPro and in determining the reasonableness and adequacy of such Independent
Valuation consistent with OTS regulations and policies, have reviewed the
methodology and reasonableness of the assumptions utilized by FinPro in the
preparation of such Independent Valuation. The Offering Range may be amended
with the approval of the OTS (if required), if necessitated by subsequent
developments in the financial condition of Bancorp or the Bank or market
conditions generally.
In the event of a change in the Independent Valuation immediately prior to
consummation of the Offering, Bancorp may adjust the Minority Ownership Interest
by increasing or decreasing the total number of shares of Common Stock to be
issued to the Mutual Company in the Reorganization and/or the number of shares
Common Stock to be issued in the Offering. Increases or decreases in the number
of shares of Common Stock to be issued in the Reorganization and Offering as a
result of a change in the Independent Valuation would be subject to applicable
limitations on purchases of Common Stock and, unless otherwise permitted by the
Bank or required by the OTS, no resolicitation of persons who ordered Common
Stock in the Offering will be made and such persons will not be permitted to
modify or cancel their orders unless the Independent Valuation changes to less
than $36.3 million or greater than $56.4 million.
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In the event of an increase in the Independent Valuation up to $56.4
million immediately prior to consummation of the Offering, Bancorp may, in its
discretion, choose to increase the number of shares of Common Stock issued in
the Offering up to 2,382,748 shares without offering persons who subscribed for
shares an opportunity to increase, decrease or rescind their orders. If the
Independent Valuation increases to $56.4 million, the total number of shares of
Common Stock issued and outstanding, including shares issued to the Mutual
Company, upon consummation of the Offering would be 5,641,018. Under such
circumstances, if Bancorp chose to increase the number of shares of Common Stock
offered in the Offering to 2,382,748 shares, the 2,382,748 shares would
represent a 42.2% Minority Ownership Interest, taking into account shares issued
to the Foundation. The final Minority Ownership Interest will be determined as
follows: (i) the numerator shall be the product of (x) the number of shares of
Common Stock sold in the Offering and (y) the Purchase Price ($10 per share);
and (ii) the denominator shall be the updated valuation of the pro forma value
of the Bank upon conclusion of the Offering as determined by FinPro.
THE INDEPENDENT VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
SUCH SHARES. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS OF THE
BANK AND NOTES THERETO AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID
FINPRO INDEPENDENTLY VALUE THE ASSETS OR LIABILITIES OF THE BANK. THE VALUATION
CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS A
LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE THE VALUATION IS BASED UPON
ESTIMATES AND PROJECTIONS ON A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING THE
COMMON STOCK IN THE OFFERING WILL BE ABLE TO SELL SUCH SHARES AT A PRICE EQUAL
TO OR GREATER THAN THE PURCHASE PRICE. SEE "ADDITIONAL INFORMATION" FOR ADVICE
ON HOW TO OBTAIN A COPY OF THE INDEPENDENT VALUATION.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank and the OTS that, to the best of its
knowledge, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause FinPro to conclude that the value of the
Common Stock at the price so determined is incompatible with its estimate of the
pro forma market value of the Common Stock at the conclusion of the
Reorganization and Offering.
In the event the Offering is either more than 15% above the maximum of the
Offering Range or less than the minimum of the Offering Range, or if the
Independent Valuation changes by more than 15%, the Bank, after consulting with
the OTS, may terminate the Offering and return all funds promptly with interest
on payments made by check, bank draft or money order, extend or hold a new
Subscription Offering and/or Community Offering, establish a new Offering Range,
commence a resolicitation of subscribers or take such other actions as permitted
by the OTS in order to complete the Reorganization and the Offering. In the
event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly returned
to investors as described above. A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45 days
unless further extended by the OTS for a period of up to 90 days not to extend
beyond ________________, ____.
If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then Bancorp may offer the remaining shares in a Syndicated
Community Offering which may commence concurrently with the Subscription and
Community Offerings, subject to prior rights of subscribers, or as soon as
practicable following the close of the Subscription and Community Offerings.
All shares of Common Stock, whether sold in the Subscription and Community
Offerings or Syndicated Community Offering, will be sold at a fixed purchase
price of $10 per share. See "--Syndicated Community Offering."
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No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, Bancorp and the OTS that, to the best
of its knowledge, nothing of a material nature has occurred which, taking into
account all relevant factors, including those which would be involved in a
cancellation of the Syndicated Community Offering, would cause FinPro to
conclude that the aggregate value of the Common Stock at the Purchase Price is
incompatible with its estimate of the pro forma market value of the Common Stock
of Bancorp at the conclusion of the Offering. Any change which would result in
an aggregate purchase price which is below the minimum or more than 15% above
the maximum of the Offering Range would be subject to OTS approval. If such
confirmation is not received, Bancorp may extend the Offering, extend, reopen or
commence a new Subscription Offering, Community Offering or Syndicated Community
Offering, establish a new Offering Range and commence a resolicitation of all
subscribers with the approval of the OTS or take such other actions as permitted
by the OTS in order to complete the Offering or terminate the Plan and cancel
the Offering. In the event that a resolicitation is commenced, unless an
affirmative response is received within a reasonable period of time, all funds
will be promptly returned to investors as described above. A resolicitation, if
any, following the conclusion of the Subscription and Community Offerings would
not exceed 45 days unless further extended by OTS for periods up to 90 days not
to extend beyond _____________, ____.
The actual number of shares of Common Stock sold in the Offering may be
adjusted within the Offering Range at the discretion of the Board of Directors
prior to completion of the Offering, as long as the Holding Company at the close
of the Offering owns a majority of the issued and outstanding voting stock of
the Bank.
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan, rights to subscribe for the purchase of Common
Stock have been granted under the Plan to the following persons in the following
order of descending priority: (1) Eligible Account Holders; (2) the ESOP; (3)
Supplemental Eligible Account Holders; and (4) Other Members. All subscriptions
received will be subject to the availability of Common Stock after satisfaction
of all subscriptions of all persons having prior rights in the Subscription
Offering and to the maximum and minimum purchase limitations set forth in the
Plan and as described below under "--Limitations on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of: (1)
the amount permitted to be purchased in the Community Offering, currently
$350,000 of Common Stock; (2) one-tenth of one percent (.10%) of the total
offering of shares of Common Stock; or (3) fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the Eligible Account Holder's Qualifying Deposit (defined by the Plan
as any deposit account in the Bank with a balance of $50 or more as of February
28, 1997) and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders, in each case on the Eligibility Record Date, subject
to the overall purchase limitation and exclusive of an increase in the shares
issued pursuant to an increase in the Offering Range of up to 15%. See "--
Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Common Stock in excess of the total number of such shares
eligible for subscription, the shares of Common Stock shall be allocated among
the subscribing Eligible Account Holders so as to permit each subscribing
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his or her
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total allocation of Common Stock equal to the lesser of 100 shares or the number
of shares subscribed for by the Eligible Account Holder. Any shares remaining
after that allocation will be allocated among the subscribing Eligible Account
Holders whose subscriptions remain unsatisfied in the proportion that the amount
of the Qualifying Deposit of each Eligible Account Holder whose subscription
remains unsatisfied bears to the total amount of the Qualifying Deposits of all
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also Directors or Officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding February 28, 1997.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Offering, including shares issued to the
Foundation, and any increase in the number of shares of Common Stock to be
issued in the Offering after the date hereof as a result of an increase of up to
15% in the maximum of the Offering Range. The ESOP intends to purchase 8% of
the shares to be issued in the Offering, including shares issued to the
Foundation, or 127,649 shares and 172,702 shares, based on the minimum and
maximum of the Offering Range, respectively. Subscriptions by the ESOP will not
be aggregated with shares of Common Stock purchased directly by or which are
otherwise attributable to any other participants in the Subscription and
Community Offering, including subscriptions of any of the Bank's directors,
officers, employees or associates thereof. See "Management of the Bank--
Benefits--Employee Stock Ownership Plan."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of: (1) the amount permitted to be purchased in the
Community Offering, currently $350,000 of Common Stock; (2) one-tenth of one
percent (.10%) of the total offering of shares of Common Stock; or (3) fifteen
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the Supplemental Eligible
Account Holder's Qualifying Deposit and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders, in each case
on the Supplemental Eligibility Record Date, subject to the overall purchase
limitation and exclusive of an increase in the shares issued pursuant to an
increase in the Offering Range of up to 15%. See "-- Limitation on Common Stock
Purchase."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of such shares eligible for subscription, the shares of Common
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Common Stock equal to the lesser of 100 shares or the
number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares
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remaining after that allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion that the amount of the Qualifying Deposit of each Supplemental
Eligible Account Holder whose subscription remains unsatisfied bears to the
total amount of the Qualifying Deposits of all Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more remaining Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable subscription
rights to subscribe for Common Stock in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $350,000 of Common Stock, or one-tenth of one percent (.10%) of the
total offering of shares of Common Stock, subject to the overall purchase
limitation and exclusive of an increase in shares issued pursuant to an increase
in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of Common
Stock which, when added to the shares of Common Stock subscribed for by the
Eligible Account Holders, the ESOP and the Supplemental Eligible Account Holders
is in excess of the total number of shares of Common Stock being issued, the
subscriptions of such Other Members will be allocated among the subscribing
Other Members so as to permit each subscribing Other Member, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation of Common Stock equal to the lesser of 100 shares or the number of
shares subscribed for by the Other Member. Any shares remaining after that
allocation will be allocated among the subscribing Other Members whose
subscriptions remain unsatisfied pro rata in the same proportion that the number
of votes of a subscribing Other Member on the Voting Record Date bears to the
total votes on the Voting Record Date of all subscribing Other Members whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more remaining Other Members, the excess shall be
reallocated (one or more times as necessary) among those remaining Other Members
whose subscriptions are still not fully satisfied on the same principle until
all available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Other Member must list on his
subscription order form all accounts in which he has an ownership interest.
Failure to list an account could result in less shares being allocated than if
all accounts had been disclosed. The subscription rights received by Eligible
Account Holders and Supplemental Eligible Account Holders will be applied in
partial satisfaction to the subscription rights to be received as an Other
Member.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on _______________, 1998, unless extended for up to 45 days by the
Bank or such additional periods with the
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approval of the OTS. Subscription rights which have not been exercised prior to
the Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the Expiration Date, unless such period is extended
with the consent of the OTS, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be cancelled. If an extension beyond the
45 day period following the Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions and have their funds returned promptly with
interest, and of the time period within which subscribers must affirmatively
notify the Bank of their intention to confirm, modify, or rescind their
subscription. If an affirmative response to any resolicitation is not received
by Bancorp from a subscriber, such order will be rescinded and all subscription
funds will be promptly returned with interest. Such extensions may not go
beyond ___________, ____.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the ESOP, the Supplemental
Eligible Account Holders and Other Members, the Bank has determined to offer
shares pursuant to the Plan to certain members of the general public, with
preference given to natural persons residing in Bergen, Essex and Morris
Counties, New Jersey, subject to the right of the Bank to accept or reject any
such orders, in whole or in part, in their sole discretion. Persons purchasing
stock in the Community Offering, together with associates of and persons acting
in concert with such persons, may purchase up to $350,000 of Common Stock
subject to the maximum overall purchase limitation and exclusive of shares
issued pursuant to an increase in the Offering Range by up to 15%. See "--
Limitations on Common Stock Purchases." This amount may be increased to up to a
maximum of 5% or decreased to less than $350,000 at the sole discretion of the
Bank. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND BANCORP, IN ITS SOLE
DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT
THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of subscribers after completion of the Subscription Offering,
such stock will be allocated first to each subscriber whose order is accepted by
the Bank, in an amount equal to the lesser of 100 shares or the number of shares
subscribed for by each such subscriber, if possible. Thereafter, unallocated
shares will be allocated among the subscribers whose order remains unsatisfied
on a 100 shares per order basis until all such orders have been filled or the
remaining shares have been allocated.
SYNDICATED COMMUNITY OFFERING
As a final step in the Offering, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of Bancorp to assist
Bancorp and the Bank in the sale of the Common Stock. Bancorp and the Bank have
the right to reject orders in whole or in part in its sole discretion in the
Syndicated Community Offering. Neither Sandler O'Neill nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
Common Stock in the Syndicated Community Offering,
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however, Sandler O'Neill has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "-- Stock Pricing and
Number of Shares Issued." Subject to overall purchase limitations, no person,
together with any associate or group of persons acting in concert, will be
permitted to subscribe in the Syndicated Community Offering for more than
$350,000 of the Common Stock, exclusive of an increase in shares issued pursuant
to an increase in the Offering Range of up to 15%; provided, however, that
shares of Common Stock purchased in the Community Offering by any persons,
together with associates of or persons acting in concert with such persons, will
be aggregated with purchases in the Syndicated Community Offering and be subject
to an overall maximum purchase limitation of $700,000 of the shares offered,
exclusive of an increase in shares issued pursuant to an increase in the
Offering Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Offering.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the close of the Subscription Offering, unless extended by the Bank
with the approval of the OTS. Such extensions may not be beyond. See "--Stock
Pricing and Number of Shares Issued."
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PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
Bancorp and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Plan provides
that the Bank is not required to offer stock in the Subscription Offering to any
person who resides in a foreign country or resides in a state of the United
States with respect to which both of the following apply: (i) a small number of
persons otherwise eligible to subscribe for shares of Common Stock reside in
such state; and (ii) Bancorp or the Bank determines that compliance with the
securities laws of such state would be impracticable for reasons of cost or
otherwise, including but not limited to a request that the Bank or its officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request to register or otherwise
qualify the subscription rights or Common Stock for sale or submit any filing
with respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Bank will base its decision as
to whether or not to offer the Common Stock in such state on a number of
factors, including the size of accounts held by account holders in the state,
the cost of registering or qualifying the shares or the need to register the
Bank, its officers, directors or employees as brokers, dealers or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank has engaged Sandler O'Neill as a consultant and financial advisor
in connection with the offering of the Common Stock, and Sandler O'Neill has
agreed to use its best efforts to solicit subscriptions and purchase orders for
shares of Common Stock in the Offering. Based upon negotiations concerning fee
structure, Sandler O'Neill will receive a marketing fee equal to 1.5% of the
aggregate Purchase Price of the shares sold in the Subscription and Community
Offerings, excluding shares purchased by directors, officers, employees, and any
immediate family member thereof, and any employee benefit plan of Bancorp or the
Bank, including the ESOP, for which Sandler O'Neill will not receive a fee. In
the event that a selected dealers agreement is entered into in connection with a
Syndicated Community Offering, the Bank will pay a fee (to be negotiated at such
time under such agreement) to such selected dealers, any sponsoring dealers
fees, and a management fee to Sandler O'Neill of 1.50% for shares sold by
National Association of Securities Dealers, Inc. ("NASD") member firms pursuant
to a selected dealers agreement; provided, however, that any fees payable to
Sandler O'Neill for Common Stock sold by them pursuant to such a selected
dealers' agreement shall not exceed 1.50% of the Purchase Price and provided,
further, however, that the aggregate fees payable to Sandler O'Neill and the
selected dealers will not exceed 7.0% of the aggregate purchase price of the
Common Stock sold by selected dealers. Fees to Sandler O'Neill and to any other
broker-dealer may be deemed to be underwriting fees, and Sandler O'Neill and
such broker-dealers may be deemed to be underwriters. The Bank has agreed to
indemnify Sandler O'Neill for reasonable costs and expenses in connection with
certain claims or liabilities, including certain liabilities under the
Securities Act. Sandler O'Neill has received advances towards its fees
totalling $50,000. Total marketing fees to Sandler O'Neill are expected to be
$167,000 and $242,000 at both the minimum and the maximum of the Offering Range,
respectively. See "Pro Forma Data" for the assumptions used to arrive at these
estimates.
Sandler O'Neill will perform proxy solicitation services, offering agent
services and records management services for the Bank in the Offering and will
receive a fee for these services of $15,000. Reasonable out-of-pocket expenses
shall not exceed $60,000.
Directors and executive officers of the Bank may participate in the
solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered representatives.
Other employees of the Bank may participate in the Offering in ministerial
capacities or
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providing clerical work in effecting a sales transaction. Such other employees
have been instructed not to solicit offers to purchase Common Stock or provide
advice regarding the purchase of Common Stock. The Bank will rely on Rule 3a4-1
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
sales of Common Stock will be conducted within the requirements of Rule 3a4-1,
so as to permit officers, directors and employees to participate in the sale of
Common Stock. No officer, director or employee of the Bank will be compensated
in connection with his participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
PROCEDURE FOR PURCHASING SHARES IN THE OFFERING
To ensure that each purchaser receives an offering circular at least 48
hours before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no offering circular will be mailed any later than five days prior to such
date or hand delivered any later than two days prior to such date. Execution of
the stock order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with an offering circular.
To purchase shares in the Subscription and Community Offerings, an executed
stock order form and certification form with the required payment for each share
subscribed for, or with appropriate authorization for withdrawal from the Bank's
deposit account (which may be given by completing the appropriate blanks in the
stock order form), must be received by the Bank at any of its offices by 12:00
noon, Eastern time, on the Expiration Date. Stock order forms which are not
received by such time or are executed defectively or are received without full
payment (or appropriate withdrawal instructions) are not required to be
accepted. In addition, the Bank is not obligated to accept orders submitted on
photocopied or facsimilied stock order forms and will not accept stock order
forms unaccompanied by an executed certification form. Notwithstanding the
foregoing, the Bank shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of Common
Stock for which they subscribe in the Community Offering at any time prior to 48
hours before the completion of the Offering. The Bank has the right to waive or
permit the correction of incomplete or improperly executed forms, but does not
represent that it will do so. Once received, an executed stock order form may
not be modified, amended or rescinded without the consent of the Bank unless the
Reorganization has not been completed within 45 days after the end of the
Subscription and Community Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (February 28,
1997) and/or the Supplemental Eligibility Record Date (_________) and/or the
Voting Record Date (_____________) must list all accounts on the stock order
form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Offering. Orders for Common Stock submitted by subscribers in the
Subscription Offering which aggregate $50,000 or more must be paid by official
or certified check or by withdrawal authorization from a deposit account of the
Bank. If payment is made by authorization of withdrawal from deposit accounts,
the funds authorized to be withdrawn from a deposit
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account will continue to accrue interest at the contractual rates until
completion or termination of the Offering, but a hold will be placed on such
funds, thereby making them unavailable to the depositor until completion or
termination of the Offering.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Reorganization. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be cancelled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription and Community
Offerings, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unaffiliated third party to lend to the ESOP, at such time,
the aggregate Purchase Price of the shares for which it subscribed.
Owners of self-directed IRAs and similar tax-qualified plans ("Qualified
Plans") may use the assets of such IRAs and Qualified Plans to purchase shares
of Common Stock in the Subscription and Community Offerings, provided that such
IRAs and Qualified Plans are not maintained at the Bank. Persons with self-
directed IRAs and Qualified Plans maintained at the Bank must have their
accounts transferred to an unaffiliated institution or broker to purchase shares
of Common Stock in the Subscription and Community Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and ten
percent shareholders who use self-directed IRA and Qualified Plans funds to
purchase shares of Common Stock in the Subscription and Community Offerings,
make such purchases for the exclusive benefit of the IRAs and Qualified Plans.
Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan sets forth various limitations on purchases of Common Stock in the
Offering. The limitations which are applicable to tax-qualified employee stock
benefit plans relate solely to the ESOP and are referred to below in this
regard.
(1) A minimum of 25 shares of Common Stock must be purchased by each Person
purchasing shares in the Offering to the extent those shares are available;
provided, however, that in the event the minimum number of shares of Common
Stock purchased times the price per share exceeds $500, then such minimum
purchase requirement shall be reduced to such number of shares of Common Stock
which when multiplied by the price per share shall not exceed $500, as
determined by the Board.
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount permitted to be
purchased in the Community Offering, currently $350,000
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of Common Stock; 2) one-tenth of one percent (.10%) of the total offering of
shares of Common Stock; or 3) fifteen times the product (rounded down to the
next whole number) obtained by multiplying the total number of shares of Common
Stock to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders, in each
case on the Eligibility Record Date subject to the overall maximum purchase
limitation in (2) above and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%.
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Common Stock issued in the Offering, including shares issued to the
Foundation and shares issued in the event of an increase in the Estimated Price
Range of 15%, and intends to purchase 8% of the shares of Common Stock issued in
the Offering, including shares issued to the Foundation.
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently $350,000 of
Common Stock; 2) one-tenth of one percent (.10%) of the total offering of shares
of Common Stock; or 3) fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the Qualifying
Deposit of the Supplemental Eligible Account Holder and the denominator is the
total amount of Qualifying Deposits of all Supplemental Eligible Account
Holders, in such case on the Supplemental Eligibility Record date subject to the
overall maximum purchase limitation in (2) above and exclusive of an increase in
the total number of shares issued due to an increase in the estimated Price
Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of: 1) the amount permitted to be purchased in the
Community Offering, currently $350,000 of Common Stock; or 2) one-tenth of one
percent (.10%) of the total offering of shares of Common Stock, in each case
subject to the overall maximum purchase limitation in (2) above and exclusive of
an increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%.
(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert with such
persons, may purchase in the Community Offering to $350,000 of Common stock,
subject to the overall maximum purchase limitation in (2) above and exclusive of
an increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%.
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons acting in concert with such
persons, may purchase in the Syndicated Offering up to $350,000 of Common Stock,
subject to the overall maximum purchase limitation in (2) above and exclusive of
an increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15% and, provided further that shares of Common
Stock purchased in the Community Offering by any persons, together with
associates of or persons acting in concert with such persons, will be aggregated
with purchases in the Syndicated Community Offering in applying the $350,000
purchase limitation.
(8) Except for the ESOP, the overall maximum number of shares of Common
Stock subscribed for or purchased in all categories of the Offering by any
person, together with associates of or persons acting
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in concert with such persons, shall not exceed $700,000 of the Common Stock
offered, exclusive of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%.
(9) In addition to the above purchase limitations, the Plan of Stock
Issuance sets forth certain additional limitations on purchases of shares of
Common Stock in the Offering, as follows: (i) the aggregate amount of Common
Stock acquired in the Offering by any non-tax-qualified employee stock benefit
plan or any insider of the Bank and his or her associates, exclusive of any
Common Stock acquired by said plan, or such insider and his or her associates,
in the secondary market, shall not exceed 10% of (a) the outstanding shares of
Common Stock, or (b) the stockholders' equity of Bancorp, held by persons other
than the MHC at the close of the Offering; and (ii) the aggregate amount of
Common Stock acquired in the Offering by all non-tax-qualified employee stock
benefit plans and insiders of the Bank and their associates shall not exceed
thirty percent (30%) of the (a) outstanding shares of Common Stock, or (b)
stockholders' equity of Bancorp, held by persons other than the Mutual Company
at the close of the Offering.
For purposes of the foregoing limitations (i) directors, officers and
employees shall not be deemed to be associates or a group acting in concert
solely as a result of their capacities as such and (ii) shares purchased by the
ESOP shall not be attributable to the individual officers or beneficiaries of
such plan for purposes of determining compliance with the foregoing limitations.
For purposes of the foregoing limitations, the term "Person" means any
corporation, partnership, association, joint stock-company, trust (including
Individual Retirement Accounts and KEOGH Accounts), unincorporated organization,
government or political subdivision thereof, or any other entity. For purposes
of the foregoing limitations, the term "Associate" when used to indicate a
relationship with any person, means (i) any corporation or organization (other
than the Bank or a majority owned subsidiary of the Bank) of which such person
is an officer or partner or is, directly or indirectly, the beneficial owner of
10% or more of any class of equity securities, (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person serves as trustee or in a similar fiduciary capacity except that the term
"Associate" does not include any Non-Tax-Qualified Employee Stock Benefit Plan
or any Tax-Qualified Employee Stock Benefit Plan in which a person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity, and except that, for purposes of aggregating total shares that may be
held by Officers and Directors the term "Associate" does not include any Tax-
Qualified Employee Stock Benefit Plan, and (iii) any relative or spouse of such
person, or any relative of such spouse, who has the same home as such person or
who is a Director or Officer of the Bank, Bancorp or the Mutual Company, or any
of its parents or subsidiaries. "Insider" means any officer or director of the
Bank, Bancorp, the Mutual Company or the Stock Bank or any affiliates of such
entities, and any person acting in concert with any such officer or director.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% at
the sole discretion of Bancorp and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit. In addition, the Boards of
Directors of Bancorp and the Bank may, in their sole discretion, increase the
maximum purchase limitation referred to above up to 9.99%, provided that orders
for shares exceeding 5% of the shares being offered in the Subscription and
Community Offerings shall not exceed, in the aggregate, 10% of the shares being
offering the Subscription and Community Offerings. Requests to purchase
additional shares of Common
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Stock under this provision will be determined by the Boards of Directors and, if
approved, allocated on a pro rata basis giving priority in accordance with the
priority rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than 1%
but the individual amount permitted to be subscribed for may be reduced by the
Bank to less than $350,000, subject to paragraphs (4), (12) and (13) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1% of the shares offering, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Offering,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Offering.
In the event of an increase in the total number of shares offered due to an
increase in the Offering Range of up to 15% (the "Adjusted Maximum"), the
additional shares will be allocated in the following order of priority in
accordance with the Plan: (i) to fill the ESOP's subscription of 8% of the
Adjusted Maximum number of shares including shares issued to the Foundation;
(ii) in the event that there is an oversubscription by Eligible Account Holders,
to fill unfulfilled subscriptions of Eligible Account Holders exclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unfulfilled subscriptions of
Supplemental Eligible Account Holders, exclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unfulfilled subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unfulfilled subscriptions in the Community Offering to the
extent possible exclusive of the Adjusted Maximum with preference given to
natural persons residing in Bergen, Essex and Morris Counties, New Jersey.
RESTRICTION ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his or her account. Each person exercising such subscription rights
will be required to certify that he or she is purchasing shares solely for this
or her own account and that he or she has no agreement or understanding
regarding the sale or transfer of such shares. OTS regulations also prohibit any
person from offering or making an announcement of an offer or intent to make an
offer to purchase such subscription rights or shares of Common Stock prior to
the completion of the Reorganization and Offering. Certificates representing
shares of Common Stock purchased in the Subscription Offering must be registered
in the name of the Eligible Account Holder or Supplemental Eligible Account
Holder, as the case may be. Joint registrations will be allowed only if the
qualifying account is so registered.
RESTRICTIONS ON SALE OF STOCK BY DIRECTORS AND OFFICERS
All shares of Common Stock purchased in the Offering by a director or an
executive officer of the Bank will be subject to a restriction that the shares
not be sold for a period of one year following the Reorganization, except in the
event of the death of such director or executive officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The directors and executive officers of the Bank will also be subject to the
insider trading rules promulgated pursuant to the Exchange Act and any other
applicable requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Bank by directors,
executive officers (or any person who was an executive officer or director of
the Bank after adoption of the Plan) and their associates during the three-year
period following Reorganization may be made only through a broker or dealer
registered with the United States Securities and Exchange Commission ("SEC"),
except with the prior written approval of the OTS. This restriction does not
apply, however, to negotiated transactions involving more than 1.0% of the
Bank's outstanding Common Stock or to the purchase of stock pursuant to any
stock option plan to be established after the Reorganization.
Unless approved by the OTS, Bancorp, pursuant to OTS regulations, will be
prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders of Bancorp on a pro rata basis
(except that the Mutual Company may be excluded from the repurchase with the
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OTS' approval); (ii) for the repurchase of qualifying shares of a director; or
(iii) for the purchase in the open market by a tax-qualified or non-tax-
qualified employee stock benefit plan of the Bank (but not of Bancorp) in an
amount reasonable and appropriate to fund such plan.
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the Bank
will be final. The Plan provides that the Bank's Board of Directors shall have
the discretion to interpret and apply the provisions of the Plan to particular
circumstances and that such interpretation or application shall be final. This
includes any and all interpretations, applications and determinations made by
the Board of Directors on the basis of such information and assistance as was
then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of Directors
at any time prior to the Special Meeting with the concurrence of the OTS. The
Plan may be amended at any time after the approval of members with the approval
of the OTS and no further approval of the members will be necessary unless
otherwise required by the OTS. By adoption of the Plan, the Bank's members will
be deemed to have authorized amendment of the Plan under the circumstances
described above.
The establishment of the Foundation will be considered as a separate matter
from approval of the Plan. If the Bank's members approve the Plan, but not the
creation of the Foundation, the Bank intends to complete the Reorganization
without the Foundation. Failure to approve the establishment of the Foundation
may materially increase the pro forma market value of the Common Stock being
offered since the Valuation Range, as set forth herein, takes into account the
dilutive impact of the issuance of shares to the Foundation. In such an event,
the Bank may establish a new Offering Range and commence a resolicitation of
subscribers. In the event of a resolicitation, unless an affirmative response is
received within a specified period of time, all funds will be promptly returned
to investors, as described elsewhere herein. See "--Stock Pricing and Number of
Shares Issued."
CERTAIN RESTRICTIONS ON ACQUISITION OF BANCORP
The following discussion is a general summary of OTS and other regulatory
restrictions on the acquisition of the Common Stock. In addition, the following
discussion generally summarizes certain provisions of Bancorp's Charter and
Bylaws.
MUTUAL HOLDING COMPANY STRUCTURE
Valuation Range. The mutual holding company structure could restrict the
ability of stockholders of Bancorp to effect a change in management of Bancorp
and the Bank and a change in control of Bancorp and the Bank because the Mutual
Company, as long as it remains in the mutual form of organization, will control
a majority of the voting stock of Bancorp. In addition, the Mutual Company is
controlled by the members of the Mutual Company (i.e., depositors of the Bank),
and such members may grant proxies in favor of the Bank's management. Thus,
management of the Mutual Company will be able to exert voting control over
Bancorp. See "Risk Factors -- Considerations Resulting from Mutual Holding
Company Structure."
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CHANGE IN BANK CONTROL ACT
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless the OTS has been given 60 days' prior
written notice. The HOLA provides that no company may acquire "control of a
savings association without the prior approval of the OTS." Any company that
acquires such control becomes a "savings and loan holding company" subject to
registration, examination, and regulation by the OTS. Pursuant to federal
regulations, control of savings associations is conclusively deemed to have been
acquired by, among other things, the acquisition of more than 25% of any class
of voting stock of an association or the ability to control the election of a
majority of the directors of more than 10% of any class of voting stock, or of
more than 25% of any class of stock, of a savings association, where certain
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition of control if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or of the public to permit the
acquisition of control by such person. The foregoing restrictions do not apply
to the acquisition of Bancorp's capital stock by one or more tax-qualified
employee stock benefit plans, provided that the plan or plans do not have
beneficial ownership in the aggregate of more than 25% of any class of equity
security of the Bank.
CHARTER AND BYLAWS AMENDMENT
The Charter of Bancorp provides that it may be amended only if such
amendment is first proposed by the Board of Directors of Bancorp, approved by
the stockholders by a majority of the votes eligible to be cast at a legal
meeting of stockholders and submitted to the OTS for action as specified by law
or regulation. The Bylaws of Bancorp may be amended in a manner consistent with
the regulations of the OTS, and at any time by a majority of the Board of
Directors or by a majority of the votes cast at any legal meeting.
BOARD OF DIRECTORS
Bancorp's Bylaws provide that the Board of Directors is to be divided into
three classes which shall be as nearly equal in number as possible. The
directors in each class serve for terms of three years. Each director serves
until his or her successor is elected and qualified. The Bylaws also provide
that a director may only be removed for cause by the affirmative vote of at
least a majority of the voting power of all the then outstanding shares of
capital stock of Bancorp entitled to vote in an election of directors.
LIMITATIONS ON VOTING RIGHTS
Bancorp's Charter provides that no person, other than the Mutual Company,
may directly or indirectly offer to acquire or acquire the beneficial ownership
of more than 10% of the Common Stock, unless such offer is approved by a
majority of the Board of Directors. In addition, for a period of five years,
each share beneficially owned in violation of the foregoing limitation shall not
be entitled to vote, shall not be voted by any person or counted as voting
shares in connection with any matter submitted to stockholders for a vote, and
shall not be counted as outstanding for purposes of determining a quorum or the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote.
146
<PAGE>
SPECIAL MEETING OF STOCKHOLDERS
Bancorp's Bylaws provide that special meetings of stockholders may be
called only by the Board of Directors.
CUMULATIVE VOTING
Bancorp's Bylaws prohibit cumulative voting for any purpose. The absence
of cumulative voting rights effectively means that the holder of a majority of
the Common Stock to be voted at a meeting of stockholders (in this case, the
Mutual Company), may, if they so choose, elect all directors, thus precluding
the Minority Stockholders from obtaining representation on the Board of
Directors unless the Minority Stockholders are able to obtain the support of the
Mutual Company, the majority stockholder. In accordance with OTS regulations,
the Mutual Company must remain the majority stockholder of the voting stock of
Bancorp.
PREFERRED STOCK
Although Bancorp has no arrangements, understandings or plans at the
present time for the issuance or use of the shares of undesignated preferred
stock proposed to be authorized, the Board of Directors believes that the
availability of such shares will provide Bancorp with increased flexibility in
structuring future financings and acquisitions and in meeting other corporate
needs which may arise. In the event of a proposed merger, tender offer or other
attempt to gain control of Bancorp of which management does not approve, it may
be possible for the Board of Directors of Bancorp to authorize the issuance of
one or more series of preferred stock with rights and preferences which could
impede the completion of such a transaction.
DESCRIPTION OF CAPITAL STOCK OF BANCORP
GENERAL
Bancorp is authorized to issue capital stock consisting of nine million
(9,000,000) shares of Common Stock, par value $.01 per share, and one million
(1,000,000) shares of Preferred Stock, which may be issued in series and classes
having such rights, preferences, privileges and restrictions as Bancorp's Board
of Directors may determine. Each share of Common Stock of Bancorp will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Subject to the approval of the OTS, which has been
received, the Board of Directors of Bancorp is authorized to approve the
issuance of Common Stock up to the amount authorized by the Charter without the
approval of Bancorp's stockholders. Under OTS regulations, a majority of the
issued and outstanding voting stock of Bancorp must be held at all times by the
Mutual Company. THE COMMON STOCK OF BANCORP REPRESENTS NONWITHDRAWABLE CAPITAL,
IS NOT AN ACCOUNT OF AN INSURABLE TYPE, AND IS NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENT AGENCY. Upon payment of the Purchase Price for the Common
Stock, all such shares will be fully-paid, duly issued and nonassessable.
147
<PAGE>
COMMON STOCK
VOTING RIGHTS. The holders of the Common Stock possess exclusive voting
rights in Bancorp, except to the extent that shares of preferred stock issued in
the future may have voting rights. Each holder of the Common Stock is entitled
to one vote for each share held, except that the Charter eliminates voting
rights with respect to those shares that are beneficially owned by any person,
other than the Mutual Company, in excess of 10% of the Common Stock then
outstanding. Stockholders will not be permitted to cumulate their votes in the
election of directors.
DIVIDENDS. Upon consummation of the Reorganization, Bancorp's only assets
will be the portion of the net proceeds retained by it, the ESOP loan and the
Bank's capital stock. The payment of dividends by Bancorp is subject to
limitations that are imposed by applicable law and regulation. Bancorp's source
for the payment of cash dividends may in the future depend on receipt of
dividends from the Bank. See "Dividend Policy." The holders of the Common
Stock are entitled to receive and to share equally in such dividends as may be
declared by the Board of Directors out of funds legally available therefor. See
"Risk Factors -- Considerations Resulting from Mutual Holding Company
Structure," "Dividend Policy" and "Federal and State Taxation -- Federal
Taxation."
LIQUIDATION. In the unlikely event of any liquidation, dissolution, or
winding up of Bancorp, the holders of its Common Stock (and the holders of any
class or series of stock entitled to participate with the Common Stock in the
distribution of assets) will be entitled to receive all assets of Bancorp
available for distribution in cash or in kind after payment of all debts and
liabilities of Bancorp (including all deposit accounts and accrued interest
thereon in the Bank and distribution of the Bank's liquidation account) and any
accrued dividend claims. If Bancorp issues preferred stock subsequent to the
Offering, the holders thereof may also have priority over the holders of
Bancorp's Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the Common Stock will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to call for redemption. If the Bank determined
to issue authorized but unissued shares in the future to persons other than, or
in addition to the existing shareholders, the interests of existing stockholders
would be diluted to the extent of the additional issuance.
PREFERRED STOCK
None of the one million (1,000,000) authorized shares of preferred stock of
Bancorp will be issued in the Offering. The Board of Directors is authorized,
without stockholder approval, to issue preferred stock and to fix and state
voting powers, designations, preferences or other special rights of such shares.
If and when issued, the preferred stock may rank senior to the Common Stock as
to dividend rights, liquidation preferences, or both, and may have full, limited
or no voting rights. Accordingly, the issuance of preferred stock could
adversely affect the voting and other rights of holders of Common Stock.
The authorized but unissued shares of Preferred Stock and the authorized
but unissued and unreserved shares of Common Stock will be available for
issuance in future mergers or acquisitions, in a future underwritten public
offering or private placement or for other general corporate purposes. Except
as otherwise required to approve the transaction in which the additional
authorized shares of Preferred Stock would be issued, no stockholder approval
generally would be required for the issuance of these shares. Depending on the
circumstances, however, stockholder approval may be required pursuant to
requirements
148
<PAGE>
for continued trading of the Common Stock on the Nasdaq or the requirements of
any exchange on which the Common Stock may then be listed.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is _________________,
________________, __________________.
EXPERTS
The consolidated financial statements of the Bank 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 in this Prospectus, in reliance upon the report of
Radics & Co., LLC, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
FinPro has consented to the publication herein of the summary of its report
to the Bank setting forth its opinion as to the estimated pro forma market value
of the Common Stock upon Reorganization and its valuation with respect to
subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Reorganization will be passed upon for the Bank by Muldoon, Murphy &
Faucette, Washington, D.C., special counsel to the Bank. New Jersey state tax
consequences of the Reorganization and the Offering will be passed upon for the
Bank by Fontanella and Babitts. Certain legal matters will be passed upon for
Sandler O'Neill by Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C.
ADDITIONAL INFORMATION
Bancorp has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information,
including the Independent Valuation and tax opinions rendered in connection with
the Reorganization and Offering, which are exhibits to the Registration
Statement, can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, NW, Washington, DC 20549, and copies of
such material can be obtained from the SEC at prescribed rates. In addition,
the SEC maintains a web site (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC, including Bancorp. The Independent Valuation may
also be inspected by Eligible Account Holders and Supplemental Eligible Account
Holders at the offices of the Bank during normal business hours. The statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions of all material aspects of such documents, although not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The Bank has filed with the OTS a Notice of Mutual Holding Company
Reorganization on Form MHC-1 (the "Notice") and an Application for Approval of a
Minority Stock Issuance on Form MHC-2 (the "Application"). Pursuant to the
rules and regulations of the OTS, this Prospectus omits certain information
contained in the Notice and Application. The Notice and Application, including
the Independent Valuation,
149
<PAGE>
which is an exhibit to the Application, may be examined at the principal office
of the OTS, 1700 G Street, NW, Washington, DC 20552 and the office of the
Northeast Regional Director of the OTS located at 10 Exchange Place, Jersey
City, New Jersey 07302.
In connection with the Offering, Bancorp will register its Common Stock
with the SEC under Section 12(g) of the Exchange Act, and upon such
registration, Bancorp and the holders of its stock will become subject to the
proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by Directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, Bancorp has undertaken that it will not terminate such
registration for a period of at least three years following the Reorganization.
A copy of the Certificate of Incorporation and the Bylaws of Bancorp and
the Charter and Bylaws of the Bank are available without charge from the Bank.
The Bank's principal office is located at 417 Bloomfield Avenue, Caldwell, New
Jersey and its telephone number is (973) 226-7911.
150
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
INDEX
-----
<TABLE>
<CAPTION>
Page
---------------
<S> <C>
Independent Auditors' Report F-2
Consolidated Statements of Financial Condition
as of March 31, 1998 (unaudited) and December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the Three-Month Periods Ended
March 31, 1998 and 1997 (unaudited) and for Each of the Years
in the Three-Year Period Ended December 31, 1997 46
Consolidated Statements of Comprehensive Income for the Three-Month
Periods Ended March 31, 1998 and 1997 (unaudited) and for Each of
the Years in the Three-Year Period Ended December 31, 1997 F-4
Consolidated Statements of Retained Earnings for the Three-Month
Period Ended March 31, 1998 (unaudited) and for Each of the Years
in the Three-Year Period Ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for the Three-Month Periods
Ended March 31, 1998 and 1997 (unaudited) and for Each of the
Years in the Three-Year Period Ended December 31, 1997 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-33
</TABLE>
_____________________
The financial statements of West Essex Bancorp, Inc. have been omitted because
West Essex Bancorp, Inc. has not issued any stock, has no assets and no
liabilities and has not conducted any business.
All schedules are omitted because the required information is either not
applicable or not required or the required information is included in the
consolidated financial statements or notes thereto.
F-1
<PAGE>
[LETTERHEAD OF RADICS & CO., LLC APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors
West Essex Bank
We have audited the accompanying consolidated statements of financial condition
of West Essex Bank (the "Bank") and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, comprehensive income,
retained earnings 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 Bank'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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of West Essex Bank and Subsidiary as of December 31, 1997 and
1996, and the results of their operations and cash flows for each of the years
in the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Radics & Co., LLC
Pine Brook, New Jersey
March 6, 1998, except for the tenth paragraph
of Note 15, as to which the date is April 8, 1998
F-2
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------
ASSETS Note(s) 1998 1997 1996
- ------ ----------------- -------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Cash and amounts due from depository institutions $ 1,839,621 $ 1,832,548 $ 925,769
Interest-bearing deposits in other banks 15,489,434 6,863,570 6,828,493
-------------- ------------- -------------
Total cash and cash equivalents 1 and 17 17,329,055 8,696,118 7,754,262
Term deposits 5,000,000 - -
Securities available for sale 1, 2 and 17 7,105,300 7,080,550 1,647,454
Investment securities held to maturity 1, 3 and 17 28,768,169 22,928,866 22,476,466
Mortgage-backed securities held to maturity 1, 4, 11 and 17 122,632,889 130,174,291 113,254,086
Loans receivable 1, 5 and 17 114,302,459 112,734,741 82,134,147
Real estate owned 1 and 6 1,120,197 1,214,840 1,394,068
Premises and equipment 1 and 7 3,112,703 3,122,584 1,640,355
Federal Home Loan Bank of New York stock 11 2,281,500 2,183,800 1,670,400
Accrued interest receivable 1, 8 and 17 2,071,895 2,012,197 1,651,427
Excess of cost over assets acquired 1 and 9 5,680,692 5,828,884 -
Other assets 14 3,116,933 3,047,961 2,346,712
-------------- ------------- -------------
Total assets $ 312,521,792 $299,024,832 $235,969,377
============== ============= =============
Liabilities and retained earnings
- ---------------------------------
Liabilities
- -----------
Deposits 10 and 17 $ 239,120,486 $238,192,141 $179,945,503
Borrowed money 11 and 17 42,300,000 30,300,000 23,650,000
Advance payments by borrowers for taxes and insurance 795,177 772,429 622,190
Other liabilities 13 and 14 505,033 485,553 3,299,447
-------------- ------------- -------------
Total Liabilities 282,720,696 269,750,123 207,517,140
============== ============= =============
Commitments and contingencies 15 and 17 - - -
Retained earnings 12 and 14
- -----------------
Retained earnings - substantially restricted 29,721,316 29,210,175 28,473,335
Accumulated other comprehensive income - Unrealized
gain (loss) on securities available for sale, net
of taxes 79,780 64,534 (21,098)
-------------- ------------- -------------
Total retained earnings 28,801,096 29,274,709 28,452,237
-------------- ------------- -------------
Total liabilities and retained earnings $ 312,512,792 $299,024,832 $235,969,377
============== ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
---------------------------- -----------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Income $ 511,141 $ 523,056 $ 736,840 $ 1,656,008 $ 2,271,955
---------- ---------- ----------- ----------- -----------
Other comprehensive
income, net of income taxes:
Unrealized holding gains (losses)
on securities available for sale 15,246 (5,424) 65,387 20,679 84,946
Reclassification adjustment
for realized gains (losses) on
securities available for sale - - 20,245 (80,813) 22,014
---------- ---------- ----------- ----------- -----------
Other comprehensive income 15,246 (5,424) 85,632 (60,134) 106,960
---------- ---------- ----------- ----------- -----------
Comprehensive income $ 526,387 $ 517,632 $ 822,472 $ 1,595,874 $ 2,378,915
========== ========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
--------------------------------------------
<TABLE>
<CAPTION>
Retained Accumulated
Earnings - Other
Substantially Comprehensive
Restricted Income Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance - December 31, 1994 $ 24,545,372 $ (67,924) $ 24,477,448
Unrealized gain on securities available
for sale, net of income tax effect - 106,960 106,960
Net income for the year ended December 31, 1995 2,271,955 - 2,271,955
------------ ----------- -------------
Balance - December 31, 1995 26,817,327 39,036 26,856,363
Unrealized loss on securities available
for sale, net of income tax effect (60,134) (60,134)
Net income for the year ended December 31, 1996 1,656,008 - 1,656,008
------------ ----------- -------------
Balance - December 31, 1996 28,473,335 (21,098) 28,452,237
Unrealized gain on securities available
for sale, net of income tax effect - 85,632 85,632
Net income for the year ended December 31, 1997 736,840 - 736,840
------------ ----------- -------------
Balance - December 31, 1997 29,210,175 64,534 29,274,709
Unrealized gain on securities available for
sale, net of income tax effect (unaudited) - 15,246 15,246
Net income for the three months ended
March 31, 1998 (unaudited) 511,141 - 511,141
------------ ----------- -------------
Balance - March 31, 1998 (unaudited) $ 29,721,316 $ 79,780 $ 29,801,096
============ =========== =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 511,141 $ 523,056
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 74,659 51,918
Net accretion of premiums, discounts and deferred loan fees (79,971) (21,631)
Amortization of intangibles 148,192 -
Provision for loan losses (22,050) 55,000
Provision for losses on real estate owned 22,050 170,000
Loss (gain) on sale of securities available for sale - -
(Gain) on sale of real estate owned (5,386) (19,714)
Deferred income tax expense (benefit) 49,670 -
(Increase) decrease in accrued interest receivable (59,698) (264,235)
Decrease (increase) in refundable income taxes 34,070 146,502
(Increase) decrease in other assets (161,281) (99,299)
(Decrease) increase in interest payable on deposits (934) (16,625)
Increase (decrease) in other liabilities 19,480 172,429
------------ ------------
Net cash provided by (used in) operating activities 529,942 697,401
------------ ------------
Cash flows from investing activities:
Purchase of term deposits (5,000,000) -
Proceeds from maturities of securities available for sale - -
Proceeds from sale of securities available for sale - -
Proceeds from repayments on and calls of securities available for sale - 115,272
Purchases of securities available for sale - (2,023,131)
Proceeds from maturities and calls of investment securities held to maturity - 2,000,000
Purchases of investment securities held to maturity (5,789,660) (2,997,060)
Principal repayments on mortgage-backed securities held to maturity 7,534,184 5,774,110
Purchases of mortgage-backed securities held to maturity - (5,243,670)
Purchase of loans receivable (61,000) -
Net (increase) decrease in loans receivable (1,448,057) (863,486)
Proceeds from sales of real estate owned 73,979 293,800
Proceeds from other payments received on real estate owned 4,000 12,402
Capitalized cost of real estate owned - -
Additions to premises and equipment (64,778) (29,618)
Purchase of Federal Home Loan Bank of New York stock (97,700) (150,500)
------------ ------------
Net cash (used in) investing activities (4,849,032) (3,111,881)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 929,279 1,489,462
Proceeds of borrowed money 30,000,000 4,000,000
Repayment of borrowed money (18,000,000) (6,000,000)
Net increase (decrease) in
advance payments by borrowers for taxes and insurance 22,748 (18,144)
Cash received in connection with branch purchases - -
------------ ------------
Net cash provided by (used in) financing activities 12,952,027 (528,682)
------------ ------------
Net increase (decrease) in cash and cash equivalents 8,632,937 (2,943,162)
Cash and cash equivalents - beginning 8,696,118 7,754,262
------------ ------------
Cash and cash equivalents - ending $ 17,329,055 $ 4,811,100
============ ============
<PAGE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C>
Cash flows from operating activities:
Net income $ 736,840 $ 1,656,008 $ 2,271,955
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 230,524 207,456 149,290
Net accretion of premiums, discounts and deferred loan fees (127,373) (137,517) (190,428)
Amortization of intangibles 1,743,062 - -
Provision for loan losses 487,015 232,103 509,729
Provision for losses on real estate owned 372,985 45,000 33,749
Loss (gain) on sale of securities available for sale 20,245 (102,752) 22,014
(Gain) on sale of real estate owned (30,080) (117,201) (69,580)
Deferred income tax expense (benefit) (725,335) (36,609) 254,297
(Increase) decrease in accrued interest receivable (360,770) 1,946 (350,224)
Decrease (increase) in refundable income taxes 90,624 (137,887) 60,824
(Increase) decrease in other assets (101,782) 134,560 (298,754)
(Decrease) increase in interest payable on deposits 90,056 24,530 16,320
Increase (decrease) in other liabilities (2,815,465) 3,009,284 (13,635)
------------ ------------ ------------
Net cash provided by (used in) operating activities (389,454) 4,778,921 2,395,557
------------ ------------ ------------
Cash flows from investing activities:
Purchase of term deposits - - -
Proceeds from maturities of securities available for sale - 100,000 -
Proceeds from sale of securities available for sale 1,588,229 202,752 27,980
Proceeds from repayments on and calls of securities available for sale 115,272 91,875 94,395
Purchases of securities available for sale (7,033,784) (88,202) (86,080)
Proceeds from maturities and calls of investment securities held to maturity 10,000,000 7,000,000 2,000,000
Purchases of investment securities held to maturity (10,399,678) (10,997,500) (12,988,750)
Principal repayments on mortgage-backed securities held to maturity 20,084,461 17,384,271 11,750,649
Purchases of mortgage-backed securities held to maturity (37,026,167) (30,569,541) (22,443,315)
Purchase of loans receivable - (1,621,000) -
Net (increase) decrease in loans receivable (31,617,835) 4,010,899 (621,282)
Proceeds from sales of real estate owned 483,300 392,228 357,058
Proceeds from other payments received on real estate owned 39,602 15,500 35,256
Capitalized cost of real estate owned (6,665) - -
Additions to premises and equipment (352,753) (332,949) (317,461)
Purchase of Federal Home Loan Bank of New York stock (513,400) (161,400) (331,100)
------------ ------------ ------------
Net cash (used in) investing activities (54,639,418) (14,573,067) (22,522,650)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits 7,148,632 1,528,768 14,194,772
Proceeds of borrowed money 44,975,000 15,000,000 19,000,000
Repayment of borrowed money (38,325,000) (8,350,000) (12,000,000)
Net increase (decrease) in
advance payments by borrowers for taxes and insurance 150,239 (4,102) 8,232
Cash received in connection with branch purchases 42,021,857 - -
------------ ------------ ------------
Net cash provided by (used in) financing activities 55,970,728 8,174,666 21,203,004
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 941,856 (1,619,480) 1,075,911
Cash and cash equivalents - beginning 7,754,262 9,373,742 8,297,831
------------ ------------ ------------
Cash and cash equivalents - ending $ 8,696,118 $ 7,754,262 $ 9,373,742
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
---------------------------- -----------------------------------------
1998 1997 1997 1996 1995
----------- ------------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 110,480 $ 62,078 $ 1,035,078 $ 1,023,150 $ 901,127
=========== =========== =========== =========== ===========
Interest $ 2,865,550 $ 2,141,515 $ 9,501,814 $ 8,171,056 $ 7,630,527
=========== =========== =========== =========== ===========
Supplemental schedule of noncash investing activities:
Unrealized gain (loss) on securities
available or sale, net of deferred income taxes $ 15,246 $ (5,424) $ 85,632 $ (60,134) $ 106,960
=========== =========== =========== =========== ===========
Loans receivable transferred to (from) real
estate owned $ - $ 157,253 $ 679,914 $ 377,285 $ (82,943)
=========== =========== =========== =========== ===========
Loans originated to facilitate the sale of real
estate owned $ - $ - $ - $ - $ 72,500
=========== =========== =========== =========== ===========
Deferred gain on sale of real estate owned $ - $ - $ - $ - $ (92,451)
=========== =========== =========== =========== ===========
Assets acquired in connection with branch purchases:
Loans receivable $ - $ - $ 54,693 $ - $ -
Premises and equipment - - 1,360,000 - -
Excess of cost over assets acquired - - 7,571,946 - -
Other assets - - 457 - -
----------- ----------- ----------- ----------- -----------
$ - $ - $ 8,987,096 $ - $ -
=========== =========== =========== =========== ===========
Liabilities acquired in connection with branch
purchases:
Deposits $ - $ - $51,007,382 $ - $ -
Other Liabilities - - 1,571 - -
----------- ----------- ----------- ----------- -----------
$ - $ - $51,008,953 $ - $ -
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------
Basis of consolidated financial statement presentation
------------------------------------------------------
The consolidated financial statements include the accounts of the Bank and
its wholly owned subsidiary, West Essex Insurance Agency, Inc.
("Subsidiary"), and have been prepared in conformity with generally
accepted accounting principles. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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 dates of the consolidated statements of
financial condition and revenues and expenses for the periods then ended.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes relate
to the determination of the allowance for loan losses, the valuation of
real estate owned and the recoverability of excess of cost over assets
acquired. Management believes that the allowance for loan losses is
adequate and that real estate owned and excess of cost over assets acquired
are appropriately valued. While management uses available information to
recognize losses on loans and real estate owned and to assess the
recoverability of excess of cost over assets acquired, future additions to
the allowance for loan losses or further writedowns of real estate owned
and excess of cost over assets acquired may be necessary based on changes
in economic and market conditions in the Bank's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses and real estate owned valuations. Such agencies may require the
Bank to recognize additions to the allowance or additional writedowns based
on their judgments about information available to them at the time of their
examination.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other banks with original
maturities of three months or less.
Investments and mortgage-backed securities
------------------------------------------
Debt securities that the Bank has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized holding
gains and losses included in earnings. Debt and equity securities not
classified as trading securities nor as held-to-maturity securities are
classified as available for sale securities and reported at fair value,
with unrealized holding gains or losses, net of deferred income taxes,
reported in a separate component of retained earnings.
Premiums and discounts on all securities are amortized/accreted using the
interest method. Interest and dividend income on securities, which
includes amortization of premiums and accretion of discounts, is recognized
in the consolidated financial statements when earned. The adjusted cost
basis of an identified security sold or called is used for determining
security gains and losses recognized in the consolidated statements of
income.
F-8
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Loans receivable
----------------
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses and deferred loan fees. Interest is calculated by the use
of the actuarial method.
The Bank defers loan origination fees and certain direct loan origination
costs and amortizes such amounts, using the level-yield method, as an
adjustment of yield over the contractual lives of the related loans.
Uncollectible interest on loans that are contractually delinquent ninety
days or more is charged off and the related loans placed on nonaccrual
status, or, alternatively, an allowance for uncollectible interest is
established by a charge to interest income equal to all interest previously
accrued. Under either method, income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments is
probable, in which case the loan is returned to an accrual status.
Allowance for loan losses
-------------------------
An allowance for loan losses is maintained at a level considered adequate
to absorb loan losses. Management of the Bank, in determining the
allowance for loan losses, considers the risks inherent in its loan
portfolio and changes in the nature and volume of its loan activities,
along with the general economic and real estate market conditions.
The Bank utilizes a two tier approach: (1) identification of impaired loans
and the establishment of specific loss allowances on such loans; and (2)
establishment of general valuation allowances on the remainder of its loan
portfolio. The Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of
potential impaired loans. Such system takes into consideration, among
other things, delinquency status, size of loans, type and estimated fair
value of collateral and financial condition of the borrowers. Specific
loan loss allowances are established for identified loans based on a review
of such information. General loan loss allowances are based upon a
combination of factors including, but not limited to, actual loan loss
experience, composition of the loan portfolio, current economic conditions
and management's judgment. Although management believes that adequate loan
loss allowances are established, actual losses are dependent upon future
events and, as such, further additions to the level of the allowance for
loan losses may be necessary.
F-9
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ---------------------------------------------
Allowance for loan losses (Cont'd)
-------------------------
A loan evaluated for impairment is deemed to be impaired when based on
current information and events, it is probable that the Bank will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. The amount of loan impairment is measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. All loans identified as impaired are evaluated independently.
The Bank does not aggregate such loans for evaluation purposes. Payments
received on impaired loans are applied first to interest receivable and
then to principal.
Real estate owned
-----------------
Real estate owned consists of real estate acquired by foreclosure or deed
in lieu of foreclosure. Real estate owned is recorded at the lower of cost
or fair value at date of acquisition and thereafter carried at the lower of
such initially recorded amount or fair value less estimated selling costs.
Costs incurred in developing or preparing properties for sale are
capitalized. Income and expense related to the holding and operating of
properties are recorded in operations. Gains and losses from sales of such
properties are recognized as incurred.
Concentration of risk
---------------------
The Bank's real estate and lending activity is concentrated in real estate
and loans secured by real estate located in the State of New Jersey.
Premises and equipment
----------------------
Premises and equipment are comprised of land, at cost, and buildings and
improvements, leasehold improvements and furnishings and equipment, at cost
less accumulated depreciation and amortization. Depreciation and
amortization charges are computed on the straight-line method over the
following estimated useful lives.
Buildings and improvements 10 to 50 years
Leasehold improvements Shorter of useful life
or term of lease
Furnishing and equipment 3 to 10 years
Significant renewals and betterments are charged to the property and
equipment account. Maintenance and repairs are charged to expense in the
year incurred. Rental income is netted against occupancy costs in the
consolidated statements of income.
F-10
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ---------------------------------------------
Excess of cost over assets acquired
-----------------------------------
The cost in excess of the fair value of net assets acquired was recorded on
October 17, 1997 in conjunction with the acquisition of certain assets and
assumption of certain liabilities of three branch offices of another
financial institution. This asset primarily consists of core deposit
intangibles, which represent the intangible value of depositor
relationships assumed in the transaction, and is being amortized to expense
over a ten-year period by use of the straight-line method.
On a periodic basis, management reviews the excess of cost over assets
acquired and evaluates events or changes in circumstances that may indicate
impairment in the carrying amount of such asset. In such instances,
impairment, if any, is measured on a discounted estimated cash flow basis.
Interest-rate risk
------------------
The Bank is principally engaged in the business of attracting deposits from
the general public and using these deposits, together with borrowings and
other funds, to purchase securities and to make loans secured by real
estate. The potential for interest-rate risk exists as a result of the
generally shorter duration of the Bank's interest-sensitive liabilities
compared to the generally longer duration of its interest-sensitive assets.
In a rising interest rate environment, liabilities will reprice faster than
assets, thereby reducing net interest income. For this reason, management
regularly monitors the maturity structure of the Bank's interest-earning
assets and interest-bearing liabilities in order to measure its level of
interest-rate risk and to plan for future volatility.
Income taxes
------------
The Bank and Subsidiary file a consolidated federal income tax return.
Income taxes are allocated based on the contribution of income to the
consolidated income tax return. Separate state income tax returns are
filed.
Federal and state income taxes have been provided on the basis of reported
income. The amounts reflected on the income tax returns differ from these
provisions due principally to temporary differences in the reporting of
certain items for financial reporting and tax reporting purposes. The
income tax effect of these temporary differences is accounted for as
deferred income taxes applicable to future periods.
Reclassification
----------------
Certain amounts as of and for the year ended December 31, 1996 and 1995
have been reclassified to conform with the current year's presentation.
F-11
<PAGE>
WEST ESSEX BANK SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. SECURITIES AVAILABLE FOR SALE
- --------------------------------
<TABLE>
<CAPTION>
March 31, 1998
-------------------------------------------------------------------------
Amortized Gross Unrealized Carrying
----------------------------------
Cost Gains Losses Value
----------------- ---------------- --------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
United States Government obligations:
Due after one year through five years $ 6,980,682 $ 124,628 $ - $ 7,105,310
================= ================ =============== ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------
Amortized Gross Unrealized Carrying
----------------------------------
Cost Gains Losses Value
----------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
United States Government obligations:
Due after one year through five years $ 6,979,747 $ 100,803 $ - $ 7,080,550
================= ================ =============== ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------
Amortized Gross Unrealized Carrying
----------------------------------
Cost Gains Losses Value
----------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions:
Due after ten years $ 114,951 $ 5,407 $ - $ 120,358
Equity securities:
Mutual fund 1,553,601 - 26,505 1,527,096
----------------- ---------------- --------------- ----------------
$ 1,668,552 $ 5,407 $ 26,505 $ 1,647,454
================= ================ =============== ================
</TABLE>
The following table presents details of sales of securities available for sale:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
-------------------------------- -----------------------------------------
1998 1997 1997 1996 1995
--------------- --------------- ------------ ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Sales proceeds $ - $ - $ 1,588,229 $ 202,752 $ 27,980
Gross gains - - - 102,752 -
Gross losses - - 20,245 - 22,014
</TABLE>
F-12
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. INVESTMENT SECURITIES HELD TO MATURITY
- -------------------------------------------
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------
Carrying Gross Unrealized Estimated
-----------------------
Value Gains Losses Fair Value
------------ ---------- ---------- ------------
(unaudited)
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due in one year or less $ 2,000,131 $ 17,049 $ - $ 2,017,180
After one year through five years 3,999,678 14,698 - 4,014,376
After five years through ten years 17,000,000 115,779 34,375 17,081,404
After ten years 5,618,360 210,145 9,501 5,819,004
------------ ---------- ---------- ------------
28,618,169 357,671 43,876 28,931,964
Municipal obligation due within one year 150,000 - - 150,000
------------ ---------- ---------- ------------
$ 28,768,169 $ 357,671 $ 43,876 $ 29,081,964
============ ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Carrying Gross Unrealized Estimated
-----------------------
Value Gains Losses Fair Value
------------ ---------- ---------- ------------
(unaudited)
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due in one year or less $ 2,000,150 $ 59,850 $ - $ 2,060,000
After one year through five years 3,999,622 11,315 - 4,010,937
After five years through ten years 12,000,000 116,247 - 12,116,247
After ten years 4,929,094 222,270 - 5,151,364
------------ ---------- ---------- ------------
$ 22,928,866 $ 409,682 $ - $ 23,338,548
============ ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Carrying Gross Unrealized Estimated
-----------------------
Value Gains Losses Fair Value
------------ ---------- ---------- ------------
(unaudited)
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due after one year through five years $ 3,999,631 $ 52,244 - $ 4,051,875
After five years through ten years 11,000,000 120,201 21,388 11,098,813
After ten years 7,476,835 194,044 55,875 7,615,004
------------ ---------- ---------- ------------
$ 22,476,466 $ 366,489 $ 77,263 $ 22,765,692
============ ========== ========== ============
</TABLE>
There were no sales of investment securities held to maturity during the three
months ended March 31, 1998 and 1997 (unaudited) or during the years ended
December 31, 1997, 1996 and 1995.
At March 31, 1998 and December 31, 1997 and 1996, investment securities held to
maturity with a carrying value of $491,000 (unaudited), $491,000 and $490,000,
respectively, were pledged to the United States Bankruptcy Trustee.
F-13
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- ------------------------------------------------
<TABLE>
<CAPTION>
March 31, 1998
---------------------------------------------------------
Carrying Gross Unrealized Estimated
-------------------------
Value Gains Losses Fair Value
------------- ----------- ----------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 73,748,361 $ 1,195,007 $ - $ 74,943,368
Federal Home Loan Mortgage Corporation 25,388,707 368,255 36,099 25,720,863
Federal National Mortgage Association 23,488,732 242,828 4,103 23,727,457
Other 7,089 - - 7,089
------------- ----------- ----------- -------------
$ 122,632,889 $ 1,806,090 $ 40,202 $ 124,398,777
============= =========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
Carrying Gross Unrealized Estimated
-------------------------
Value Gains Losses Fair Value
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 78,657,282 $ 1,158,307 $ 40,774 $ 79,774,815
Federal Home Loan Mortgage Corporation 26,551,191 275,562 77,959 26,748,794
Federal National Mortgage Association 24,958,646 191,719 - 25,150,365
Other 7,172 - - 7,172
------------- ----------- ----------- -------------
$ 130,174,291 $ 1,625,588 $ 118,733 $ 131,681,146
============= =========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Carrying Gross Unrealized Estimated
-------------------------
Value Gains Losses Fair Value
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 65,995,553 $ 1,099,373 $ - $ 67,094,926
Federal Home Loan Mortgage Corporation 32,041,105 227,832 245,424 32,023,513
Federal National Mortgage Association 15,204,132 59,035 36,534 15,226,633
Other 13,296 - - 13,296
------------- ----------- ----------- -------------
$ 113,254,086 $ 1,386,240 $ 281,958 $ 114,358,368
============= =========== =========== =============
</TABLE>
There were no sales of mortgage-backed securities held to maturity during the
three months ended March 31, 1998 and 1997 (unaudited) or during the years ended
December 31, 1997, 1996 and 1995.
See Note 11 to consolidated financial statements regarding mortgage-backed
securities held to maturity pledged as collateral for borrowed money
F-14
<PAGE>
5. LOANS RECEIVABLE
- -------------------
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------
1998 1997 1996
------------- ------------- -----------
(unaudited)
<S> <C> <C> <C>
Real estate mortgage:
Conventional $ 101,179,365 $ 99,474,155 $ 74,201,698
FHA insured 201,593 257,285 301,161
VA guaranteed 441,023 457,155 581,547
------------- ------------- ------------
101,821,981 100,188,595 75,084,406
------------- ------------- ------------
Agency for International Development 57,326 58,875 87,009
------------- ------------- ------------
Construction and land development 7,141,336 6,484,920 2,080,011
------------- ------------- ------------
Consumer:
Passbook or certificate 496,695 550,169 427,122
Equity 8,294,785 8,491,437 6,579,475
Second mortgage 59,670 62,595 73,591
Home improvement - - 4,621
Automobile 274,127 259,097 163,110
Credit reserve 29,795 31,480 -
------------- ------------- ------------
9,155,072 9,394,778 7,247,919
------------- ------------- ------------
Total loans 118,175,715 116,127,168 84,499,345
------------- ------------- ------------
Less: Loans in process 2,009,066 1,437,016 440,400
Allowance for loan losses 1,862,971 1,885,021 1,563,991
Deferred loan fees 1,219 70,390 360,807
------------- ------------- ------------
3,873,256 3,392,427 2,365,198
------------- ------------- ------------
$ 114,302,459 $ 112,734,741 $ 82,134,147
============= ============= ============
</TABLE>
Included in real estate mortgage in the above table, at March 31, 1998 and
December 31, 1997 and 1996, are one- to four-family residential mortgages
totalling $89,451,000 (unaudited), $87,489,000 and $60,741,000, respectively.
The Bank has granted loans to officers and directors of the Bank and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$1,193,000 (unaudited) at March 31, 1998 and $1,200,000 and $501,000 at December
31, 1997 and 1996, respectively. During the three months ended March 31, 1998,
repayments totalled $7,000 (unaudited). During the year ended December 31,
1997, new loans granted and repayments totalled $835,000 and $136,000,
respectively.
At March 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995,
loans serviced for the benefit of others totalled approximately $45,000
(unaudited), $68,000 (unaudited), $53,000, $72,000 and $92,000, respectively.
F-15
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS RECEIVABLE (Cont'd.)
- -------------------
Nonperforming loans consist of nonaccrual and renegotiated loans. Nonaccrual
loans are those on which income under the accrual method has been discontinued
with subsequent interest payments credited to interest income when received, or
if ultimate collectibility of principal is in doubt, applied as principal
reductions. Renegotiated loans are loans whose contractual interest rates have
been reduced or where other significant concessions have been made due to a
borrower's financial difficulties. Interest on these loans is either accrued or
credited directly to interest income.
Nonperforming loans were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------
1998 1997 1996
------------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Nonaccrual $ 2,214 $ 2,413 $ 2,869
Renegotiated 92 94 99
------------- ---------- ----------
$ 2,306 $ 2,507 $ 2,968
============= ========== ==========
</TABLE>
The impact of nonperforming loans on interest income is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ -------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income if performing in
accordance with original terms $ 52 $ 67 $ 234 $ 278 $ 229
Interest income actually recorded 12 5 57 74 48
------------ ------------ ------------- ------------ ------------
Interest income lost $ 40 $ 62 $ 177 $ 204 $ 181
============ ============ ============= ============ ============
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ -------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance - beginning $ 1,885,021 $ 1,563,991 $ 1,563,991 $ 1,199,888 $ 1,236,032
Provision (credited) charged to operations (22,050) 55,000 487,015 232,103 509,729
Loans charged off to allowance - - (165,985) - (545,873)
Recovery of loan previously charged off - - - 132,000 -
------------ ------------ ------------ ------------ ------------
$ 1,862,971 $ 1,618,991 $ 1,885,021 $ 1,563,991 $ 1,199,888
============ ============ ============ ============ ============
</TABLE>
F-16
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS RECEIVABLE (Cont'd.)
- -------------------
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------
1998 1997 1996
------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
Recorded investment in impaired loans:
With recorded allowances $ 1,345 $ 1,344 $ 1,505
Without recorded allowances 304 304 304
------------- --------------- ---------------
Total impaired loans 1,649 1,648 1,809
Related allowance for loan losses 580 580 435
------------- --------------- ---------------
Net impaired loans $ 1,069 $ 1,068 $ 1,374
============= =============== ===============
</TABLE>
For the three months ended March 31, 1998 and 1997 and the years ended December
31, 1997, 1996 and 1995, the average recorded investment in impaired loans
totalled $1,648,000 (unaudited), $1,757,000 (unaudited), $1,916,000, $1,567,000
and $1,590,000, respectively. During the year ended December 31, 1996, interest
income of $11,000, all on the cash basis, was recognized on such loans during
the time each loan was impaired. During the three months ended March 31, 1998
and 1997 (unaudited) and the years ended December 31, 1997 and 1995, no interest
income was recognized on such loans during the time each loan was impaired.
6. REAL ESTATE OWNED
- --------------------
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------
1998 1997 1996
------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
Acquired in settlement of loans $ 1,120,197 $ 1,388,840 $ 1,492,068
Allowance for losses - 174,000 98,000
------------- --------------- ---------------
$ 1,120,197 $ 1,214,840 $ 1,394,068
============= =============== ===============
</TABLE>
The following is an analysis of the allowance for losses:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ -------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance - beginning $ 174,000 $ 98,000 $ 98,000 $ 98,000 $ 500,000
Provisions charged to operations 22,050 170,000 372,985 45,000 33,749
Losses charged to allowance (196,050) (170,000) (296,985) (45,000) (435,749)
------------ ------------ ------------ ------------ ------------
Balance - ending $ - $ 98,000 $ 174,000 $ 98,000 $ 98,000
============ ============ ============ ============ ============
</TABLE>
F-17
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. REAL ESTATE OWNED (Cont'd.)
- --------------------
The following is an analysis of the (loss) income on real estate owned:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------ ----------------------------------------------------
1998 1997 1997 1996 1995
--------- ---------- ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Gain on sale, net $ 5,386 $ 19,714 $ 30,080 $ 117,201 $ 162,031
Carrying cost, net (7,084) (7,035) (36,965) (51,638) (69,349)
Provision for losses (22,050) (170,000) (372,985) (45,000) (33,749)
----------- ------------- ------------- ------------- -------------
$ (23,748) $ (157,321) $ (379,870) $ 20,563 $ 58,933
----------- ------------- ------------- ------------- -------------
</TABLE>
7. PREMISES AND EQUIPMENT
- -------------------------
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------------------
1998 1997 1996
------------- --------------- --------------
(unaudited)
<S> <C> <C> <C>
Land $ 979,315 $ 979,315 $ 358,253
------------- --------------- --------------
Building and improvements 2,168,439 2,159,938 1,419,641
Less accumulated depreciation 800,195 778,047 709,995
-------------- --------------- --------------
1,368,244 1,381,891 709,646
-------------- --------------- --------------
Leasehold improvements 112,754 112,754 112,754
Less accumulated amortization 110,282 110,017 108,957
-------------- --------------- --------------
2,472 2,737 3,797
-------------- --------------- --------------
Furnishings and equipment 2,631,742 2,575,464 2,224,070
Less accumulated depreciation 1,869,070 1,816,823 1,655,411
-------------- --------------- --------------
762,672 758,641 568,659
-------------- --------------- --------------
$ 3,112,703 $ 3,122,584 $ 1,640,355
============== =============== ==============
</TABLE>
F-18
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. ACCRUED INTEREST RECEIVABLE
- ------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------
1998 1997 1996
------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Loans $ 677,941 $ 690,706 $ 564,744
Mortgage-backed securities 715,833 852,519 691,298
Investments and other 686,971 479,574 407,028
------------- ------------ ------------
2,080,745 2,022,799 1,663,070
Less allowance for uncollected interest on loans 8,850 10,602 11,643
------------- ------------ ------------
$ 2,071,895 $ 2,012,197 $ 1,651,427
============= ============ ============
</TABLE>
9. EXCESS OF COST OVER ASSETS ACQUIRED
- --------------------------------------
On October 17, 1997, the Bank acquired three branch locations from another
financial institution. The amounts related to the transaction are reflected
separately in the consolidated statement of cash flows for the year ended
December 31, 1997. The $7,571,946 excess of cost over assets acquired initially
recorded was based upon the amount of deposits the Bank had acquired. The
deposits purchased declined at a rate significantly in excess of that expected
before stabilizing by December 31, 1997. Management performed a reassessment of
the carrying value of this asset and, as a result, a loss of $1,585,313 was
recorded. Such loss is included in "Amortization of intangible" in the
consolidated statement of income for the year ended December 31, 1997.
10. DEPOSITS
- ------------
<TABLE>
<CAPTION>
March 31, 1998
------------------------------------------
Weighted
Average
Rate Amount Percent
----------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
Demand accounts:
Non-interest-bearing 0.00% $ 11,433,090 4.78
Interest-bearing 1.69% 22,255,814 9.31
------------- ------------
1.12% 33,688,904 14.09
Savings and club accounts 2.58% 61,840,466 25.86
Certificates of deposit 5.49% 143,591,116 60.05
------------- ------------
4.13% $ 239,120,486 100.00
============= ============
</TABLE>
F-19
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
10. DEPOSITS (Cont'd.)
- ------------
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1997 1996
--------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Rate Amount Percent Rate Amount Percent
---------- ------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Non-interest-bearing 0.00% $ 11,371,513 4.78 0.00% $ 7,270,396 4.04
Interest-bearing 1.84% 21,662,441 9.09 1.81% 15,214,291 8.46
------------- ---------- ------------- ----------
1.18% 33,033,954 13.87 1.23% 22,484,687 12.50
Savings and club accounts 2.60% 62,834,205 26.38 2.49% 49,814,106 27.68
Certificates of deposit 5.51% 142,323,982 59.75 5.33% 107,646,710 59.82
------------- ---------- ------------- ----------
4.14% $238,192,141 100.00 4.03% $179,945,503 100.00
============= ========== ============= ==========
</TABLE>
The amount of certificates of deposit with balances of $100,000 or more at
March 31, 1998 and December 31, 1997 and 1996 were approximately $17,596,000
(unaudited), $19,327,000 and $15,064,000, respectively. Individual deposits in
excess of $100,000 are not insured by the Federal Deposit Insurance
Corporation.
The scheduled maturities of certificates of deposit are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------
1998 1997 1996
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
One year or less $ 115,168 $ 114,233 $ 86,574
After one to three years 25,387 25,309 16,417
After three years 3,036 2,782 4,656
------------ ----------- -----------
$ 143,591 $ 142,324 $ 107,647
============ =========== ===========
</TABLE>
A summary of interest on deposits is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
--------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Demand accounts $ 94 $ 67 $ 293 $ 269 $ 311
Savings and club accounts 407 314 1,357 1,278 1,397
Certificates of deposit 1,932 1,428 6,439 5,602 4,843
--------- ---------- ---------- ---------- ----------
$ 2,433 $ 1,809 $ 8,089 $ 7,149 $ 6,551
========= ========== ========== ========== ==========
</TABLE>
F-20
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. BORROWED MONEY
- -------------------
The following table presents details of borrowed money, all of which has been
borrowed from the Federal Home Loan Bank of New York ("FHLB"):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
March 31, 1998 1997 1996
----------------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Rate Amount Rate Amount Rate Amount
---------------- -------------- ------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Securities sold under
agreements to
repurchase maturing
within three months - % $ - 5.82% $ 18,000,000 5.60% $ 6,000,000
Convertible advances:
due March 24, 2008(a) 5.33% 10,000,000 - % - - % -
due March 25, 2008(b) 5.59% 10,000,000 - % - - % -
Monthly amortizing advances:
Payable in sixty monthly
principal and interest
installments of $96,286
through February 24, 2003 5.84% 5,000,000 - % - - % -
Payable in 120 monthly
principal and interest
installments of $55,591
through February 25, 2008 6.03% 5,000,000 - % - - % -
Term advances maturing:
within one year 6.38% 7,350,000 6.38% 7,350,000 6.25% 8,350,000
after one to two years 6.50% 4,350,000 6.50% 4,350,000 6.57% 4,350,000
after two to three years 6.95% 600,000 6.95% 600,000 6.48% 4,350,000
after three to four years - % - - % - 6.90% 600,000
------------ ------------ ------------
5.86% $ 42,300,000 6.08% $ 30,300,000 6.20% $ 23,650,000
============ ============ ============
</TABLE>
(a) Convertible at lender option to replacement funding at then current rates
on March 24, 2001 and quarterly thereafter.
(b) Convertible at lender option to replacement funding at then current rates
on March 25, 2003 and quarterly thereafter.
Certain information concerning borrowed money is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ -------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Average balance outstanding $ 30,144,000 $ 22,650,000 $ 26,223,000 $ 18,096,000 $ 15,615,000
Maximum month-end balance outstanding 42,300,000 23,650,000 43,675,000 23,650,000 19,000,000
Average interest rate 5.80% 6.06% 5.97% 6.36% 6.83%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
11. BORROWED MONEY (Cont'd.)
- ------------------
At March 31, 1998 (unaudited) and December 31, 1997 and 1996, the borrowings
were secured by pledges of the Bank's investment in the capital stock of the
FHLB totalling $2,281,500, $2,183,800 and $1,670,400, respectively, and
mortgage-backed securities held to maturity with an aggregate carrying value of
$48,478,000, $39,870,000 and $27,035,000, respectively.
12. REGULATORY CAPITAL
- ----------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Bank.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to assets (as defined). The following tables present a
reconciliation of capital per generally accepted accounting principles ("GAAP")
and regulatory capital and information as to the Bank's capital levels at the
dates presented:
<TABLE>
<CAPTION>
March 31, 1998 December 31,
----------------- ----------------------
(unaudited) 1997 1996
-------- --------
<S> <C> <C> <C>
GAAP capital $ 29,801 $ 29,275 $ 28,452
Less: excess of cost over assets acquired (5,681) (5,829) -
Less: unrealized gain on debt securities (80) (65) (5)
-------- -------- --------
Core and tangible capital 24,040 23,381 28,447
Add: general valuation allowance, as limited 1,252 1,185 946
-------- -------- --------
Total regulatory capital $ 25,292 $ 24,566 $ 29,393
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1998 (unaudited)
-------------------------------------------------------------------
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Actions Provisions
------------------ -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- --------- -------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) $ 25,292 19.95% $ 10,144 8.00% $ 12,680 10.00%
Tier 1 Capital
(to risk-weighted assets) 24,040 18.96% - - 7,608 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 24,040 7.84% 12,268 4.00% 15,335 5.00%
Tangible Capital
(to adjusted total assets) 24,040 7.84% 4,600 1.50% - -
</TABLE>
F-22
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. REGULATORY CAPITAL (Cont'd.)
- ------------------------
<TABLE>
<CAPTION>
As of December 31, 1997
----------------------------------------------------------------------------
To Be Well capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Actions Provisions
--------------------- ----------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- ----------- ---------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) $ 24,566 26.10% $ 7,530 8.00% $ 9,412 10.00%
Tier 1 capital
(to risk-weighted assets) 23,381 24.84% - - 5,647 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 23,381 7.98% 8,794 3.00% 14,657 5.00%
Tangible Capital
(to adjusted total assets) 23,381 7.98% 4,397 1.50% - -
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996
----------------------------------------------------------------------------
To Be Well capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Actions Provisions
--------------------- ----------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- ----------- ---------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) $ 29,393 39.15% $ 6,006 8.00% $ 7,507 10.00%
Tier 1 capital
(to risk-weighted assets) 28,447 37.90% - - 4,504 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 28,447 12.06% 7,079 3.00% 11,798 5.00%
Tangible Capital
(to adjusted total assets) 28,447 12.06% 3,539 1.50% - -
</TABLE>
As of December 4, 1997, the most recent notification from the OTS, the Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions existing or events which have
occurred since notification that management believes have changed the
institution's category.
13. RETIREMENT PLAN
- ---------------------
The Bank has a non-contributory pension plan covering all eligible employee.
The plan is a defined benefit plan which provides benefits based on a
participant's years of service and compensation. The Bank's funding policy is
to contribute annually the maximum amount that can be deducted for federal
income tax purposes.
F-23
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. RETIREMENT PLAN (Cont'd.)
- ---------------------
The following table sets forth the plan's annually determined funded status:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation, including
vested benefits of $2,658,587 and $2,238,389, respectively. $ 2,709,212 $ 2,271,153
============= =============
Projected benefit obligation $ (3,257,644) $ (2,789,153)
Plan assets at fair value; primarily mutual funds 2,984,086 2,534,416
------------- -------------
Projected benefit obligation in excess of plan assets (273,558) (254,737)
Unrecognized net transition obligation 189,872 221,517
Unreconized past service cost 80,492 90,045
Unreconized net (gain) (131,598) (188,143)
------------- -------------
Accured pension cost included in other liabilities $ (134,792) $ (131,318)
============= =============
</TABLE>
The following table sets forth the components of net periodic pension cost:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Net periodic pension cost
included the following components
Service cost $ 109,752 $ 130,573 $ 90,794
Interest cost 206,416 187,634 173,961
Actual return on plan assets (361,720) (284,857) (427,904)
Net amortization and deferral 222,518 170,747 348,456
------------ ------------ -------------
Net periodic pension cost
included in salaries and employee benfits $ 176,966 $ 204,097 $ 185,307
============ =========== =============
</TABLE>
Retirement Plan expense recorded for the three months ended March 31, 1998 and
1997 totalled approximately $47,000 (unaudited) and $48,000 (unaudited),
respectively.
Assumptions used to develop the net periodic pension cost were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Discount rates 7.50% 7.00% 8.25%
Expected long-term rate of return 7.00% 7.00% 7.00%
Rate of increase in compensation levels 5.50% 5.00% 6.00%
</TABLE>
F-24
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. INCOME TAXES
- -----------------
The Bank qualifies as a Savings Institution under the provisions of the Internal
Revenue Code and, therefore, was permitted, prior to January 1, 1996, to deduct
from taxable income an allowance for bad debts based upon the more favorable of:
(i) a method based on the Bank's actual loss experience (the "experience"
method); or (ii) a method based on eight percent of taxable income before such
deduction, less certain adjustments and subject to certain limitations (the
"percentage of taxable income" method). Effective January 1, 1996, the
percentage of taxable income method was repealed. The Bank may now use either
the experience method or the specific charge off method. See Note 16 to
consolidated financial statements. Retained earnings at December 31, 1997,
include approximately $6.8 million of such bad debt allowance for which federal
income taxes have not been provided.
The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------- -----------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current tax expense:
Federal income $ 193,763 $ 261,184 $ 1,066,590 $ 801,976 $ 925,368
State income 16,126 23,301 95,024 70,584 41,152
---------- ---------- ----------- ----------- -----------
209,889 284,485 1,161,614 872,560 966,520
---------- ---------- ----------- ----------- -----------
Deferred tax (benefit) expense:
Federal income 45,528 - (664,857) (33,554) 197,099
State income 4,142 - (60,478) (3,055) 57,198
---------- ---------- ----------- ----------- -----------
49,670 - (725,335) (36,609) 254,297
---------- ---------- ----------- ----------- -----------
$ 259,559 $ 284,485 $ 436,279 $ 835,951 $ 1,220,817
========== ========== =========== =========== ===========
</TABLE>
The components of the net deferred income tax asset are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------
1998 1997 1996
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 716,829 $ 777,563 $ 519,185
Deferred loan origination fees, net - - 89,538
Goodwill 589,660 581,747 -
Other 65,093 41,073 33,450
----------- ----------- -----------
Total deferred tax assets 1,371,582 1,400,383 642,173
----------- ----------- -----------
Deferred tax liabilities:
Deferred loan origination fees, net 57,809 36,940 -
Unrealized gain on securities available for sale 44,838 36,269 -
Other - - 4,065
----------- ----------- -----------
Total deferred tax liabilities 102,647 73,209 4,065
----------- ----------- -----------
Net deferred tax asset included in other assets $ 1,268,935 $ 1,327,174 $ 638,108
=========== =========== ===========
</TABLE>
F-25
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
14. INCOME TAXES (Cont'd.)
- -----------------
Refundable income taxes totalling $54,834 (unaudited), $88,904 and $178,960 are
included in other assets at March 31, 1998 and December 31, 1997 and 1996,
respectively. Income taxes payable totalling $135,606 (unaudited), $39,069 and
$6,319 are included in other liabilities at March 31, 1998 and December 31, 1997
and 1996, respectively.
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------ ----------- ---------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal income tax $ 262,038 $ 274,564 $ 398,860 $ 847,266 $ 1,187,542
Increases (reductions) in taxes resulting from:
Reinstatement of portion of base
year bad debt reserve for income tax purposes - - - - (57,328)
Non-deductible captial loss - - 6,883 7,485
Utilization of capital loss carryforward - - - (34,936) -
New Jersey savings institution tax,
net of federal income tax effect 13,377 15,379 22,800 44,569 64,911
Other items, net (15,856) (5,458) 7,736 (20,948) 18,207
------------ ----------- ----------- ----------- -----------
Effective income tax $ 259,559 $ 284,485 $ 436,279 $ 835,951 $ 1,220,817
============ =========== =========== =========== ===========
Effective income tax rate 33.7% 35.2% 37.2% 33.5% 35.0%
============ =========== =========== =========== ===========
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
- ----------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments primarily include commitments to extend credit. Such instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated statements of financial condition.
The contractual amounts of these instruments reflect the extent of involvement
the Bank has in those particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
At March 31, 1998 (unaudited), the Bank had $12,860,000 in commitments to
originate loans, consisting of $11,445,000 for fixed rate loans with interest
rates ranging from 6.625% to 7.625%, $760,000 for adjustable rate loans with
initial interest rates ranging from 6.625% to 6.875%, $50,000 for a floating
rate equity line of credit with an initial interest rate of 8.00% and $605,000
for the purchase of loan participation interests. The $605,000 in loan
participations include $275,000 for a twelve-month, 8.25% construction loan,
$80,000 for a fixed rate loan whose rate will be fixed at funding at 1.60% above
the Federal Home Loan Bank CIP advance rate and a $250,000 adjustable rate loan
whose initial rate will be fixed at funding for five or ten years at 1.60% above
the Federal Home Loan Bank CIP advance rate and will adjust every fifth or tenth
year thereafter.
F-26
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. COMMITMENTS AND CONTINGENCIES (Cont'd.)
- ----------------------------------
At December 31, 1997 and 1996, the Bank had $1,324,000 and $2,374,000,
respectively, in outstanding commitments to originate loans. The outstanding
commitments at December 31, 1997 include $724,000 for fixed rate loans with
interest rates ranging from 7.25% to 7.75%, $100,000 for a floating rate equity
line of credit with an initial rate of 8.00% and $500,000 for the purchase of
loan participations consisting of $200,000 for fixed rate loans whose rates will
be fixed at funding at 1.60% above the Federal Home Loan Bank CIP advance rate
and a $300,000 adjustable rate loan whose initial rate will be fixed at funding
for five years at 1.60% above the Federal Home Loan Bank CIP advance rate and
will adjust every fifth year thereafter.
At March 31, 1998 and December 31, 1997 and 1996, undisbursed funds from
approved lines of credit under a homeowners' equity lending program amounted to
approximately $4,339,000 (unaudited), $4,137,000 and $3,117,000, respectively.
Unless they are specifically cancelled by notice from the Bank, these funds
represent firm commitments available to the respective borrowers on demand. The
interest rate charged for any month on funds disbursed under the program is 1.0%
above the prime rate published in The Wall Street Journal on the last day of the
preceding month.
At March 31, 1998 and December 31, 1997, undisbursed funds from approved
unsecured lines of credit under the Credit Reserve program totalled $115,000
(unaudited) and $99,000, respectively. Funds drawn on these lines are assessed
interest at a rate of 18.00%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but primarily
includes commercial and residential real estate.
Rentals under a long-term operating lease for a branch office amounted to
approximately $12,000 (unaudited) for each of the three months ended March 31,
1998 and 1997 and approximately $50,000 for each of the years ended December 31,
1997, 1996 and 1995. At December 31, 1997, the minimum rental commitment under
this noncancellable lease expiring in 1998 is $41,000.
The Bank also has, in the normal course of business, commitments for services
and supplies. Management does not anticipate losses on any of these
transactions.
During the year ended December 31, 1997, the Bank became a defendant in a
litigation matter under which it is accused of breach of contract, fraud and
violation of the New Jersey Consumer Fraud Act. The lawsuit is related to a
condominium construction project which was discontinued due to borrower default.
The Bank denies the material allegations set forth in the Complaint. The Bank
filed a motion to dismiss the contract claims and to re-plead the fraud claims.
On February 20, 1998, the
F-27
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Superior Court of New Jersey denied the Bank's motion to dismiss the contract
claims, but granted the Bank's motion requiring plaintiffs to re-plead the fraud
counts with particularity. On March 13, 1998, the plaintiffs filed an amended
complaint and, on April 8, 1998, the Bank filed its answer to the amended
complaint. The plaintiffs are seeking, among other things, compensatory damages,
punitive damages in the amount of $5,000,000, and reimbursement of costs and
legal fees associated with this matter. The Bank's ultimate liability, if any,
which might arise from the disposition of these claims cannot presently be
determined. Accordingly, no provision for any liability that may result
upon adjudication has been recognized in the accompanying consolidated financial
statements.
The Bank is also a party to various litigation which arises primarily in the
ordinary course of business. In the opinion of management, the ultimate
disposition of such litigation should not have a material effect on the
consolidated financial position or operations of the Bank.
16. LEGISLATIVE MATTERS
- ------------------------
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Bank, to recapitalize the SAIF and
spread the obligation for payment of Financial Corporation ("FICO") bonds across
all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied
amounted to 65.7 basis points on SAIF assessable deposits held as of March 31,
1995. The special assessment was recognized in the third quarter of 1996 and
was tax deductible. The Bank took a charge of $1,098,000 as a result of the
special assessment. This legislation eliminated the substantial disparity
between the amount that BIF and SAIF members had been paying for deposit
insurance premiums.
Currently, the FDIC has estimated that, in addition to normal deposit insurance
premiums, BIF members will pay a portion of the FICO payment equal to 1.3 basis
points on BIF-insured deposits compared to 6.4 basis points by SAIF members on
SAIF-insured deposits. All institutions 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 legislation is adopted to
eliminate the savings association charter and no savings associations remain as
of that time.
The FDIC has 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 precise level of FDIC insurance assessments on an
ongoing basis or whether the BIF and SAIF will eventually be merged.
On August 21, 1996, legislation was enacted to allow for the recapture of post-
1987 tax bad debt reserves ("excess reserves"). Prior to enactment certain
thrift institutions such as the Bank were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. This legislation
repealed the Code Section 593 reserve method of accounting for bad debts by
thrift institutions effective for taxable years beginning after 1995. Thrift
institutions that are treated as small banks are allowed to utilize the
experience method applicable to such institutions or the specific charge-off
method, while thrift institutions that are treated as large banks are required
to use only the specific charge off method.
F-28
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. LEGISLATIVE MATTERS (Cont'd.)
- ------------------------
For small institutions such as the Bank, the amount of the institution's
applicable excess reserves generally is the excess of the balances of its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over the greater of the balance of (a) its pre-1988 tax
reserves or (b) what the reserves would have been at the close of its last year
beginning before January 1, 1996, had the Savings Bank always used the
experience method. At January 1, 1996, the Bank had excess reserves of
approximately $18,000, which, in accordance with the legislation, are being
recaptured over a six-year period commencing January 1, 1996. As such amount has
been treated as a temporary difference in accordance with Financial Accounting
Standard Board ("FASB") Statement of Financial Accounting Standards
("Statement") No. 109, the recapture has no impact on consolidated earnings.
17. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Significant estimations were used by
the Bank for the purposes of this disclosure. Estimated fair values have been
determined by the Bank using the best available data and estimation methodology
suitable for each category of financial instruments. For those loans and
deposits with floating interest rates, it is presumed that estimated fair values
generally approximate their recorded book balances. The estimation
methodologies used and the estimated fair values and carrying values of the
Bank's financial instruments are set forth below:
Cash and cash equivalents and accrued interest receivable
---------------------------------------------------------
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value.
Securities
----------
The fair values for securities available for sale, investment securities
held to maturity and mortgage-backed securities held to maturity are based
on quoted market prices or dealer prices, if available. If quoted market
prices or dealer prices are not available, fair value is estimated using
quoted market prices or dealer prices for similar securities.
Loans
-----
The fair value of loans is estimated by discounting future cash flows,
using the current rates at which similar loans with similar remaining
maturities would be made to borrowers with similar credit ratings.
F-29
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- --------------------------------------------------
Deposits
--------
For demand, savings and club accounts, fair value is the carrying amount
reported in the consolidated financial statements. For certificates of
deposit, fair value is estimated by discounting future cash flows, using
rates currently offered for deposits of similar remaining maturities.
Borrowed money
--------------
Fair value is estimated using rates currently offered for liabilities of
similar remaining maturities, or when available, quoted market prices.
Commitments to extend credit
----------------------------
The fair value of credit commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates.
The carrying values and estimated fair values of the Bank's financial
instruments are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------------------------------
1998 1997 1996
-------------------- ----------------------------- -------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value Value Fair Value
-------- ----------- ---------- --------------- ---------- -----------
Financial assets (unaudited)
- ----------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 17,329 $ 17,329 $ 8,696 $ 8,696 $ 7,754 $7,754
Term deposits 5,000 5,000 - - - -
Securities available for sale 7,105 7,105 7,081 7,081 1,647 1,647
Investment securities held to maturity 28,768 29,082 22,929 23,339 22,476 22,766
Mortgage-backed securities held to maturity 122,633 124,399 130,174 131,681 113,254 114,358
Loans receivable 114,302 115,352 112,735 114,021 82,134 84,615
Accrued interest receivable 2,072 2,072 2,012 2,012 1,651 1,651
Financial liabilities
- ---------------------
Deposits 239,120 240,064 238,192 239,241 179,946 181,155
Borrowed money 42,300 41,814 30,300 30,337 23,650 23,730
Commitments
- -----------
Loan origination and purchase 12,860 12,860 1,324 1,324 2,374 2,374
Unused lines of credit 4,454 4,454 4,236 4,236 3,117 3,117
</TABLE>
F-30
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- --------------------------------------------------
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 entire holdings of a particular financial instrument.
Because no market value exists for a significant portion of the 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, involve uncertainties and matters of judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
In addition, 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 exclude the value of assets and liabilities that are not
considered financial instruments. Other significant assets and liabilities that
are not considered financial assets and liabilities include premises and
equipment, real estate owned and advance payments by borrowers for taxes and
insurance. 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 any of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
18. IMPACT OF NEW ACCOUNTING STANDARDS
- ---------------------------------------
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Statement
No. 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on consistent
application of a financial components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes the financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. A transfer of financial assets in which
the transferor surrenders control, as defined, over those assets is accounted
for as a sale to the extent that consideration other than beneficial interests
in the transferred assets is received in exchange. Statement No. 125 requires
that liabilities and derivatives incurred or obtained by transferors as part of
a transfer of financial assets be initially measured at fair value, if
practicable, and requires that servicing assets and other retained interests in
the transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interest, if any, based on the
relative fair values at the date of the transfer. Further, servicing assets and
liabilities must be subsequently measured by (a) amortization in proportion to
and over the period of estimated net servicing income or loss and (b) assessment
for asset impairment or increased obligation based on their values. Statement
No. 125 requires that debtors reclassify financial assets pledged as
F-31
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. IMPACT OF NEW ACCOUNTING STANDARDS (Cont'd.)
- ---------------------------------------
collateral and that secured parties recognize those assets and their obligation
to return them in certain circumstances in which the secured party has taken
control of those assets. Statement No. 125 is effective for transactions
occurring after December 31, 1996, with the exception of certain provision which
have had their effective date delayed an additional year via FASB Statement No.
127. The application of the provisions of Statement No. 125 has not had and, for
provisions not applicable until January 1, 1998, is not expected to have a
material adverse effect on the Bank's consolidated financial condition or
results of operations.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 requires that all items that are components of
"comprehensive income" be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income is
defined as the "change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners". Companies
will be required to (a) classify items of other comprehensive income by their
nature in the financial statements and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Statement No. 130 is effective for fiscal years beginning after December 15,
1997 and requires reclassification of prior periods presented. As the
requirements of Statement No. 130 are disclosure-related, its implementation,
effective January 1, 1998, had no impact on the Bank's consolidated financial
condition or results of operations. Management has presented a consolidated
statement of comprehensive income corresponding to each period for which a
consolidated statement of income has been presented.
19. MUTUAL HOLDING COMPANY REORGANIZATION AND INITIAL STOCK OFFERING
- ---------------------------------------------------------------------
(UNAUDITED)
-----------
On March 18, 1998, the Board of Directors of the Bank unanimously adopted the
Plan of Reorganization and Stock Issuance (the "Plan") pursuant to which the
Bank will convert from a federal mutual savings bank to a federal stock savings
bank and reorganize into the federal mutual holding company structure (the
"Reorganization"). As part of the Reorganization, the Bank will concurrently
form a Federally-chartered stock holding company ("Bancorp"), which will own
100% of the Bank's common stock following the conversion, as well as a federal
mutual holding company ("MHC"), which will own at least 51% of Bancorp's
outstanding common stock following the Reorganization and stock issuance, and
Bancorp will issue up to 49% of its outstanding common stock in a subscription
and community offering, as contemplated under the Plan. The Plan must be
approved by both the OTS and by the Bank's members as of the voting record date
to be established by the Bank.
Following the completion of the Reorganization, all depositors who had
membership or liquidation rights with respect to the Bank as of the effective
date of the Reorganization will continue to have such rights solely with respect
to the MHC so long as they continue to hold deposit accounts with the Bank. In
addition, all persons who become depositors of the Bank subsequent to the
Reorganization will have such membership and liquidation rights with respect to
the MHC.
F-32
<PAGE>
WEST ESSEX BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. MUTUAL HOLDING COMPANY REORGANIZATION AND INITIAL STOCK OFFERING
- ---------------------------------------------------------------------
(UNAUDITED) (Cont'd.)
-----------
In addition to the shares offered through the subscription and community
offering, Bancorp plans to fund a charitable foundation with a contribution
equal to 4.0% of the common stock sold in the subscription and community
offering as well as a $100,000 cash contribution. An Employee Stock Ownership
Plan, which is expected to be established by the Bank for the benefit of its
employees, is expected to purchase 8.0% of the combined number of shares issued
to the public and the charitable foundation. The MHC will maintain the majority
ownership of at least 51% of Bancorp shares issued, in addition to $100,000
received from the Bank, which is the anticipated amount of the initial
capitalization of the MHC. Bancorp will use a portion of the proceeds received
from the stock offering to purchase 100% of the outstanding capital stock of the
Bank. Costs incurred in connection with the offering, which totalled $30,000 at
March 31, 1998 and are included in other assets, will be recorded as a reduction
of the proceeds from the offering. If the offering does not take place, all
costs incurred will be charged to operations.
F-33
<PAGE>
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE BANK OR WEST ESSEX BANCORP, INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE BANK SINCE
ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
______________________________
TABLE OF CONTENTS
Page
----
Summary of the Reorganization and the Offering.........................
Selected Consolidated Financial and Other Data of the Bank.............
Recent Developments....................................................
Risk Factors...........................................................
West Essex Bancorp, M.H.C..............................................
West Essex Bancorp, Inc................................................
West Essex Bank........................................................
Regulatory Capital Compliance..........................................
Use of Proceeds........................................................
Dividend Policy........................................................
Waiver of Dividends by the Mutual Company..............................
Conversion of the Mutual Company to Stock Form.........................
Market for the Common Stock............................................
Capitalization.........................................................
Pro Forma Data.........................................................
Comparison of Valuation and Pro Forma Information With No Foundation...
Consolidated Statements of Income for West Essex Bank, F.S.B.
and Subsidiaries...................................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................
Business of Bancorp....................................................
Business of the Bank...................................................
Federal and State Taxation.............................................
Regulation and Supervision.............................................
Management of Bancorp..................................................
Management of the Bank.................................................
The Reorganization and Stock Offering..................................
Certain Restrictions on Acquisition of Bancorp.........................
Description of Capital Stock of Bancorp................................
Transfer Agent and Registrar...........................................
Experts................................................................
Legal and Tax Opinions.................................................
Additional Information.................................................
Index to Consolidated Financial Statements.............................
______________________________
UNTIL ___________, ____ OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
2,071,955 Shares
WEST ESSEX BANCORP, INC.
COMMON STOCK
__________
PROSPECTUS
__________
__________________, 1998
______________________
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC filing(1).............................................. $ 7,324
OTS filing fee............................................. 16,400
NASD filing fee(1)......................................... 2,300
Exchange listing fee(1).................................... 25,000
Printing, postage and mailing.............................. 100,000
Legal fees and expenses.................................... 225,000
Accounting fees and expenses............................... 70,000
Appraisers' fees and expenses (including business plan).... 33,000
Marketing fees and selling commissions(1).................. 220,000
Underwriter's expenses (including underwriter's counsel)... 60,000
Conversion agent fees and expenses......................... 15,000
Transfer agent fees and expenses........................... 3,000
Certificate printing....................................... 1,000
Blue Sky................................................... 15,000
Miscellaneous.............................................. 26,976
TOTAL...................................................... $820,000
========
- ----------------------
</TABLE>
(1) Unless otherwise noted, based upon the registration of 4,200,000 shares and
offering of 1,800,000 shares at $10.00 per share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XII of the registrant's Bylaws provides as follows:
ARTICLE XII: INDEMNIFICATION
The Holding Company shall indemnify all officers, directors and employees
of the Holding Company, and their heirs, executors and administrators, to the
fullest extent permitted under federal law against all expenses and liabilities
reasonably incurred by them in connection with or arising out of any action,
suit or proceeding in which they may be involved by reason of their having been
a director or officer of the Holding Company, whether or not they continue to be
a director or officer at the time of incurring such expenses or liabilities,
such expenses and liabilities to include, but not be limited to, judgments,
court costs and attorneys' fees and the cost of reasonable settlements.
This indemnification provision is consistent with the Office of Thrift
Supervision Regulation 12 C.F.R. (S) 545.121.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letters between West Essex Bank, F.S.B. and Sandler O'Neill &
Partners, L.P.*
1.2 Draft Form of Agency Agreement between West Essex Bank, F.S.B. and
Sandler O'Neill & Partners, L.P.*
2.1 Plan of Mutual Holding Company Reorganization and Stock Issuance
(including Federal Mutual Holding Company Charter and Bylaws of West
Essex Bancorp, M.H.C., Federal MHC Subsidiary Holding Company Charter and
Bylaws of West Essex Bancorp, Inc. and Federal Stock Charter and Bylaws
of West Essex Bank)*
3.1 Federal MHC Subsidiary Holding Company Charter of West Essex Bancorp,
Inc.*
3.2 Bylaws of West Essex Bancorp, Inc.*
4.0 Draft Stock Certificate of West Essex Bancorp, Inc.*
5.1 Opinion of Muldoon, Murphy & Faucette re: legality
8.1 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters*
8.2 Opinion of Fontanella and Babbitts re: State Tax Matters*
10.1 Form of West Essex Bank Employee Stock Ownership Plan*
10.2 Form of West Essex Bank Employee Stock Ownership Plan Trust *
10.3 Form of ESOP Loan Commitment Letter *
10.4 Form of West Essex Bank Employee Stock Ownership Trust Loan and Security
Agreement *
10.5 Form of Proposed Employment Agreement between West Essex Bank and certain
executive officers *
10.6 Form of Proposed Employment Agreement between West Essex Bancorp, Inc.
and certain executive officers*
10.7 Form of Proposed Change in Control Agreement between West Essex Bank and
certain executive officers*
10.8 Form of Proposed Change in Control Agreement between West Essex Bancorp,
Inc. and certain executive officers*
10.9 Form of Proposed West Essex Bank Employee Severance Compensation Plan*
10.10 Form of Proposed West Essex Bank Supplemental Executive Retirement Plan*
10.11 Form of Proposed West Essex Bank Management Supplemental Executive
Retirement Plan*
10.12 Employment Agreement between West Essex Bank and Leopold W. Montanaro*
10.13 Restated Executive Supplemental Retirement Income Agreement for Leopold
W. Montanaro*
10.14 Restated Executive Supplemental Retirement Income Agreement for Charles
E. Filippo*
23.1 Consent of Radics & Co., LLC
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Fontanella and Babbitts*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc. (P)
99.2 Draft of West Essex Bancorp Charitable Foundation Gift Instrument*
- --------------------------------------
*Previously filed
(P) Previously filed pursuant to Rule 202 of Regulation S-T.
II-2
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Caldwell, State of New
Jersey, on August 11, 1998.
West Essex Bancorp, Inc.
(in organization)
By: /s/ Leopold W. Montanaro
------------------------------------------
Leopold W. Montanaro
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Leopold W. Montanaro President, Chief Executive Officer August 11, 1998
- --------------------------- and Director
Leopold W. Montanaro (principal executive officer)
/s/ Dennis A. Petrello Executive Vice President and August 11, 1998
- --------------------------- Chief Financial Officer
Dennis A. Petrello (principal accounting
and financial officer)
* Chairman of the Board
- ------------------------
William J. Foody
* Director
- ------------------------
David F. Brandley
* Director
- ------------------------
Everett N. Leonard
* Director
- ------------------------
James P. Vreeland
* Director
- ------------------------
John J. Burke
</TABLE>
_____________________
*Pursuant to a Power of Attorney dated June 12, 1998 and filed as Exhibit 24.1
to the Registration Statement on Form S-1 of West Essex Bancorp, Inc. on June
12, 1998.
/s/ Leopold W. Montanaro August 11, 1998
- --------------------------
Leopold W. Montanaro President,
Chief Executive
Officer and Director
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the trustees
(or other persons who administer the West Essex Bank, F.S.B. 401(k) Savings
Plan) have duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in Caldwell, New Jersey, on August
11, 1998.
WEST ESSEX BANK, F.S.B. 401(k) SAVINGS PLAN
By: /s/ Leopold W. Montanaro
--------------------------------------------------
Leopold W. Montanaro, President and
Chief Executive Officer
West Essex Bank, F.S.B.
Plan Administrator
II-5
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
1.1 Engagement Letters between West Essex Bank, F.S.B. and Sandler O'Neill &
Partners, L.P.*
1.2 Draft Form of Agency Agreement between West Essex Bank, F.S.B. and
Sandler O'Neill & Partners, L.P.*
2.1 Plan of Mutual Holding Company Reorganization and Stock Issuance
(including Federal Mutual Holding Company Charter and Bylaws of West
Essex Bancorp, M.H.C., Federal MHC Subsidiary Holding Company Charter and
Bylaws of West Essex Bancorp, Inc. and Federal Stock Charter and Bylaws
of West Essex Bank)*
3.1 Federal MHC Subsidiary Holding Company Charter of West Essex Bancorp,
Inc.*
3.2 Bylaws of West Essex Bancorp, Inc.*
4.0 Draft Stock Certificate of West Essex Bancorp, Inc.*
5.1 Opinion of Muldoon, Murphy & Faucette re: legality
8.1 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters*
8.2 Opinion of Fontanella and Babbitts re: State Tax Matters*
10.1 Form of West Essex Bank Employee Stock Ownership Plan*
10.2 Form of West Essex Bank Employee Stock Ownership Plan Trust*
10.3 Form of ESOP Loan Commitment Letter*
10.4 Form of West Essex Bank Employee Stock Ownership Trust Loan and Security
Agreement*
10.5 Form of Proposed Employment Agreement between West Essex Bank and certain
executive officers*
10.6 Form of Proposed Employment Agreement between West Essex Bancorp, Inc.
and certain executive officers*
10.7 Form of Proposed Change in Control Agreement between West Essex Bank and
certain executive officers*
10.8 Form of Proposed Change in Control Agreement between West Essex Bancorp,
Inc. and certain executive officers*
10.9 Form of Proposed West Essex Bank Employee Severance Compensation Plan*
10.10 Form of Proposed West Essex Bank Supplemental Executive Retirement Plan*
10.11 Form of Proposed West Essex Bank Management Supplemental Executive
Retirement Plan*
10.12 Employment Agreement between West Essex Bank and Leopold W. Montanaro*
10.13 Restated Executive Supplemental Retirement Income Agreement for Leopold
W. Montanaro*
10.14 Restated Executive Supplemental Retirement Income Agreement for Charles
E. Filippo*
23.1 Consent of Radics & Co., LLC
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Fontanella and Babbitts*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc. (P)
99.2 Draft of West Essex Bancorp Charitable Foundation Gift Instrument*
- --------------------------------------
*Previously filed
(P) Previously filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
EXHIBIT 5.1 OPINION OF MULDOON, MURPHY & FAUCETTE RE: LEGALITY
<PAGE>
[MULDOON, MURPHY & FAUCETTE LETTERHEAD]
August 11, 1998
Board of Directors
West Essex Savings Bank
417 Bloomfiled Avenue
Caldwell, New Jersey 07081
Re: The offering of up to 2,071,955 shares of
West Essex Bancorp, Inc. Common Stock
Gentlemen:
We have acted as special counsel to West Essex Bank (the "Bank") in
connection with its reorganization from a federal mutual savings bank to the
federal mutual holding company form (the "Reorganization") and the related
subscription offering, community offering and syndicated community offering (the
"Offerings") by West Essex Bancorp, Inc., a federally chartered stock holding
company (the "Company") of up to 2,071,955 shares of its common stock, par value
$.01 per share ("Common Stock"), (2,382,748 shares if the Offering Range is
increased up to 15% to reflect changes in market and financial conditions
following commencement of the Offerings).
In connection with your request for our opinions, you have provided to us
and we have reviewed the Company's Registration Statement on Form S-1, as filed
with the Securities and Exchange Commission initially on June 12, 1998 and as
amended on July 31, 1998 and August 11, 1998; Notice of Mutual Holding Company
Reorganization on Form MHC-1 (the "Notice") and the Bank's Application for
Approval of a Minority Stock Issuance by a Savings Association Subsidiary of a
Mutual Holding Company on Form MHC-2 (the "Application"), both as filed with the
Office of Thrift Supervision ("OTS") initially on June 12, 1998 and as amended
on July 31, 1998 and August 11, 1998; the Bank's Plan of Mutual Holding Company
Reorganization and Stock Issuance (the "Plan of Reorganization"), including the
proposed Federal Stock Charter and Bylaws of West Essex Bank, the proposed
Charter and Bylaws of West Essex Bancorp, M.H.C. (the "Mutual Holding Company")
and the proposed Charter and Bylaws of West Essex Bancorp, Inc.; the Bank's
proposed common stock certificate; the Company's proposed common stock
certificate; and the Company's proposed stock order form. In addition, we have
made such investigations of law and have examined such other documents and
records as we have considered necessary for purposes of this opinion.
We have assumed the genuineness of the signatures on and the authenticity
of all documents submitted to us as originals and the conformity to the
originals of documents submitted to us as certified or photostatic copies. We
have relied as to factual matters upon certificates from officers
<PAGE>
Board of Directors
August 11, 1998
Page 2
of the Bank and we have assumed the accuracy and authenticity of the
aforementioned certificates of public officials and officers of the Bank. We
have also relied on Bank records.
We understand that the Company will loan to the trust for the Bank's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP Trust will use to
purchase shares of Common Stock for which the ESOP Trust subscribes pursuant to
the Offerings and for purposes of rendering the opinion set forth below, we
assume that: (a) the Board of Directors of the Company has duly authorized the
loan to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid corporate
purpose for the Company; (c) the Loan will be made at an interest rate and on
other terms that are fair to the Company; (d) the terms of the Loan will be set
forth in customary and appropriate documents including, without limitation, a
promissory note representing the indebtedness of the ESOP Trust to the Company
as a result of the Loan; and (e) the closing for the Loan and for the sale of
Common Stock to the ESOP Trust will be held after the closing for the sale of
the other shares of Common Stock sold in the Offerings and the receipt by the
Company of the proceeds thereof.
Based upon and subject to the foregoing, and limited in all respects to
matters of Federal law of the United States, it is our opinion that:
Upon the due adoption by the Pricing Committee of a resolution fixing the
number of shares of Common Stock to be sold in the Offerings, the Common Stock
to be issued in the Offerings (including the shares to be issued to the ESOP
Trust and the shares to be granted to a charitable foundation to be established
by the Company in connection with the Conversion) will be duly authorized and,
when such shares are sold and paid for in accordance with the terms set forth in
the Prospectus and such resolution of the Pricing Committee, and certificates
representing such shares in the form provided to us are duly and properly
issued, will be validly issued, fully paid and nonassessable.
<PAGE>
Board of Directors
August 11, 1998
Page 3
We consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-1 and to the use of the name of our firm where it appears in
the Registration Statement and Prospectus.
Very truly yours,
MULDOON, MURPHY & FAUCETTE
/s/ MULDOON, MURPHY & FAUCETTE
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EXHIBIT 23.1 CONSENT OF RADICS & CO., LLC
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our report dated March 6, 1998, except for
the tenth paragraph of Note 15, as to which the date is April 8, 1998, on the
consolidated financial statements of West Essex Bank and Subsidiary as of
December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997 in the Pre-effective Amendment Number 2 to the Form S-1
filed by West Essex Bancorp, Inc. (the "Company"); in the Pre-effective
Amendment Number 1 to the Application H-(e)1 filed by the Company; in the
Pre-effective Amendment Number 2 to the Notice of Mutual Holding Company
Reorganization, Form MHC-1, filed by West Essex Bank, and in the Pre-effective
Amendment Number 2 to the Application for Approval of a Minority Stock Issuance
by a Savings Bank Subsidiary of a Mutual Holding Company, Form MHC-2, filed by
the Company, all relating to the reorganization of the Bank from a federally
chartered mutual savings bank to the two-tier form of mutual holding company
organization and concurrent minority stock offering of the Company's common
stock. We further consent to the reference to our firm under the heading
"Experts" in the offering circular.
/s/ Radics & Co., LLC
Pine Brook, New Jersey
August 11, 1998
